Digital Payments: Unlocking the formal economy for small businesses

By Joel Muhumuza

Like many developing countries, Uganda is a cash economy. This is particularly true for the transportation sector. Boda-Boda's or motorcycle taxis dominate private transportation in Uganda, particularly in major towns like the capital city - Kampala. Until recently, boda-boda drivers in Uganda's cities and towns acquired customers by standing alongside busy roads close to where people might need transport. With the increased penetration of smartphones and the emergence of companies like SafeBoda, an app based ride hailing company for motorcycle taxis - the dynamics of demand and supply have changed, with drivers now able to accept passenger requests from anywhere within a certain catchment area. Thus matching demand and supply more accurately.

What is unique about this regular transaction is the mode of payment - it's no longer in cash but digital, entirely mobile money driven.

Not only has SafeBoda's application improved business for Boda-Boda drivers on the platform, but going digital has had an unexpected benefit - SafeBoda drivers have gained access to formal financial services and have a reason to continue to use formal financial services. Thus, gradually formalizing a largely informal sector.

Micro, Small, and Medium Enterprises (MSMEs): Bound by a common problem

A Boda-Boda is an example of a micro business - proprietor owned or run or both. Micro, small and medium businesses world over face similar issues when it comes to access to capital to scale.

The biggest challenge in providing financial services to informal businesses is the lack of reliable and accurate data that gives insight into the health of the business. Digital transaction data trails solve both issues. Digital transactions give visibility into the cash inflows and outflows of small businesses. More than a collateral based loan, which is hard to liquidate for commercial banks, data trails generated by mobile money, and card payments give a credit, and insurance provider direct insight into the economics of the small business and help them accurately assess the risk of the business.

However, Informal micro, small and medium sized businesses often capture and rely on manually entered records, if at all. Banks on the other hand, require accurate book-keeping that is independently verified and increasingly are demanding this information electronically to expedite loan processing. Thus, consciously or unconsciously excluding micro, small and medium enterprises - the engine of growth for any economy. In 2015, per the the Ministry of Trade, Industry and Cooperatives MSME Policy 2015, MSMEs contributed to 70% of Uganda's GDP and were responsible for 90% of employment. The World Bank reports that Sub-Saharan Africa's payment systems, with the exception of two-three countries, are the least developed globally. Cash is still the default payment instrument. Combined with the high cost of setting up brick and mortar financial outlets in the areas within reach of small businesses, financial service providers have no oversight and find it costly to reach businesses like the Boda-Boda riders, or roadside Dukas (mom and pop stores). The chasm therefore is the way in which informal business is carried out and how formal financiers process data.

For the SafeBoda drivers, mobile money not only removes the cash-handling risk but also creates a digital trail of the incomes - thus, helping financial service providers learn about the economics of the

motorcycle business. Additionally, the SafeBoda platform also dispalys complaints, incomplete rides, and number of accidents - crucial information that helps financial service providers ascertain individual risk - thus, not only building a financial but also behavioral profile of the driver that they might lend to or insure.

The Boda-Boda small business example can be extended across multiple sectors. Digital payments , through mobile money, are beginning to make a dent in cash's dominance in Africa with about 400 million (two in five) people owning a mobile wallet.

Large corporations in Uganda such as Mukwano Industries - an agro processing and manufacturing conglomerate in Uganda - pay thousands of their farmers along various agricultural value chains. Digital payments provide us a picture of how much farmers earns each season. Mukwano saves on the cost of sending cash vans to make payments, and the farmers finally have records that can be used to assess their income and potentially, ability to take on credit.

Not only are small businesses and large corporations seeing the value in digital, but so too is the government of Uganda. From government social benefits payments (Government to Person) being disbursed using mobile money and electronic vouchers to the payment of taxes and fees (Person to Government) as well as utility payments (Person to Business), electronic money as a payment mode of choice beyond person-to-person payments is gaining traction. All these types of digital transactions generate volumes of data and if harvested well, can help assess the risk of businesses and individuals against which lending decisions can be made.

Digitization of payments is not without its challenges. From the informality of small businesses, to poor network connectivity in rural areas, to individual phone ownership penetration at 52%, to not enough cash-in, cash-out agent density - there is a long way to go when it comes to digitizing payments. However, that does not negate the promise of digital payments and how they are emerging as a reliable data source to unlock the formal financing and insurance gap for businesses and individuals - thus, reducing their exclusion and helping them achieve a positive multiplier effect.

I recently needed to rush back to the office for a major meeting. Traffic was logjammed. Within three minutes of using the Safeboda app, the driver arrived, asked if I was using mobile money and we were on our way.

He told me: "I also have a serious job. I am getting a salary now from mobile money. I even have insurance." His excitement is an illustration of how digital services can transform an informal industry into one that formal financial service providers can begin to support. This is evidenced by the fact that even though only about one in 100 people in Uganda have insurance, all Safeboda riders are currently insured.

It's a small step but a critical one on the road to ensuring all small business owners have access to financial services that can help them grow their businesses.

The writer is the manager, financial services at financial sector Deepening Uganda. He's a product development and financial services professional having designed products in East and Southern Africa.