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A recent report by Visa shows net benefits businesses, consumers and authorities would gain if they transitioned from cash-based economies to full digital payments.
The Cashless Cities: Realising the benefits of digital payments report — which was compiled by economics and research firm Roubini ThoughtLab — is based off data drawn from 3000 consumers and 900 businesses across six cities, which was then extrapolated to 94 cities around the world.
In all, the study covers 100 cities from 80 countries around the world. An infographic at the bottom of the article shows how nine other African cities (Accra, Algiers, Cairo, Casablanca, Durban, Kigali, Nairobi, Lagos and Luanda) in the report compare.
‘Markets like Zimbabwe, Zambia, Ghana, Mozambique and Angola are ground zero for digital payments’
“The use of digital technologies — from smartphones and wearables to artificial intelligence and driverless cars — is rapidly transforming how city dwellers shop, travel, and live,” Roubini ThoughtLab head Lou Celi (pictured below) said in a statement.
“Without a firm foundation in electronic payments, cities will not be able to fully capture their digital future, according to our analysis,” added Celi.
This data suggests there is room for disruption and need for digital payments solutions. But, how should startups working in this field focus their efforts?
Room for disruption
Broadly there appear to be two groups of cities — those with largely cash-based economies and those where 50% or more transactions are concluded via credit card, electronic transfers or mobile wallets.
In five of the surveyed African cities (namely Accra, Algiers, Cairo, and Casablanca) an average of just 31% of transactions are conducted digitally. Kigali, Luanda and Lagos come in next with 32%, 33% and 39% cashless transactions, respectively.
In comparison, Durban (57%) and Johannesburg (65%) appear to be among the continent’s more digitally mature cities, followed by digitally transitioning Nairobi at 50%.
The report also appears to echo sentiments of another study conducted by Johannesburg-based research company Answered Insight earlier this year for PayPal.
The study revealed that 85% of 400 surveyed South Africans had used mobile phones to make a purchase in the past year.
“We found that many (South Africans) are already using their phone as a digital wallet, going so far as leaving their wallets behind to do all their transactions with their phone,” said Efi Dahan, PayPal general manager for Russia, Middle East and Africa, in an emailed statement earlier this month.
‘Myriad of opportunity’
With so much money to be saved, and made, what can startups glean from these numbers?
“Many fintechs are elbow deep in developing technology solutions which means they can often forget to look at the broader world around them,” said Visa South Africa country manager James Simpson.
“Research like this gives fintechs a clear view of the myriad of opportunity (sic) that exists to solve for smarter cities. The need to engage with public and private sector to keep abreast can be time consuming and research like this means they can focus on the things they really need to,” added Simpson.
Is there still room for more digital payment startups in South Africa?
“Fintechs are incredibly good at disrupting channels and taking the cost out of the system — in South Africa opportunities are already being unlocked to expand acceptance for small merchants, make bill payments easier and solve for costly cross-border remittance and there is still plenty of opportunity out there,” he said.
“The question is, where are the real gaps and opportunities where agile innovators can step in and how can big technology companies like Visa work to take advantage of this evolving space?” said Simpson.
However, there is need for collaboration between the private sector and the government (local, provincial and national) to drive the level of digital payments imagined in this report.
“(In markets) where we are seeing great traction around cashless innovation, it’s where either government is very heavily involved in some kind of demonetisation initiative or where either currency is just not available for some reaason and we need to very quickly innovate in that,” said Geraldine Mitchley, Visa’s senior director for digital solutions for Sub-Sahara Africa.
Mitchley (pictured above) gave an example of Nigeria’s cashless mandate.
In 2012, in an effort to curb the amount of physical cash circulating in the economy, Nigeria’s Central Bank launched the Cash-less Nigeria policy which imposed a cash handling charge on withdrawals exceeding N500 000 (R16 575) for individuals and N3-million (R99 450) for companies.
‘Ground zero markets’
“This is going to sound a little bit cliché, but probably South Africa, Kenya, Nigeria is where we have a lot of opportunity and maybe because of the growth of mobile connectivity, and specifically because of the role the smartphone is playing,” Mitchley opined.
She added that there’s been “loads of investments” in markets like Zimbabwe, Zambia. Ghana, Mozambique and Angola,” which she said “literally form ground zero” for digital payments.
Consider regulatory efficiency
i-Pay co-founder and CEO Thomas Pays shares the same view as Mitchley, saying the hottest markets at the moment in digital payments are in Nigeria and South Africa.
Pays (pictured below, right) explained that this is because communications networks infrastructure, internet service providers and the cost of data are key factors when it comes to digital payments.
However, he mentioned that he’s starting to see a rise in opportunities in countries like Ghana.
His Johannesburg-based electronic fund transfer processing platform currently operates in South Africa and Nigeria, with plans to expand to Kenya, Ghana and Namibia.
He said when considering a move to a new country, meeting the dominant player and the regulator enables him to gain insights on how viable the opportunities in that market are.
Although he uses data supplied by Ernst and Young (EY), he cautioned startups “not to make decisions (solely) based on data”.
“If you have a country with lots of opportunities, but with regulators who are not efficient, then you’ll have a challenge,” he said, adding that there’s a correlation in countries with opportunities in digital payments and efficient regulation.
He mentioned Rwanda as one of those countries that have “extremely efficient” regulators.
“Rwanda regulators get back to you in under six hours in certain industries. That makes a big difference,” he said.
Recommendations for policy makers
In an effort to encourage residents to pay their municipal bills electronically, Visa has embarked on a partnership with the City of Johannesburg.
Partnerships like this, Simpson said, “go a long way in making the necessary difference to drive efficiencies”.
He added that the Cashless Cities report also includes an action roadmap outlining the steps policymakers can consider to reduce cash in their city.
The roadmap addresses the barriers to digital payments adoption that key stakeholders (consumers, businesses and governments) may have to work to overcome.
Recommendations in the action roadmap include undertaking financial literacy programmes to help integrate the unbanked into the banking system, implementing incentives to stimulate innovation that is focused on scaling new payment technologies, and implementing secure open-loop payment systems across all transportation networks, among others.
The report is supplemented by an online data visualisation tool. Both assets, he said, are resources that policymakers and stakeholders can use to explore the benefits of increasing digital payments use.
The infographic below was created using data from Visa’s Cashless Cities report. It shows benefits African cities will gain by fully transitioning their economies to digital payments.