[Long Read]: Financial inclusion – Are small businesses being incentivized enough to go cashless?


More and more of our daily purchases are increasingly being done using the plastic in our pockets, not just at the cashier but online as well, with consumers all over the world gradually transitioning to cashless payments.

In 2017, global non-cash transactions reached $538.6 billion in value, with $96.2 billion taking place in the Middle East and Africa. In 2018, the world total of business-to-consumer (B2C) e-commerce sales (which includes non-cash) almost reached $4.4 trillion.

In recent years, some steps have been taken in Egypt to steer it towards a cashless economy. In late 2016, the government established the National Council for Payments (NCP) to lead this transition. Around the same time, the Central Bank of Egypt (CBE) also passed new regulations to facilitate the uptake of mobile and digital payments, while last year, a new law was issued that went as far as to make some cashless payments obligatory for certain public entities (including privately owned companies) and circumstances.

However, Egypt has still been falling behind other similar countries and sluggish in reaching its full potential. Why is this the case, then? Are banks and other entities doing enough to encourage small businesses to provide their customers the option of paying with their cards? Are the businesses themselves reluctant to join the cashless economy? Or has it been down to consumers?

According to a 2017 report that was jointly compiled by the Ministry of Communications and Information Technology (MCIT) and the United Nations Conference of Trade and Development (UNCTAD), Egypt has the largest number of cardholders in the region yet it is still small in proportion to the population; however the report also highlights that Egyptian cardholders are often reluctant to use their cards.

Point-of-sale (POS) card terminals

According to the central bank’s April 2020 statistical bulletin, by the end of December 2019, there were around 17.3 million debit cards and 3.3 million credit cards circulating in the country (with a population of around 100 million people), and only just over 88,000 POS terminals.

This is in stark contrast to advanced economies such as the United Kingdom (with a population of just under 68 million) which in 2019 issued 61.9 million credit cards and 97.3 million debit cards. In 2017, the UK had 2.2 million POS terminals.

In order for any small or medium-sized business (SME) such as a café or grocery shop to acquire a POS terminal, they must first go through a number of procedures with a chosen financial entity to set up an account. These entities include the big banks, such as Commercial International Bank (CIB) and Qatar National Bank Al Ahli (QNB). There are also other financial service providers such as Fawry and Paymob.

Each entity has their own process to go through for a business to acquire a POS terminal.

The publicly owned National Bank of Egypt has a relatively straightforward process and information on all the requirements was easily acquirable by telephone through a hotline number. The customer service agent who spoke to Business Forward divulged the fees of using the service, which was 2 percent of every sale made through the POS terminal. There are no other fees except for a deposit of EGP 5,000 in a new bank account to be opened for the service.

Fawry have a hotline dedicated to current business clients who possess their POS terminals and for prospective businesses wishing to acquire one. They offered the convenience of an automated voice message which listed all the documents required to begin the process. However, more information on costs, fees and terms of use could not be provided before submitting an application first.

Bassem Al-Makawy, who co-owns a car repair shop in Nasr City, has a Fawry POS terminal but has mixed feelings about the cashless setup.

I am obligated to have a [card] machine because a lot of people now have cards and do not carry cash,” he says. “I would rather cash than card. There is 2 percent I pay to the bank. If I make EGP 100,000, I pay EGP 2,000.”

Al-Makawy believes these fees, among other issues, discourage small businesses from going the cashless route. He adds that with Fawry, the sale does not go directly into a bank account belonging to his business. Whatever cashless sale he makes, the money goes to a bank account he cannot access which the bank and Fawry collect their fees from. He ultimately gets it in cash but has to wait for it to be delivered in person. “They only pay [the] money once a week, maybe twice a week,” which only happens under special circumstances.

“And the maximum is EGP 12,000 a week.” If he makes more, he still has to wait until the next week. “It is not nice but it keeps business going,” he concedes.

Considering the bureaucratic procedures, the added costs and logistical issues, what is the incentive to accept cashless payments?

“They incentivize you by making you a business that accepts cashless payments, that is it,” he says. “Customers will prefer to come to me instead of my competitors because I can provide that option. If I do not have a POS terminal, they will go elsewhere.”

