A $1.5 Trillion Tip on Cracking Merchant Payments

Mobile network operators (MNOs) have been trying to crack merchant payments in Africa for over five years. It is easy to understand why: Although person-to-person (P2P) payments have proven to be a good initial use case in many markets, merchant payments are a much bigger prize. The global card industry, which is the closest analogue, has grown since 1958 to become a $26 trillion business, with over 11 billion cards in circulation and growth rates of 6 to 16 percent a year in the last two years, including in emerging markets (China Union Pay grew at an astonishing 30 percent from 2014 to 2015). And the IFC estimates that retail payments in Africa are on the order of $1.5 trillion today, a number that is likely to grow with Africa’s rapid population growth and rising prosperity. But MNOs have, for the most part, failed at building a successful merchant payment use case in Africa. Why?

There are many potential culprits, but the most obvious is the ease of using cash. A consumer is highly unlikely to cash in to his mobile money account so he can pay for a small item digitally; he will just hand over the cash. And the merchant probably prefers cash anyway. P2P payments solved the problem of distance. But paying for a good or service from a merchant doesn’t involve distance, so people revert naturally to cash. Until people hold balances on wallets or in bank accounts and have incentives to pay digitally, cash will always win. It is well understood, it’s low cost, and it works perfectly well, especially for low-value transactions. That will always be a pretty tough nut to crack. So paying digitally must be better than paying with cash, especially for consumers.

Have early experiments in merchant payments met that standard? The honest answer is no. Not for merchants and not for consumers. For merchants who are also agents, there is a conflict, as they receive a fee if the customer cashes out, but often pay a fee if the customer pays digitally. Beyond that, digital payments leave the merchant in a position of managing two sets of accounts — cash accounts and e-money accounts. For the merchant who is also an agent, the best choice is to do a cash out and take payment in cash. From a consumer perspective, the process is also not very attractive: It involves the usual long USSD strings, with multiple screens and confirmations. Definitely not better than cash. So the customer interface will also have to get a lot better to entice consumers into wanting to transact digitally. For more on this, see CGAP’s new slide deck, “Digitizing Merchant Payments: What Will It Take?”

But there is another challenge at play here: Cash is fully interoperable. Anyone can accept it and use it in the same way with any merchant. In contrast, holders of different mobile wallets all use different processes to pay merchants digitally. One company might use a P2P payment, another NFC, and another a QR code. And the pricing model for merchants varies across different providers. The customer experience and acceptance architecture is different in every single case. That is a recipe for confusion for both merchants and consumers. This is where the mobile industry has important lessons to learn from the card industry.

Mobile money is in many ways in a similar position as the card industry in the 1950s and 60s. BankAmericard was created in 1958 by Bank of America, which was originally limited to banks in California but started licensing banks outside of California in 1965. Not coincidentally, in 1966 Master Charge was introduced by a different set of banks as competition to Bank of America and its partners. During this period, banks basically issued their own cards and acquired their own acceptance networks, much like MNOs do today. As consumer demand to use cards grew, merchants had to juggle multiple acceptance processes, and consumers could not use their cards in the same way everywhere. In the late 1960s, Dee Hock proposed the idea of an association that would bring the banks in the system together into a more coherent scheme. This was done in 1970 with the formation of National BankAmericard Inc (or NBI), which brought the BankAmericard issuing banks in the United States into one system, and in 1974 with a company called IBANCO that managed the international BankAmericard program. Master Charge evolved along similar lines.

These separate entities were consolidated into fully global schemes with the formation of Visa in 1976 and MasterCard in 1979. Both companies were established as associations to build out a common platform for managing payments across different member banks’ systems. Eventually, the need for a common user experience, brand and rules became evident, and these organizations evolved to provide the consistent and reliable experience for both merchants and consumers that we see today. The result is that I can take my Visa or MasterCard card anywhere in the world, and it works the same way. I know roughly what a transaction will cost me and I know that fraud will probably be flagged and brought to my attention. I also know that my bank will cover the cost of fraudulent transactions under certain agreed conditions and that there are agreed dispute processes in place to resolve problems arising from any transactions I perform.

MNOs have experimented with interoperability in many markets, Tanzania being a well-known example. But that early experiment was limited to P2P transfers. Operators are aware that they need interoperability to make merchant transactions work — because they need that same seamless experience that exists in the card space, both for merchants and for consumers. And that is not simply a matter of interconnecting so that transactions flow across different networks. In the same way as the card companies have done over the last 60 years, they will need to build interconnection, common processes and a common acceptance brand if they aspire to have merchant payments work in Africa in the same way as they do in the card industry. Merchants and consumers need to feel that there is a benefit for them to paying with mobile money, and that is hard to do if it requires more energy than simply using cash. The relatively low value of transaction sizes in Africa is a challenge, but this is a long game, and MNOs are perfectly positioned to build merchant payments networks if they are patient and understand the need to work together.

The interesting question is whether these fiercely competitive companies will come together to build the collaborative infrastructure required to make this work. Multiple closed loop systems will always result in sub-optimal outcomes, so if MNOs want to build the kind of market we have seen emerge in the card space over the last 60 years, they will need to move in this direction. It will take time for this to evolve, but there is much to learn from the card industry, and even a fraction of a $1.5 trillion market is probably ultimately worth the effort.