Both Kopo Kopo and CGAP have previously written about how payment acceptance alone is insufficient to stimulate change since it’s not a pain point in a merchant’s business; and that getting merchants on board will require a broader suite of value-added services that address the pain points they do have. This is because few if any merchants even in mature mobile money markets see significant numbers of customers demanding to pay with mobile wallets—and this is likely to remain the case in most countries for years to come, as providers strive to create (and convince their customers of) tangible benefits from buying their groceries with e-money rather than cash.
But micro-, small- and medium-sized (MSME) merchants in these markets do have any number of other business challenges that a digital enterprise solution, deployed via till, laptop or mobile device, could help them overcome. Therefore, building a more comprehensive product that provides tools to manage those needs in addition to mobile payments acceptance may be the fastest route to merchant buy-in.
While every market has its unique characteristics, our sense from anecdotal evidence as well as research by CGAP in Indonesia and by BFA and Kopo Kopo in Kenya is that these needs will in many cases be fairly similar. Small merchants the world over would benefit greatly from digital tools that provide simple records, reports and analytics on their business; basic customer relationship management, including offers and loyalty schemes; management of store credit; supervision of staff; payment of suppliers; inventory management; and credit scoring for formal working capital, to which most of them have little access.
Over the last four and a half years, Kopo Kopo has built and tested a number of such value-added services as part of its merchant solution in Kenya, which is now being licensed in other markets, with the goal of driving merchant activity and optimizing lifetime value. So is it working? There are several parts to this question:
- Which value-added services are compelling to merchants and thereby lead them to sign on to the service?
- Which value-added services can incentivize merchants to drive more transactions over the channel?
- How much influence do merchants have over the payment choices of their customers?
Merchant cash advances
The finance gap for small- and medium-enterprises (SMEs) in emerging markets, or the ‘missing middle,’ precludes countless SMEs from access to capital. These businesses operate in markets where credit reference bureaus are nascent or non-existent, making it difficult – not to mention expensive – for financial institutions to price risk when making a lending decision. In turn, these financial institutions charge high interest rates, require significant collateral (often in excess of 100% the value of the loan) and take months to turn around a decision.
Payments companies are beginning to fill this gap by leveraging their data to offer financial services on top of the ‘payment rails’ (Kopo Kopo refers to this as the ‘lending layer’). Kopo Kopo’s GROW service analyzes over 200 variables to price risk and offer an unsecured, short term credit product to eligible merchants. The loan has no fixed maturity but is repaid over time as a fraction of transactional fees; merchants who repay faster gradually get access to larger advances at lower rates. The idea is to create a virtuous cycle that rewards merchants for increasing their acceptance of electronic payments, while also giving them access to the capital they need to grow—from which both sides will benefit—and providing another revenue stream for Kopo Kopo.
Since launching the service in early 2014, Kopo Kopo has facilitated loans of more than US $2,000,000 to 500-600 merchants throughout Kenya. Comparing transaction volumes (in dollar terms) of those merchants during a period three months prior to accessing the loan—reflecting their incentive to get a good first credit score—and three months after—reflecting their incentive to repay quickly and earn better terms—shows a 42% higher transaction growth among GROW merchants. This shows that a working capital product can be a powerful element not only in building a more compelling value proposition for merchants, but in incenting them to drive more transactions over the channel.
Kopo Kopo’s role as a merchant aggregator in Kenya entails handling everything from merchant acquisition and onboarding to platform management and customer support. Perhaps most important is the responsibility for the reconciliation and timely settlement of merchant funds into any bank account or M-PESA wallet in Kenya. This is because costs and delays of sometimes several days for merchants in accessing the funds they collect from customers have in several markets proven to be a massively discouraging factor in getting them to accept mobile payments.
With that in mind, Kopo Kopo decided to make it even easier for merchants to use the funds collected by enabling them to not only settle into their own bank account, but also to make transfers to any other bank account. The service, dubbed “Payments Hub,” was priced below the true cost of a check and quietly switched on without any real marketing, but merchants immediately started using it for paying suppliers, especially for larger payments.
And so, with a deceptively simple feature, Kopo Kopo has made mobile payments acceptance not only no worse than cash for merchants, but decidedly better–which is precisely what mobile merchant acquirers have to do. The result so far? Merchants that avail themselves of this service are generating a 22% higher growth of transaction volumes than merchants who do not.
So what does this all mean?
Our initial analysis of the transaction impact of GROW and Payments Hub lends support to the idea that merchants will respond positively to a broader value proposition around mobile payments acceptance by driving more transactions over the channel—demonstrating along the way that they can influence customer choice of payment instrument. In the end, merchants will invest in the behaviors and systems that help their businesses grow. So the key question to ask is: What can we build on top of the ‘payment rails’ that actually helps our merchants succeed? Only then will mobile merchant payments solutions truly start to gain widespread momentum on the acquiring side.