The fresh market (Vietnam) -- Wen Jye Chan, 2016 CGAP Photo Contest Photo by Wen Jye Chan, 2016 CGAP Photo Contest
Graph of global payments revenue
Source: McKinsey, 2018

Merchant payments present DFS providers with a sizeable opportunity to grow their businesses while also potentially advancing the financial inclusion of low-income customers. In large part, this is because merchant payments present a sizeable revenue opportunity in emerging markets and developing economies (EMDEs), where payments have traditionally been based on cash but are shifting to digital channels at sometimes dizzying speeds.

But the merchant payments opportunity goes far beyond short-term opportunities for direct revenue. Savvy providers have already realized the value of transaction data generated by digital payments and are positioning themselves to capture and make use of it in the longer term. As online and offline commerce merge into a seamless retail space, new opportunities are emerging for providers to support it with a range of services powered by digital data.

In this new world of retail, DFS providers will need to look past short-term priorities to position themselves for a future that is fast approaching. Those who do will reap the rewards and will improve low-income customers’ access to financial services in the process.

Merchant payments are a crucial new market for DFS providers

Source: State of the Industry Report for Mobile Money 2018, GSMA. Innovation in Electronic Payment Adoption: The Case of Small Retailers, World Bank, 2016.

Just how big is the merchant payments opportunity for DFS providers? The World Bank has estimated that out of the $38 trillion worth of payments that micro, small, and medium-sized enterprises (MSMEs) accept from customers each year, $19 trillion are made in cash.

A sizeable portion of these cash payments are made in EMDEs, where the penetration of bank cards and accounts is low. This part of the world is poised to leapfrog straight to mobile payments for retail purchases. Many markets are already well positioned thanks to mobile money, which according to the latest figures from GSMA, has created nearly 900 million new accounts, many in the hands of low-income customers who have never had a formal financial account before.

Yet the total volume of payments currently made over mobile money is a fraction of the outstanding opportunity in merchant payments.


Merchant payments solutions have two distinct users with their own needs and preferences: merchants and their customers. A successful solution must appeal to both.

The card industry once faced a challenge in retail payments familiar to today’s mobile money providers: competitors were building their own acceptance networks, limiting the usefulness of their services. The card industry’s solution could hold a valuable lesson for today.
Blog Series

Merchant payments are emerging as an increasing priority for digital financial services providers across emerging markets. The retail space holds the promise of new potential revenue streams, deepened customer engagement and vastly increased transaction data on which to build new

Merchant payments can also unlock new indirect revenue streams

A potentially greater reason for providers to get into merchant payments is the opportunity to capture data on consumer spending behavior. Such data can be used to better understand, segment, and target customers and to offer other products and services.

For example, digital credit and insurance powered by data analytics have already proven to have great customer appeal and revenue potential, spawning a large and rapidly growing industry. Richer spending data will boost the algorithms powering these products, reduce risks and losses, expand eligibility, and raise loan limits. As CGAP’s research in East Africa has demonstrated, however, these opportunities also introduce new consumer risks that providers need to navigate responsibly to build a sustainable business.

These are big opportunities. Today, three in four MSMEs — an estimated 280 million companies — lack access to formal credit across EMDEs. The total financing gap may be as large as $4.9 trillion, and potential revenues associated with closing that gap are equally significant.

Additionally, merchants are willing to pay for a variety of nonfinancial value-added services (VAS), such as working capital, customer relationship management, or inventory management, as CGAP has demonstrated in several African and Asian markets. Each of these VAS options can enable DFS providers to generate indirect revenue from the digitization of payments without the need for transaction fees. This is important, since transaction fees often deter merchants from accepting digital payments.


There is a $4.9 trillion unmet credit need for micro and small enterprises in emerging markets, and digitizing merchant payments is one of the best ways to overcome barriers to small business finance.

Data may be the strongest reason to enter merchant payments

The most important reason for DFS providers to look at merchant payments is arguably to position themselves for the future of fully digital banking and retail commerce.

As fintech start-ups, super-platforms, banks, and mobile network operators increasingly vie to become the main interface between customers and their money, the question of who has the most and best data — and who can best put it to use — is going to be a decisive factor.

This is why players like Google and Facebook are launching payments not just in the United States but in developing markets. It is why Alibaba and Tencent, having already transformed the payments space in China, are aggressively expanding internationally. These companies are not primarily focused on offering payments services or generating payments revenue. But they understand the value of the data generated from retail payments in driving an entire ecosystem of ancillary services.

This will change the face of retail as we know it, and merchant payments data are a central foundation of that shift.


When considering a profit strategy for merchant payments, providers typically look to the debit/credit card and mobile money models for ideas. But many would be better off pursuing a third model: the digital payments ecosystems emerging in China.
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Data generated by low-income consumers’ use of mobile phones and digital financial services can help expand financial inclusion, but its use can also result in the loss of privacy and other harm. These benefits and risks will be explored in this data protection blog series.

It is much harder than you think to get merchant payments right

Merchant payments have proven challenging for the early moving DFS providers, even in East African markets with high uptake and use of mobile money. Despite having recruited tens of thousands of merchants, even leading providers have struggled with low activity levels and transaction volumes.

Part of the reason for this is that merchant payments is a two-sided market. Providers need to convince both merchants and consumers to digitize — two user groups that want different things from a payments solution. Without lots of customers asking to make digital payments, a digital payments solution offers little value to merchants. Yet unless large numbers of merchants already accept digital payments, consumers won’t see the point in going digital. Providers who don’t approach the business with a strong customer focus on both merchants and consumers will inevitably struggle.

This is very different from a cash-in/cash-out business, which is a one-sided market that providers have learned to manage well. Agents get paid to transact and do not need a value proposition beyond commissions that are high enough to cover costs and earn a margin. Merchants do not earn commissions, and in many models, they are the ones paying transaction fees. That makes them customers, too. Whatever solution they are offered must add enough value to their business to make it worth spending money on. Recognizing this from the start is essential for success.


Interoperability is essential for a merchant payments solution to achieve the necessary scale. Here are three models of merchant interoperability relevant to digital financial services providers.