Guest Articles

July 30

Shreya Kankanhalli / Luz Gomez

Why Don’t Small Retailers Adopt E-Payments?: New Research Suggests the Reasons Behind Merchant Aversion – And Solutions for Stimulating Customer Demand

A typical shopper in Mexico buys products from a small, traditional business and pays for it with cash. Indeed, 2.1 million traditional tienditas (or retail microenterprises) in Mexico drive the majority of retail sales, and 83% of them don’t accept any form of payments other than cash [1]. This is a puzzle to policymakers who have long held e-payments as a panacea to the challenges of tienditas. E-payments create a digital financial trail which could help these business owners easily manage cashflow, maintain customer databases and establish their creditworthiness to formal lenders. And with the onset of the COVID-19 pandemic, digitizing these retail payments has taken on new importance. In-person cash transactions now present public health hazards to both tiendita owners and consumers. Moreover, strengthening these entrepreneurs’ ability to manage their cashflow via digital payments is critical in the face of economy-wide shocks to customer demand.

In light of these benefits, the widespread lack of e-payment acceptance among tienditas remains surprising – particularly when considering their availability. Technology to accept e-payments is agile and cheaply accessible in the Mexican market. Gone are the days of having to install a computerized point-of-sale system, with a barcode scanner and dial-up-connected payment card terminal. Today, a Bluetooth-driven clip-on dongle that accepts electronic payments will only cost a retailer about US $20, on average, provided they own a smartphone. So why don’t most small retailers in Mexico accept electronic payments?


Researching Electronic Payment Adoption Among Tienditas

Researchers from Stanford University’s Graduate School of Business and the World Bank, supported by the Mastercard Impact Fund in collaboration with the Mastercard Center for Inclusive Growth, are tackling the puzzle through a field study in Guadalajara, Mexico. In partnership with innovative fintech provider Kiwi, the research team is testing interventions to encourage retailers to adopt e-payments (including remote, contactless e-payment options), via a rigorous randomized field experiment with 1,200 firms. While their research started prior to the COVID-19 outbreak, it is now uniquely positioned to provide actionable insights, as the pandemic threatens to leave cash-only businesses uncompetitive in a socially-distanced era.

Their baseline survey of 270 retailers revealed patterns that defy conventional wisdom on technology adoption by small businesses. Amongst businesses that were cash-only, all were already aware and informed of the available technologies to accept e-payments. In addition to information, affordability also didn’t seem to be a barrier. On average, the businesses made US $585 in monthly profits, so the e-payment dongle would cost a small percentage of only one month’s earnings. Importantly, the researchers found that owners of tienditas were not digitally illiterate by any means. Smartphone usage was high amongst the owners, in line with statistics showing that almost 80% of Latin Americans will own smart mobile devices by 2025. Owners of tienditas used other digital technologies extensively—80% of owners said they used the internet for product and supplier research, and 50% engaged in some type of digital marketing (whether that was a Facebook page, a listing on Google maps, or a WhatsApp group chat to promote their shop). This reveals a pre-existing familiarity with, and appreciation for, using digital tools to enhance their business.


The Reasons Retailers Avoid Electronic Payments

Essentially, this data suggests that retailers avoid electronic payments for more strategic reasons. During early field interviews, the researchers found that commissions on e-payments loomed large in the minds of some business owners. Owners were anxious about losing a cut of each sale (usually 3% to 5%) in fees to an e-payment service provider. Some business owners even considered completely altering their pricing strategy to offset the cost of the fees. Many more retailers were reluctant to accept e-payments because they didn’t perceive a strong demand for it from their customers. Sometimes the perception was rooted in reality, particularly for retailers based in low-income neighborhoods where customers lack the means to pay electronically. But this argument was also made in neighborhoods with relatively high debit card ownership among shoppers. This is a classic chicken-or-egg dilemma. Customers don’t acquire e-payment methods because retailers won’t accept them, and retailers don’t accept e-payments because they think customers don’t want to pay electronically.

These insights tell us that if we want retailers to adopt e-payments, we should avoid a typical training model which focuses predominantly on education and information provision. Instead, interventions that directly target retailers’ worries could be more fruitful. Firstly, offering temporary discounts on commission fees to retailers could help them overcome initial resistance to using the e-payment devices. Moreover, proactively marketing e-payments to customers could go a long way – even if it consists of something as simple as a window sign that says “Payment cards are welcome.” This could help retailers learn about the hidden demand from customers to pay with cards, correct their misperceptions, and nudge customers to go cashless. COVID-19 could also play a role in breaking the chicken-and-egg problem, as it may push customers to consider non-cash payment options.

These interventions, currently being tested in a randomized field experiment, have also been adapted to accommodate the social-distancing requirements of COVID-19. The researchers have developed video tutorials for business owners that explain how to troubleshoot their e-payment technology. They have also launched a WhatsApp account to deliver personalized technology support to business owners from a distance. Meanwhile, they’ve designed in-person interventions (currently on hold, to be resumed after COVID-19) with a “Make Changes, Don’t Preach” philosophy that the researchers deployed in Mexico City, where they tested modernization interventions for retailers. There, both customer-facing and back-end modernization interventions improved retailer sales performance by 15-20% over a control group of businesses that were similar at baseline.

Understanding the dynamics hindering (or facilitating) digital inclusion for a large portion of small retailers can help policymakers and financial service providers break the chicken-or-egg dilemma. And, perhaps most importantly, these insights can help drive the development of solutions for small retailers so that they may reap the benefits of an increasingly digital economy, especially as they navigate the new world of COVID-19.


NOTE: The team that produced this research also includes Stephen J. Anderson, Sridhar Narayanan and Leonardo Lacovone.

[1] Figures from INEGI, the census-conducting government agency in Mexico. Encuesta Nacional sobre Productividad y Competitividad de las Micro, Pequeñas y Medianas Empresas (ENAPROCE 2018).


Shreya Kankanhalli is a PhD candidate in quantitative marketing at Stanford’s Graduate School of Business and Luz Gomez is the Director of the Mastercard Center for Inclusive Growth’s work in Latin America and the Caribbean.


Photo courtesy of Ted McGrath.




Coronavirus, Finance, Technology
business development, COVID-19, digital finance, digital payments, fintech