Lessons from Incentives Encouraging Digital Payments

The World Bank’s Financial Inclusion Global Initiative (FIGI) has issued a paper investigating Incentives for Electronic Payment Acceptance (EPA) ¹. The report was funded by the Bill and Melinda Gates Foundation.

The paper explains why electronic payments are beneficial, how they are incentivised and makes recommendations for their acceleration in the face of the slow transition away from paying with cash of many micro, small and medium retailers (MSMRs) in emerging economies.

The paper reviews economic, policy and infrastructure incentives used around the world direct to merchants and indirectly to consumers and Payment Service Providers (PSPs). The focus is on MSMRs, although much of this also applies to larger retailers.

Critical editorial comment

In light of all these entities having to work so hard to move people to electronic payments, it is a shortcoming that the paper does not investigate what might be lost if cash payments decline to a point where they are uneconomic.

It does not analyse the financial or societal costs and implications of actively subsidising one form of payments at the expense of another. It does not question the implications of promoting commercial money over state money or justify the state subsidy and support for commercial organisations. Perhaps important questions that the sponsors and commercial supporters of the paper did not feel should be examined.

Benefits of electronic payments

The report states that it is based on the key assumption that electronic payments are beneficial for relevant stakeholders. For MSMRs electronic payments, these are to: 

Increase revenues 

• Allow efficiency gains

• Lower cash handling costs

• Provide real-time access to revenue and expense histories

• Allow remote selling

• Provide access to other financial and value adding services.

For consumers, electronic payments: 

• Increase safety

• Reduce transaction times 

• Allow remote purchases

• Provide better financial management 

• Provide access to other financial services.

For PSPs, they increase revenues and give opportunities to cross-sell other products and services.

For governments they reduce the size of the shadow economy, allow the collection of taxes and enable the disbursement of funds.

At the macro level, electronic payments are linked to higher levels of economic growth, increased efficiency of money transfers and they support increase online business.

Financial inclusion

The adoption and frequent use of digital payments is thought of as a first step to broader financial inclusion for traditionally unbanked individuals and merchants.

Financial inclusion is regarded as a positive because electronic payments are necessary for these groups to have access to other relevant and suitable financial products which provides the incentive for businesses to provide them. It gives the unbanked access to the digital economy.

The World Bank is already running projects to digitalise payments whenever feasible and relevant, for example for agricultural payments, utility bill payments and government payments including social safety nets.

The challenge

The data in the report is drawn from sources only up to 2019. In 2016, $19 trillion out of $34 trillion was spent in cash at MSMRs. In the 2017 Global Findex database only 52% of adults paid digitally, but only 26% of low income and 29% of middle income people paid digitally. In 2011 that figure had been 41%. In developing countries 63% of people had transaction bank accounts compared with 96% in developed countries. Overall the figure was 69%, up from 51% in 2011. 56% of women were unbanked.

The report identified three elements that had to be built to allow EPA to increase.

First, merchants and consumers need to have transaction bank accounts. Second, the use of electronic payments needs to become established. And finally, people need to become psychologically comfortable with paying digitally. The rise of the ‘killer app’, for example WeChat Pay and M-Pesa, is proving to be a major part of drawing people into making digital payments and making them part of everyday life.

Usage incentives

These are loyalty programmes such as cashback or air miles or access to credit, perhaps with lower rates or interest free periods or, recently, staged payments such as buy now pay later. The report notes that this can lead to over indebtedness and over consumption. They can also draw people away from lower cost payment options, such as debit cards, to credit cards.

Some governments have chosen to mandate lower interchange fees. Evidence suggests that this is most effective when the card infrastructure is already in place. Spain is used as an example. In Malaysia the government limited fees on debit cards to 0.15% or 0.01% of the value of the transaction, whichever was lower. It also sought to enhance the e-payment infrastructure and ran education and awareness programmes.

The result was an increase in transaction account ownership from 66% in 2011 to 85% in 2017, the number of point-of-sale (POS) terminals increased from 9,000 per million people in 2015 to 20,000 in 2019, and the number of card holders increased between 2014 and 2019 by 440% for debit cards and 48% for credit cards. The number of transactions did not increase in the same way, rising from approximately 430 million to 485 million.

Despite those apparent successes, the targets set were missed and cash in circulation as a percentage of GDP remained firmly at 6.6-7% between 2015 and 2019. The report suggested that the authorities needed to be less interventionist and more market-oriented.

POS and fiscal incentives

POS terminal subsidies usually take the form of tax credits (for example in Argentina and Uruguay) or acceptance development funds (ADF).

ADFs target card issuers and networks to support payment acceptance. This has been done in Mexico, Poland, Indonesia, Malaysia and India. One finding is that MSMR merchants often regard these as an instrument for tax collection.

In addition, tax deductions and VAT credits are offered to merchants and income tax deductions and VAT rebates to consumers. This has been tried in South Korea, Uruguay and Colombia. Again, the challenge is a fear of the tax authorities. The South Korea case study highlights how challenging this is. The answer suggested was simple and transparent tax codes and easy to use tax collection mechanisms.

In 2004 Mexico ran a lottery to encourage electronic payments. Called the El Boletazo campaign, it was run by the Ministry of Finance and the Mexican Banking Association and supported by Visa and Mastercard. Every card purchase was automatically registered and each week a raffle was run on TV with prizes such as cars and fridges. This was sufficiently popular that the raffle became daily.

This has also been tried in South Korea and by Safaricom in Kenya using M-Pesa.

Cash disincentives

Cash disincentives, mandatory electronic payments and mandatory reporting requirements are primarily aimed at reducing the size of the shadow economy. Benefits for EPA are secondary.

Typically, these requirements include caps on cash transactions, mandatory usage of tax invoices, special cash reporting requirements and eliminating higher value denominational notes. The report does mention that this can have an effect on the financially excluded but goes no further about this.

Examples of restrictions are South Korea who, in 2014, required merchants to have to accept cards if the sales value was over $20,000. In Italy in 2014 merchants had to accept cards for any transaction of €30 or more. In 2021 it limited cash payments to €1,000. The ECB no longer issues the €500 banknote.

Where an obligation is introduced requiring merchants to issue and report receipts, cash becomes a burden. This works best for business-to-business transactions, and it only works if the policy is implemented with the IT systems in place and if it is carefully policed. In Mexico since 2005 e-invoicing has been a requirement and the system works well.

Added value for merchants

PSPS can offer significant additional value to MSMRs around customer marketing, vendor management and access to short term credit. The data collected means they can offer holistic views of a company’s finances (eg. cash flow, accounts payable) inventory and staff productivity. It also allows financial institutions to assess the credit worthiness of the company.

Squire, for example, supports merchants with online presence, marketing software and loyalty programmes to increase customer engagement, monitoring of staff hours and the ability to track inventory across tills and sites.

Recommendations

The paper has nine recommendations for encouraging EPA. They range from paying government salaries and benefits electronically to reducing taxes when electronic payments are used by consumers and merchants to regulating to create a level playing field between banks and non-banks.

If only cash were supported as vigorously! If governments can intervene so actively to promote EPA, there has to be a question why central banks insist on payment choice neutrality.

1 - The report was prepared by the Electronic Payments Acceptance (EPA) Initiative Working Group of the World Bank Group’s Financial Inclusion Global Initiative (FIGI), working with Payment Systems Development group’s Finance, Competitiveness and Innovation Global Practice, have issued a paper investigating Incentives for EPA.