Building Rural Digital Ecosystems, One Small Payment at a Time

Expanding mobile money to low-income rural customers has been challenging for financial services providers in developing countries. Many mobile network operators (MNOs) have tried digitizing the bulk payments that agribusinesses make to smallholders who sell their crops, as a first step toward encouraging farmers to use digital financial services (DFS). To date, these efforts have not been widely embraced by smallholders or resulted in the widespread adoption of DFS. However, new CGAP research with OLAM — one of the world’s largest agribusinesses — and MNOs in Ghana and Côte d’Ivoire show that digitizing smallholders’ everyday, face-to-face payment transactions can be a promising way to unlock scale in the digitization of agricultural payments and foster broader rural digital ecosystems.

A key constraint for increasing digital transaction volumes in rural areas is that farmers who receive agricultural payments digitally find it difficult to use e-money for their daily transactions. To use their hard-earned income, they must often cash out at their nearest agent and pay the associated fees. This process can be cumbersome and expensive because agents are often far away and do not always have the liquidity to fulfill customers’ cash-in/cash-out requests. CGAP’s interviews with more than 300 smallholders working with OLAM in the cocoa, cashew, cotton and coffee value chains, along with over 100 rural shops and mobile money agents, confirm that the value proposition for smallholders to receive digital payments increases significantly if recipients can make their most common everyday transactions digitally.

The most common types of face-to-face payment transactions made by smallholders are frequent (four to five times per day) and involve paying temporary farm workers (35 percent) and purchasing consumer goods like food and beverages (20 percent) at small shops, often individual merchants with no employees. These findings align with CGAP’s research on smallholders’ financial lives, which shows diverse expenses beyond farm-related costs. If providers could digitize these two payment categories alone as person-to-person (P2P) transfers, it would be equivalent to digitizing over half the value of all payments that smallholders make using income they receive digitally from agribusinesses. This is in the order of tens of millions of dollars in both countries we studied.

But can providers digitize these small-value, face-to-face payments as P2P transfers? Four MNOs (two in Côte d’Ivoire, two in Ghana) confidentially shared their pricing and transaction data with us to help us better understand the economic feasibility of this approach. We discovered that their current P2P pricing models assumed most P2P transfers would necessarily be urban-to-rural remittances that happen once per month — the type of transaction for which customers are willing to pay a higher fee because of the low frequency and the long distance of the transactions. The fees the MNOs were currently charging for P2P would be too high to make P2P competitive with cash for in-person transactions. However, our analysis showed that the high transaction frequencies and high annual value of face-to-face payments would make it possible for MNOs to price in-person P2P much lower (in the single digits per transaction, in local currency) than their fees for long-distance remittances. The MNOs lacked evidence on how smallholders spend their money, so they had not realized this sooner.

The modeling exercise we conducted suggested that enough face-to-face transactions could be digitized within a year to turn a profit with the lower pricing. It showed that the increased revenue from agricultural payments could, in turn, reduce MNOs' reliance on cash-out revenue from their agent networks, where fees paid to agents result in slim margins, and could reduce the value proposition for smallholders. Essentially, MNOs could improve their sustainability in rural areas by shifting from a high transaction value/low transaction frequency model to a low-value/high-frequency one.

A practical challenge to implementing this new model is that MNOs would need to be able to distinguish between face-to-face and long-distance P2P transactions in their networks. One feasible proxy recognition would be to assume that any P2P transfers between a sender and recipient logging into the same base transition station or cellphone tower is a face-to-face transaction subject to lower pricing.

Marketing face-to-face digital payments to smallholders and those they transact with regularly will also be a challenge. In another blog post, we argued that MNOs can work more closely with agribusinesses on this front. More so than MNOs, agribusinesses and government-supported rural development initiatives are close to last-mile communities and have strong rural networks. They have the incentive and ability to build smallholders’ interest and trust in new digital payment solutions, as these bring efficiency and risk management gains in their payments to smallholders.

Compliance with current know-your-merchant requirements would not be possible under this approach. Implicit in the model is an acknowledgment that the types of merchant payments that smallholders and poor people in rural areas make are more like P2P transfers between individuals rather than payments received by more formal urban merchants, which are of greater value and between individuals as well as larger businesses.

Yet there are many reasons to explore this model. In addition to opening a scalable source of revenue for mobile money providers in rural areas, digital face-to-face payments could generate new transaction data and help expand low-income customers’ access to other financial services, such as credit and savings for micro and small enterprises and their clients. These additional services would, in turn, reinforce the value of digital payments, eventually facilitating a larger rural digital ecosystem.

The MNOs we worked with have all expressed interest in validating these new pricing and delivery strategies, and we will share lessons from their experiences.