Unlike other emerging economies, the challenge of financial inclusion in South Africa is not the low numbers of bank cardholders but rather the low numbers of payment acceptance points. There are around 80 million bank cards in circulation, yet usage within these accounts remains low. Many South Africans use their bank cards once a month to draw their full salary or grant. In urban suburbs, bank cards are accepted for purchases almost everywhere; but as you move into peri-urban or rural areas only one in 10 retailers accept card payments.
It is no wonder that over 60% of all transactions in South Africa are conducted in cash, and this increases to as much as 90% in rural areas where both informal retailers and low-income levels prevail. According to a study by Mastercard, the cost of cash in South Africa tops at R23-billion — 0.53% of GDP — and it is largely low-income earners who are carrying this cost.
According to the World Bank, financial inclusion means that “individuals and businesses have access to useful and affordable financial products and services that meet their needs — transactions, payments, savings, credit and insurance — delivered in a responsible and sustainable way”.
This is not the case in South Africa and it is the indigent who are the most adversely affected by the way our financial services sector is structured. Financial technology or fintech companies have stepped in to change that, but the odds that they face as entrepreneurs are huge.
For payment service providers like Sureswipe, which has been joined by newer fintech start-ups such as Yoco and iKhokha, the ability to access and service the informal sector at a price point that makes commercial sense has been one of the main business challenges. Expensive regulatory and compliance requirements make the costs of onboarding a new retailer far greater than the revenue earned on the transactions that the retailer makes every month. Though this changes as the retailer moves from start-up to small business, the initial outlay is being carried by fintech providers.
Furthermore, access to the National Payment System is limited and payment service providers still need to partner with one of the big financial institutions to operate. All this has done is decrease both competition and product reliability and increase costs.
Interestingly, since the inception of card payment fintech players into the South African market, the increase in competition to incumbent banks has seen merchant discount (transaction) fees almost halve, putting millions of rand back into the pockets of independent retailers.
It is well known that the solution to our unemployment crisis will come from the small and medium enterprise sector. Many small businesses and particularly independent retailers start as a way for people to survive. Those that can move beyond the start-up phase and grow not only provide jobs to the business owner and their family, but over time to the broader community as well.
SMEs have a far better chance of surviving if they can accept card payments. Mastercard studies have also shown that merchants who introduce card acceptance report an average increase in turnover of 50%, while those who introduce mobile payment acceptance — via quick response (QR) codes — see their revenues climb by 10%.
To ramp up financial inclusion in South Africa, we need to look at other emerging economies. The Indian and Indonesian governments introduced differentiated banking licences to increase financial inclusion. This has allowed smaller financial services companies to provide specific products and sometimes only in prescribed geographies. This approach is more affordable for the fintech companies offering the service and provides a niched solution to a specific market. The Mexican government worked with its Chamber of Commerce and Visa to subsidise payment devices for informal retailers. About 20 000 devices were deployed, building more businesses, triggering sales and uplifting local economies.
Our government could step in on two fronts by introducing differentiated banking licences and by driving more impactful public-private partnerships to quickly build a stronger SME sector.
Between Sureswipe, Yoco and iKhokha, we have more than 40 000 payment devices in South Africa and we estimate that over 30 000 businesses are accepting card payments for the first time.
This year, Sureswipe marks its 10th year of existence. Yet in reaching this significant milestone, we have carried a lot of the risk ourselves by providing card payment services to businesses and independent retailers that would otherwise not have been able to afford them. Through our cash advance offering, we are also stepping in to provide loans that merchants would be hard-pressed to secure from the big banks. This is effectively access to working capital for merchants to expand or improve their businesses which is paid through customer card swipes.
Since 2010, more than 55 countries have made commitments to financial inclusion, and more than 30 have either launched or are developing a national strategy. Research by the World Bank has also shown that when countries institute a national financial inclusion strategy, they increase the pace and impact of reforms.
South Africa needs a national financial inclusion strategy that has the commitment of all the dominant players in government and business.
- Paul Kent is MD of Sureswipe, an independent card payment solutions company