Pay on demand model essential for Uganda's small businesses

BUSINESS | SCIENCE & TECHNOLOGY 

Mastercard released a white paper titled, ‘Pay on Demand: The digital path to financial inclusion in Africa'.

The paper reveals how Pay on Demand, a business model that gives people the ability to pay only for what they use, as they need it, can lift millions of people across Africa. 

Raghav Prasad, Division President for Sub-Saharan Africa, Mastercard spoke to the New Vision's Samuel Sanya about the model and how it can lift millions out of poverty by enhancing the operations of micro, small and medium enterprises (MSMEs) in Uganda.  

Below is the conversation;  

Q. What is the basis of this pay on demand whitepaper? What influenced it?  

Two decades ago, the growth and spread of mobile phones completely changed the landscape of Africa. Their widespread use bridged urban-rural and rich-poor divides by connecting people to peers, information, markets and services.

Mobile phones became a viable instrument of digital inclusion when prepaid plans allowed individuals to recharge for as low as ten cents at a time. 

Today, the Pay on Demand business model is making significant inroads in the same way the telecoms industry did with the mobile phone at the turn of the century.

By giving people the ability to pay in small increments for what they use, as and when they need it, the model connects both people and businesses to the networks and systems they need, whether it's access to electricity, clean water, or basic financial services.  

For a farmer, this means having access to light at night to protect their livestock from predators.

For a parent, this means having their children do their homework with light, without being exposed to damaging fumes from a kerosene lamp.

For a small business owner, this means being able to charge their smartphone at any time of the day to ensure customers can always reach them. 

The Pay on Demand model has already transformed the lives of millions, but we believe we are just scratching the surface in terms of its potential.  

We are confident that there is real opportunity for it to positively impact the lives of a billion people across the continent.  

It's our desire to ensure the Pay on Demand model fulfills its potential to help realize true inclusive growth and increase prosperity, coupled with our commitment to the growth of Africa that inspired us to conduct this research.

We believe that Pay on Demand will help drive a new wave of digital and financial inclusion, but in order to further scale the model effectively, we must collectively better understand how it affects economic activity, how exactly it impacts individuals and businesses, what the barriers to access are, and how we can overcome them together to scale the solution. 

Q. How was the whitepaper survey carried out? 

The report is based on research from in-depth face-to-face interviews with Pay on Demand users across Nigeria, Kenya and Uganda, as well as secondary data.

This research method allowed us to go beyond the surface and develop a deep understanding of the far-reaching impact of this model. 

 Q. What was the key outcome? 

What really came out of this white paper was a clear way forward. It's our belief that to drive financial inclusion we must ensure that consumers and small businesses have the devices and connectivity necessary to participate in the digital economy and improve their livelihoods.

And this will happen by fulfilling their needs and solving their credit requirements, all through enabling easy payment when they want it and in the amounts they can afford.  

However, we can only do this if all stakeholders - governments, MNOs, small businesses, payment service providers, device manufacturers, financers - participate collaboratively to enable digital inclusion, which will ultimately lead to financial inclusion. 

But beyond the practical benefits, unexpectedly we were touched to discover the emotional benefits that Pay on Demand provides.

For example, the dignity that comes from having a phone that is always charged with credit or the social status that comes with having a smartphone.

In all three countries where our research took place, many users reported having happier and more comfortable family lives and higher self-esteem. 

Q. How does maintaining a digital transaction history improve access to credit, loans and insurance? Privacy concerns? 

 Close to a third of adults globally - 1.7 billion - are still unbanked, which means that they don't have access to a financial account.

About half of unbanked people include women in poor households in rural areas or those who are out of the workforce.

For these individuals, being a part of a financial system means being able to access and afford products and services that would be denied to them if they were to rely entirely on cash.

And for Micro-, Small- and Medium-Enterprises (MSMEs) - 44 million in Sub-Saharan Africa - this means being able to access financing to help them grow, create jobs, and boost the economy. 

Take a farmer in Uganda, for example. They might need agricultural equipment or supplies to support their business but don't have any kind of financial or credit history to get a loan and buy what they need.

