[From CGAP Technology blog, 6 September 2012]
The Square: what a remarkable way to crash into the knotty payments scene. Just attach this cheap but neat-looking block on the standard audio jack of your mobile phone, and you too can collect payment by credit or debit card. Since its launch over two years ago, Square has been operating at the edge of the merchant payment market in the US, serving tradesmen and small shops for who the usual acquiring solutions are too expensive. But now Starbucks says it’ll adopt it at its stores. This thing may be going mass market.
If you’ll forgive the trite expression, Square is democratizing retail electronic payments by eliminating the need for dedicated point-of-sale terminals. Is the growth curve of Square in the US an indication that similar low-cost acquiring solutions could trigger an explosion of merchant payments in developing countries?
I’m not so sure. The Square leverages three trends in the US. First, more people are more adamant about wanting to pay for stuff electronically, even for small transactions, than ever before. People are becoming more impatient with cash, ATM charges are becoming more commonplace, and issuers have been lavishing all kinds of rewards on cardholders. Second, practically everyone has a bank or credit card. Third, smartphones and tablets are becoming more commonplace, and these are the things you need to attach the Square too. The Square is a neat idea at the confluence of these trends in the US. Right time, right place.
In developing countries, none of these trends is so apparent: most people do not have a preference for electronic payments, and the installed base of cards and smart devices is still low. The former is by far the bigger obstacle. The majority of people in developing countries who have an electronic account do don’t have much value stored in them, and many more don’t even have an account. It’s hard to create a preference for paying in a currency you don’t have. In this situation, only merchants that tend to serve the richer banked elites will see a reason for accepting electronic payments (and, more significantly, the merchant discounts that come with that). Accordingly, we’ll observe the usual slow progression down-market.
We can look at the choice of payment at a store as a contest between electronic money (whether card or mobile phone-based) and cash. But the contest operates at two levels. First, at the store-of-valuelevel. If you have cash in your wallet but no money on your card/mobile phone, there won’t be much of a contest when you reach into your pocket at the retail shop. Second, at the payment instrument level. If you do have both cash in your wallet and money on your card/ phone, then the question becomes which is more convenient to use. Now we are talking speed of transaction, cost and security. The much vaunted Near-Field Communications (NFC) cards/phones will definitely help here, but again only if there is a contest going on at all.
You might be thinking that the argument might be played backwards: if people could pay electronically in a convenient fashion at the local shop, might that by itself induce them to want to maintain balances in their electronic account? I have trouble seeing this. Will people want to hand in their cash at one
store which happens to be an agent, primarily for the privilege of not having to hand in cash at the other stores down the street when they go shopping? We have seen over and over again that the instinct of the majority of people who receive money electronically (whether from a remittance, social welfare payment or a wage) is to withdraw their money immediately and in full rather than figuring out who else they can pass it on to. I suspect that’s because they don’t see electronic accounts as a good way to keep their money saved and plan their outlays.
We do need to crack merchant payments, because that’s where the transactional volumes are and that’s what will make electronic banking solutions daily relevant for people. I’ve called this the last yard problem, because that’s the distance that separates buyer and seller across a counter, but it’s more like a rift. Merchant payments will only begin to be addressable when the majority of people are comfortable with electronic savings options.
Do this thought experiment: what would be a form of physical cash which didn’t have intrinsic value (i.e. it didn’t perform a storage of value function) but which was readily accepted as a means of payment? It’s really hard to imagine, because if would have to be a form of cash that had ephemeral value – just at the moment of exchange. (The closest I can think of is the Zimbabwe dollar at the height of hyperinflation – not a comforting thought).
Equally, mobile money cannot be just a form of payment and expect it to make in-roads into retail payments. Unless it evolves into a useful savings service, mobile money will continue being relegated to non-face-to-face transactions where the sheer inaptness of cash puts even empty electronic accounts back into the contest. People will take the trouble to top up their account with the express purpose of paying a bill or sending money home, but not to buy half a kilo of rice.
Let me paint my central scenario for electronification of payments. Adoption starts with remote payments, where beating cash is easiest. Then it goes through providing reasons for people to want to accumulate value electronically, if only to meet their needs for future payments. Then, once people are long electronic money, the fight is on with cash over stores’ counters.
Cash has been around a long time, it’s a powerful enemy. The assault on cash is not a matter of brute force (deployment of acceptance devices); it will require winning hearts and minds.