Making Digital Payments Work for Low-Income Farmers

From hurling sacks of money out of planes to transporting cash with armored vehicles, the methods Uganda’s agricultural exporters (off-takers) use to pay smallholder farmers can be unsafe and inefficient. Although mobile money use has increased over the years, CGAP’s research shows that only 5 percent of all payments in agriculture are paid digitally. CGAP and a number of actors who promote financial inclusion have been advocating for wider use of digital financial solutions, but customers have not embraced digital finance as fast as expected. Why haven’t digital bulk payments taken off?

CGAP, United Nations Capital Development Fund (UNCDF) and PHB Development have been exploring this question by looking at how to improve the value proposition of mobile money in Uganda’s coffee value chain. As in other agricultural value chains, the digitization of business-to-person payments in coffee is emerging as an opportunity for mobile money providers to expand their services beyond urban regions and into new segments. For smallholder farmers, traders and off-takers, however, the switch from cash to digital payments has been slow. Our research revealed that the reason for this is that mobile money just isn’t offering a strong enough value proposition.

For digitization to really take off in the coffee value chain, it will need to be attractive to all actors, from farmers to off-takers. Digital bulk payments currently offer only isolated value to certain actors. Off-takers, for example, stand to cut at least 10 percent of their costs by switching to digital, as their current payment processes are so labor intensive. Yet the thousands of farmers who receive bulk payments must pay high costs to cash out and use their funds, significantly weakening the value proposition for them.

In fact, we found high cash-out fees to be one of the most significant obstacles to digitizing the coffee value chain. Digital money is not widely accepted for retail and other types of payments in Uganda, so cashing out is a must for most people to use their money. And the cash-out fees that mobile network operators (MNOs) charge can be as high as 8 percent for the low-value transactions smallholders tend to make. Addressing this weakness is one of the best ways to improve the value proposition of digital payments.  

First, steps can be taken to expand mobile money use cases and minimize the need for recipients to cash out. Large payments, such as selling a cow at a local market or land to a neighbor, are difficult to digitize because of challenges around wallet size limits and the availability of agents who have sufficient liquidity to support big transactions. Smaller, regular payments present better opportunities in the near term.

Second, there is a strong business case for MNOs to lower their transaction fees. MNOs could drastically increase their revenue by lowering the transaction fees and relying on a high quantity of small-value transactions rather than a small quantity of larger ones. This could lead to positive value propositions at almost every level and for every stakeholder in the value chain, effectively unlocking bulk payments in rural markets.

UNCDF, CGAP and PHB Development have used the findings from a value proposition mapping exercise to develop a transformative business model for one of the leading MNOs in Uganda. We expect that this model will be a key entry strategy for other MNOs into the agricultural bulk payments space.


17 October 2017 Submitted by Jean Succar (not verified)

Obviously 7 years after launch, these are still the universal challenges: high cash-out fees and limited alternate uses in the eco system.

18 October 2017 Submitted by Moses Mukiibi (not verified)

Thanks Nathan for sharing this piece, very insightful. I think what we generally see is that the value proposition for different actors to adopt mobile money is weak. Even though we can see that MM maybe cheaper than cash, but i think it is not just about affordability - but the value that users generate from accepting mobile money. I guess this is what UNCDF and CGAP continue to study and find ways how the VP can be strengthened, communicated and evaluated across different actors in the value chains.
Otherwise, thank you.

24 October 2017 Submitted by Jacob Taru (not verified)

Timely sharing. As a Lead Partner in coffee supply chain development Participatory Partnership in Agriculture Project in Coffee, I was keen in bulk digital payment. Mobile Phone Literacy is low and use of mobile banking could be limited. Need to promote Mobile Literacy.

27 February 2018 Submitted by nathan (not verified)

Thanks for your comment Jacob, true low digital literacy is a challenge for many smallholders to navigate complex user interfaces and several steps needed to complete a single transaction. Some of our work in Uganda is testing the use of self directed SMS and IVR to help solve this problem and increase uptake and use of mobile money. We will be sharing some insights about this work in the due course.

14 December 2017 Submitted by John Ssali (not verified)

As long as the ecosystem for the farmers is not digitized, it will be difficult to accept these modes of payment given the high cash out costs as you rightly state. MNOs may not easily lower their charges on assumption of an increased number of MM platform users, it will be demand driven. The magic will be in the entire ecosystem being digitized, less that the VP will remain weak. Thanks for sharing.

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