Pay on Demand solves this problem by not only providing a platform where they can purchase equipment or supplies in small increments, but also by helping them build creditworthiness over time that lenders and financial institutions can access.  

And because engagement and transactions are digital, the data is now available for every individual or MSME and allows for more efficient loan decisioning and disbursements, while cutting out manual costs.

So, the next time the farmer needs to buy some fertilizer or new tires for their tractor, lenders can actually offer them better credit terms, and can even disburse a small amount very efficiently. 

And when you combine the data from Pay on Demand platforms with other digitization platforms such as the Mastercard Farmer Network, an innovative solution that connects small-scale farmers with buyers, more sales information can be captured digitally, and payment patterns can be better understood.

This can lead to access to a wider range of products. So apart from creating a history of creditworthiness, data can be used to develop better solutions for the farmer which can positively impact their business in terms of higher productivity and yields, and increased access to potential buyers. 

Q. The Mastercard paper expects the ‘Pay on Demand' model to lift millions of people out of poverty. How effective has the model been so far?  

The power of choice is incredible. Let me explain this. 

The Pay on Demand model has already transformed the lives of millions of people. From giving people the option to switch on an electric light in their house, as opposed to living with paraffin fumes from a  single lamp that services all the rooms, to giving children an hour of additional study time in the home each day after the sun sets, the impact of solar energy has been the most significant and far-reaching. 

But the model is extending to meet other needs. A small shop owner who wants to start selling cold drinks, for example, can potentially buy a fridge on credit through Pay on Demand.

Gas stoves, mobile phones, agricultural equipment, and TVs are among other widely sought-after products that are also now available.  

 So you can see how when we give people the choice - and it's important that we give them the right choice - they are able to broaden their opportunities to benefit themselves and their communities. 

 There are, of course, still challenges that need to be overcome for us to improve the effectiveness of the Pay on Demand model.

Unavailability of Pay on Demand solutions close to the customer results in slow consumer adoption, for instance.

Compliance-related challenges, unavailability of low cost and effective payment solutions and unattractive finance rates can all contribute to this.  

 However, we can overcome these challenges if major stakeholders work together.

Device manufacturers provide the capability to enable and update devices in real time based on the status of payments.

Payment service providers enable consumers to use existing payment credentials to easily pay on demand in small values while also being ready to lock or unlock a device in real time.

Device distributors, such as multinational organizations with a large market footprint, need to make devices available easily to consumers.

And financers must be able to use this capability and lend competitively and digitally. 

Q. Small businesses dominate the landscape in Africa. How can the model be harnessed to support them? 

In Sub-Saharan Africa there are 44 million MSMEs, 97% of which are micro enterprises.

These are the backbone of the region's growth. Pay on Demand can be harnessed to support them by creating improved opportunities through increased connectivity, and new revenue opportunities through being part of a financial system. 

If a tailor needs to contact a customer on WhatsApp regarding the design of a dress, for example, or a shopkeeper wants to expand their business by selling cold drinks and needs a fridge, Pay on Demand can provide them with a means to meet their specific needs. 

The model can also provide financial institutions with the confidence to lend to them.

In the absence of credit bureaus, lenders face high costs and high risks, but this can be resolved by using alternate methods of payments such as Pay on Demand which creates credit history.

Additionally, once a business owner finishes paying off a product and owns it, their recorded financial history will likely give them access to more products and better credit terms. 

And for small business owners, the assets made possible through Pay on Demand have a direct relationship with improved opportunities and increased revenue.

Our research found that those who run small businesses said that being part of a financial system makes them aware of a route towards saving for better purchases.

Knowing exactly how much they will be paying in a week or month helps them manage finances better. The emotional security of having products with warrantees adds to the general sense of financial well-being. 

 Q. Closing thoughts...... 

 It is our belief that the potential the Pay on Demand business model presents is groundbreaking, in the same way the birth of the telecoms industry and the availability of small top-ups was two decades ago.

By paving the digital path to financial inclusion, the Pay on Demand model can create an increasingly prosperous and financially inclusive society across the entire continent.  

This will be only be achieved through the power of partnerships. To further scale the model effectively and create a digital economy that works for everyone, key players in the ecosystem must come together to drive a new wave of inclusion through connectivity and smart devices.