February 6, 2018

The vast majority of mobile money transactions, by volume and value, are airtime top-ups and person-to-person (P2P) transfers, respectively.  Recently, mobile money providers have been experimenting with merchant payment services, whereby consumers can purchase goods and services from online and retail businesses using mobile money.  A successful merchant payment program holds enormous potential: it would not only catalyze commerce (in the same way that MasterCard and Visa have through card payments), but would play a major role in moving a country towards a ‘cash-lite’ economy: in its current form, mobile money requires so many ‘cash-in and cash-out’ agents precisely because consumers use cash in so many everyday payment transactions.  Ultimately, the end-goal is for consumers and merchants to transact using mobile money even if they had different mobile money providers – in other words if merchant payment interoperability were enabled amongst the mobile network operators (MNOs).

The IFC had been working in the Tanzanian market to develop interoperable mobile money use-cases since 2012 and was a key player in the industry’s launching of an interoperable P2P service among all four of the country’s MNOs in 2014 (described in this case study).  It later sought to uncover key user insights, both from consumers and from retail merchants, that could help inform the design of an interoperable merchant payments program in the country; at the time, all four mobile operators had recently launched merchant payment products.  The IFC commissioned Digital Disruptions to undertake the research: it conducted a quantitative survey with over 700 small business merchants in urban and peri-urban areas, as well as a total of 18 focus groups (including eight human-centered-design ‘sprints’) with small businesses and customers.  (See the full report here).

Overall market size of small merchants

One of the first findings was that the market size for mobile money merchant payments at the retail level is enormous: we estimated that Tanzania has between 350,000 and 500,000 retail stores, but only about 60,000 registered mobile money merchants (and just over 2,500 point-of-sale card payment terminals).  In many ways this is in line with the country’s development; in developing markets where retail infrastructure is underdeveloped, there are significantly fewer mid-size and large retail outlets, and thus small stores (less than four staff) are more prevalent.

One of the major questions we wanted to address through the research is whether small business retailers would be willing to accept mobile money as a form of payment.  Our survey indicated that 42% of retailers were open to becoming mobile money merchants, although, in focus group discussions (where the merchant payment product was explained and demonstrated), nearly all respondents indicated interest.  This figure was likely influenced by the fact that mobile money in Tanzania is ubiquitous (over 40% of the adult population have active accounts, per the GSMA), and any mechanism to make it easier for consumers to pay will be welcomed by merchants.


Would merchants pay to accept payments?  

The second big question – and one that has been discussed more generally in other blogs – is the amount, if any, that they would be willing to pay to accept mobile money merchant payments.  Although there are early indications to the contrary in markets suck as Kenya, Ghana, and Sri Lanka, a common belief is that small merchants are simply unwilling to pay a fee, either out of principle (i.e., ‘we shouldn’t have to’) or out of financial concerns (i.e., thin gross profit margins on their products).  Asking a series of survey questions that gauges price sensitivity for a hypothetical 10,000 Tanzania shilling transaction (about $4.50 USD), we estimated that small businesses would be willing to pay anywhere between 150 and 580 shillings (1.5% to 5.8% of transaction value).   This is shown in the figure below.


We then asked a similar set of questions to small businesses in focus groups and received similar ranges from the participants.  One highlight is that through reactions to prototypes, they appeared inclined both to adopt merchant payments and to pay more by the inclusion of value-added services, particularly those that could help them grow their business, such as inventory control management, budgeting tools, and monthly transaction performance data (which is in line with insights from a landscape report on merchant payments that Digital Disruptions wrote for the World Bank and World Economic Forum in July 2016).

A related question is: if merchants are willing to pay, should customers be charged, too?  Some MNOs felt that since customers are already accustomed to paying for other mobile money services such as P2P, they may as well be charged for merchant payments as well.  But a key finding of our research was that, while merchants see cash handling as a large enough pain point, customers see paying in cash either as straightforward or at worst a minor irritation – and thus are much less inclined to pay a fee.  And since the customer is ultimately the one who decides on the payment form, adding any additional ‘friction’ to paying with mobile money (in the form of a surcharge) is bound to hinder adoption.

Lastly, the concept of interoperability tested extremely well in discussions with small businesses.  Those who were initially receptive of the idea of accepting mobile money as a payment form understood that they would benefit from doing so across all mobile wallets, not only from those customers who were on the same provider.  Unlike neighboring Kenya, Tanzania has a competitive mobile money market (where Vodacom, Tigo, and Airtel all have sizeable customer bases), which helps bolster the perceived benefit of interoperability for prospective merchants.

The report contains many other insights: on merchant segmentation, ideal customer experience, and technology acquisition models.  We also break down the strategic “pathways” to enable interoperability among competitors, based on successful examples from the airline (code-sharing), banking (ATM), and telecom (SMS) sectors, and strategic considerations to achieve merchant payment interoperability.  We invite you to take a look here.