According to the World Bank, over half of all payments in the retail industry are made in cash, with most of these transactions occurring among more than two billion individuals and 200 million small businesses in emerging economies. These businesses and individuals lack access to formal capital and credit and must rely on informal lenders and personal networks to raise funds to meet their daily personal and business needs.
The over-dependency on cash payments in the retail industry has had devastating effects on merchants, retailers, and FMCGs, as a World Bank study shows that the average retailer loses between 4 and 15 percent of total revenue to the costs of cash handling, while brands lose between 7 to 20 percent of annual company turnover.
While digital payments can remedy these challenges, eliminating cash payments and driving the adoption of digital payments across emerging markets is easier said than done, as many Digital Financial Services (DFS) providers have found.
How cash payments cause friction
In rural Uganda, an FMCG company had to drop bags of cash by plane every 15 days to pay workers. Upon arrival, over 8000 workers had to queue for more than half a day to receive their wages, and the company had to deploy nearly 100 staff to manage this process, including 64 field security guards and armed police. In Nigeria, Coca-Cola truck drivers who deliver drinks to corner shops are victims of armed robbery as often as once a month. FMCG brands also report that collecting and transporting cash from small “mom-and-pop” shops is not only incredibly risky and prone to fraud but is notoriously inefficient, as field officers must spend extra time to collect and manage cash – time that could be better spent selling to new customers.
Evidently, cash transactions pose significant problems for FMCG companies and brands across emerging markets, but it also affects retailers and merchants. Every year, retailers lose nearly $100 billion to shrinkage and leakages, with over 34 percent of this shrink attributed to cash theft. Dealing exclusively in cash means small retailers and merchants are restricted from accessing the vital financial services they need to grow their businesses. Even those with access to traditional banking cannot fully maximize the available credit and savings facilities. Making bank deposits, for example, is a challenge because many merchants operate during the same hours as banks and cannot afford to ignore customers and close their stores. This leaves the merchants stuck with cash and the dominance of cash payments continues.
Digital payments are catching on, but not fast enough
Digital payments have the potential to solve the numerous problems caused by cash payments across emerging markets and can potentially reach over 1.6 billion new retail customers across emerging markets and provide $2.1 trillion in new credit for merchants, retailers, and small businesses. In addition, full adoption of digital payments can increase the GDPs of all emerging economies by 6 percent, or $3.7 trillion, an equivalent of creating a new economy bigger than all the economies of Africa.
FMCG brands can substantially increase their revenue by leveraging digital payments to drive distributor and retailer growth with advanced supply chain financing and access to credit. These value-added services also enable stronger business relationships across the supply chain and drive increased loyalty from merchants and distributors. Digital payments also open the door for increased visibility across the distribution chain, providing valuable insights at POS that FMCGs can leverage to develop growth strategies and increase sales.
Despite the clear benefits of digitalizing payments, many FMCGs still struggle to drive its adoption across their distribution chain. Most digital payment solutions were built to solve the cash problems of larger FMCG brands but do not give smaller merchants a compelling enough reason to adopt the solutions. However, these merchants are often paid in cash by the end consumers, placing the burden of converting cash to digital money on smaller merchants and distributors, who do not have a reason to do so.
Solving the cash problem and reaping the dividends of digital payments will require FMCG brands to:
- Incentivize the adoption of digital payments: FMCGs and other DFS providers must build payment solutions with a clear value proposition aimed at distributors, smaller retailers, and merchants and provide them with value-added services that help them sell more and grow their businesses.
- Collaborate to build a payment ecosystem: FMCG brands and larger distributors must switch from building payment solutions in silos to collaborating with DFS providers, Mobile Network Operators (MNOs), and third-party payment solutions, recognizing that distributors, retailers, and smaller merchants are unlikely to adopt a solution that only works with a single brand.
Eliminate cash friction with RedCloud’s open commerce platform
RedCloud has built the world’s first open commerce platform with an integrated digital payment system the world’s largest local payment network consisting of 2 million+ payment points that leverage the widespread adoption of mobile phones across emerging markets as over 80 percent of adults in developing economies have a mobile phone, while less than 65 percent have bank accounts.
We solve the cash problem by creating a solution with value propositions for both the largest FMCG brands and the smallest corner shop. We created Red101, a digital platform that enables merchants to offer digital products like mobile airtime and cable TV subscriptions to their customers and get a commission on every transaction.
The RedCloud open commerce platform enables FMCG brands to connect with every distributor, retailer, and merchant across their distribution chain and accept digital payments. The platform also captures valuable data at every POS along the distribution chain and analyzes the data to provide brands with insights into market demand and consumption patterns that sales and marketing teams can leverage to create growth campaigns, drive sales, and increase revenue.
Book a demo today to see how you can start unlocking the full value of your distribution chain, sell to more merchants, and start accepting digital payments seamlessly.