The benefits for buyers of digitizing agricultural produce payments are both clear and persuasive. Exporters, cooperatives, and the many middlemen involved, benefit significantly from reduced costs and increased security by avoiding cash. For the more progressive, there are also benefits of payment transparency and data collection. However, as CGAP has noted before, DFS innovations in the agricultural context – driven by benefits for buyers – are not sufficiently based on financial needs and behaviors of smallholders. Slow uptake is largely due to resistance from the farmers who are the intended recipients of digital payments.
Why are farmers resistant to digitization?
From our research, which consisted of interviewing farmers, their cooperatives, associations, and buyers in Uganda for a CGAP-commissioned project, it appears that the problem is that farmers do not see the benefits of payment by DFS. On the contrary, they see it as an alternative, less convenient cash delivery mechanism.
In practice, the pilot sugar and coffee farmers we met had just one goal upon receipt of their digital payments, and that was to cash out as quickly as possible. According to users of M-Sente, the DFS offering from UTL which is Uganda’s oldest MNO, the need for haste was due to the relatively poor liquidity of local agents in the face of very high demands for cash when payments were disbursed. Farmers that did not get to the front of the line had the choice of waiting for an uncertain period until their local agent had more cash, or travelling to the next agent, or the one beyond that, with no guarantee that liquidity would be any better there. Tales of having to repeatedly visit agents before they could cash out were common. Even when the agent has sufficient cash to satisfy the farmers’ needs, there was the issue of cost. Cashing out mobile money can be expensive.
For farmers to embrace DFS, they need to see meaningful benefits in the form of security, faster access to money, convenience and affordability. These can be provided by structuring the services, which inherently already have many of these advantages, in a way that is more relevant to the farmer.
Security was a universal concern, both when travelling to collect cash, and when storing it at their homes. The situation is much more critical for arable farmers as they receive their entire annual income over a few weeks at harvest-time, and need to store their diminishing stock of cash for many months. DFS provide an ideal way to receive and store money safely, only withdrawing the cash needed for the coming week or two. But for this behavior to be a feasible option, the fees need to be affordable, especially when compared with single large withdrawals.
Affordable services are essential to adoption of DFS anywhere, and rural customers are generally less well off and thus more price-sensitive than their urban counterparts. For farmers to embrace digital payments, the cost of doing so must be offset by understandable benefits. Fees tend to favor customers making a single large withdrawal rather than multiple smaller ones, giving customers little incentive to withdraw only what is required in the short term while leaving the balance stored safely in their account, which would have the added benefit of taking pressure off the agents. It is accepted that DFS providers need to make a profit, but rebalancing the cost of different transactions could perhaps encourage this behavior to the benefit of all.
Faster payment for produce is extremely important, and even a day or two can be crucial. By the harvest, many farmers are in debt and desperate for cash. We encountered farmers who had previously accepted lower prices from middlemen rather than wait a day or two to be paid more by an association or exporter. Providing the agent liquidity issues can be resolved, speed is a key benefit of DFS. It may require the buyers to modify their business processes: for example giving their agents phones with access to a company or divisional account so they can pay some or all of the amount due at the farm gate; or for crops that need to be graded and reweighed before a final price is confirmed, reimbursing farmers by bulk payment in real time from the receiving site. Farmers will only benefit if the processes are in place to ensure the payment is sent quickly, and that there are local agents with sufficient cash to service the required withdrawals.
Convenience takes many forms and work is needed to support agri-value chains. Until the farmer has an alternative to cashing out, he is not part of the digital economy in any meaningful way. He is also probably not a profitable customer for the DFS provider as he receives few payments per year. For successful digitization the farmer needs relevant, meaningful ways to spend the money in his account. An obvious possibility is bill payments, but his bills are quite different to those of urban customers. However, all farmers have periodic bills associated with the upkeep of their farms, in the form of agricultural inputs and land rental. If their agro-dealers and landlords could be persuaded to accept payment by DFS, the possibilities become very interesting. Another bill that looms over most of the farmers we met was the payment of school fees. In Uganda these are typically paid three times per year at the start of each term. Digital payment, and even prepayment at harvest-time could be a welcome service.
Demand for savings services and for access to loans is high in Uganda, as in most emerging economies, and many farmers we encountered make use of their local MFIs and SACCOs. Providing access to these services by DFS has been well-received in many markets, and would be a logical extension to digital payments. In addition, services like M-Shwari and KCB-M-PESA in Kenya, operated directly by the DFS provider, are ideal for rural communities with severely limited access to conventional financial services. CGAP’s recent publication on designing digital financial services for smallholder farmers provides actionable insights on designing successful smallholder-specific DFS.
The rural economy is large and underserved by DFS providers. It is more challenging than the urban market because of its diversity, and possibly because of a limited understanding of the market infrastructure and the opportunities amongst DFS providers. However, there is a growing awareness of the benefits of digitization by the produce buyers, although few are yet extending this logic to considering the benefits and disadvantages for the farmer. Payment ecosystems need to be tailored to their needs, and the farmers must be educated about their benefits before large-scale digitization of agri-value chains is likely to occur.