November 2

Kate Richards

New Report: Small Merchants Offer Big Financial Inclusion Opportunities

There are more than 180 million micro and small merchants operating in developing and emerging markets globally. These merchants serve the world’s lowest income customers at a scale that is staggering. Every day, small merchants interact with more than 4.5 billion customers. While individually each merchant generates low revenues, they collectively influence the global economy significantly; the financial transactions they conduct total an estimated U.S. $6.5 trillion annually.

Since small merchants generate low transaction values and often run their businesses informally, little effort has been made by financial service providers to incorporate them into the digital economy. However, given the number of financial transactions and their vast customer network, small merchants have the potential to spark huge growth in digital financial services. If these merchants were to adopt cashless payment systems, and therefore encourage their customers to use digital payment accounts, they would provide a critical pathway toward financial inclusion for themselves and their low-income customers. The movement to digital payments would also present a substantial commercial opportunity for the financial sector; transaction fees alone could amount to an estimated U.S. $35 billion a year in additional value for financial service providers.

While the potential impact of small merchants adopting digital payments is huge, most of the current systems offer few obvious benefits to the merchants. Fewer than one in 10 small merchants in the developing world are using cashless payment systems, and those who are often find the process frustrating, time consuming and unreliable. Broadly speaking, customers and small merchants alike still prefer to use cash, and it will take a concerted effort from governments, regulators, financial services and businesses to change this reality.

A new report, Small Merchants, Big Opportunity: The Forgotten Path to Financial Inclusion – commissioned by Visa and authored by Dalberg Global Advisors and the Global Development Incubator – explores how financial service providers can engage micro and small merchants to unlock the social and economic potential of digital payments. (Note: the author is employed at Dalberg). Drawing on conversations with more than 300 merchants and 75 key financial sector stakeholders, the report concludes that digital payment systems must be improved to meet the specific needs of small merchants. These improvements include simpler and less expensive card terminals, effective support and customer services, increased merchant protections around chargebacks, faster processing times and reduced costs. Creating cashless systems that suit small merchants is crucial for both the merchants and financial service providers, as cashless systems are often the first step toward increased uptake of more sophisticated financial products such as loans and insurance.

The opportunity to increase micro and small merchants’ access to capital is identified in the report as a key motivator for the adoption of digital payment systems. Digital payment products can allow merchants to receive supplier credit, or to track their financial history so that it can be used to access bank credit. The potential opportunities for merchants to expand their businesses by processing payments for utility bills, mobile phone top-up or other transactions is also a motivating factor.

Financial regulators and governments play a vital role in encouraging progress toward a cashless ecosystem. Introducing and supporting policies that reduce barriers to creating and using digital payment systems, and promote competition, is crucial. The report suggests that policymakers should issue licenses to payment operators who offer only basic accounts and payment services without the restrictive regulations needed for more complex financial products. This idea is already gaining traction in countries like India, Colombia and Mexico, where regulators have created a new category of financial institutions that can accept funds up to a certain cap (around $1,500 in India, for example), provide payments and remittance services, and debit cards – but cannot make loans or issue credit cards.

By using digital payment systems in their interactions with employees, merchants and customers, businesses and governments can also drive forward a demand for cashless payments systems from the customer side. It’s also important that these actors lead with communications about the benefits of cashless transactions to both customers and merchants, and increase financial literacy.

Increasing micro and small merchants’ use of cashless payment systems will require broad participation and innovation from the financial sector, regulators, governments and the private sector. But the payoff will be well worth it. The impact of moving to a cashless system will be transformative for millions of small merchants and their customers – as well as for the broader economies in which they operate.


Kate Richards is a global communications associate at Dalberg.

Photo by Laszlo Ilyes via Flickr






Base of the Pyramid, digital payments, financial inclusion, poverty alleviation