In interviews with several shoppers conducted by Business Forward, there was a general preference for using card over cash, especially at businesses that provided POS terminals, but almost three quarters of the interviewees said they would just pay in cash if the card option was not available. Only a few of the respondents said they would walk away and find another business that accepts card payments.

Hisham, who runs a small fruits and vegetables shop in Cairo, has a POS terminal and told Business Forward the processes in acquiring it through the National Bank of Egypt were relatively easy. “It was difficult to begin with, of course,” he says, as he was trying to get to grips with the system. But eventually after studying how it works and how it would benefit his business, it became easier to adopt and operate.

He concedes, however, that he still preferred customers to pay in cash. “With regards to me, small shops and [fruits and] vegetables shops, cash is better, of course,” because it provides more flexibility. He explains when there is new produce, it is more convenient to have cash around to purchase it.

One reason being, Hisham says, is because of the maximum daily withdrawal limits on his business bank account. He cannot directly buy more produce from his suppliers by card so he needs to have cash on hand. To be prepared, he withdraws money from his account to sustain his purchases for the following 10 or 15 days. On some days, he reaches his withdrawal limit but will not have enough cash to complete a transaction. Hisham says the limits are the same as they were before COVID-19.

The 2 percent sales fees the bank charges are also a minor annoyance to Hisham. He says he only accepts card from customers who are going to buy at least EGP 50 worth of produce, but for those who want to spend less, he overcharges their cards and returns the difference in cash.

Mobile wallets

“Over the past few years, Egypt has built a robust infrastructure for digital payments, especially mobile wallets,” says Ayman Ismail, an associate professor at the AUC School of Business and Abdul Latif Jameel Endowed Chair of Entrepreneurship who specializes in technology.

“Today, we have more than 15 million Egyptians who are using their mobile wallets in many ways to simplify their lives, such as paying their bills [or] buying products and services.”

However, Ismail concedes that mobile wallets still face limits as many SMEs still cannot accept them as a method of payment.

Paymob, a locally based financial technology (fintech) startup which specializes in digital wallet payments, helps SMEs with the tools and skills to adopt cashless technologies. They also help by reducing costs and cutting out the bureaucratic hurdles required by banks, says Alain El Hajj, Paymob’s co-founder and chief operating officer.

“They could sign up with us without having to go to the bank, eliminating all sorts of dependencies required by the banking sector.”

More importantly, El Hajj says a big part of what they do at Paymob is helping SMEs understand the benefits of going cashless, showing them that the digital route can increase their profitability and help them survive competition from bigger businesses.

While acquiring the tools to go digital comes at a cost, El Hajj maintains that “the ROI (return-on-investment) of such things is very justifiable.”

Going online

In December 2019, Egypt (a lower-middle-income country according to the World Bank) boasted 49.2 million internet users, roughly 48 percent of the population. In comparison with other lower-middle-income countries with similar population sizes, the Philippines had 79 million internet users in June 2019, 72 percent of the population. In December 2018, Vietnam had 68.5 million internet users, around 70 percent of their population.

In the financial year 2015/2016, e-commerce B2C activity in Egypt was estimated to have reached $544 million in value, comprising around 0.4 percent of all retail sales.

According to UNCTAD’s 2019 B2C E-Commerce Index (where the closer the value is to 100, the better the country’s performance is) Egypt scored 39.4, ranking 102nd out of 152 countries. This puts it behind the Philippines (89) and Vietnam (64) who scored 48.6 and 61.1 respectively. Kenya, another lower-middle-income country albeit with around half of Egypt’s population size, scored 49, coming in just behind the Philippines.

UNCTAD and Egypt’s communications and IT ministry jointly designed and conducted a survey in the first quarter of 2016 with the Central Agency for Public Mobilization and Statistics (CAPMAS) on the barriers to e-commerce facing micro and small enterprises (MSEs) in the handicrafts industry.

It was the first official nationwide survey conducted in the country on microenterprises. 1000 enterprises operating in handicrafts industries across all 26 governorates were surveyed.

Only 11 percent of the MSEs used the internet for their work, and only 6.7 percent had a website of their own to sell their products, with the remaining internet users using social media. 40 percent said that they lacked the skills to be able to run a website and only 2 percent said they used online marketplaces like Jumia or Souq. Nine out of 10 businesses who sold their products online collected cash on delivery.

Is COVID-19 changing anything?

COVID-19 may have driven local consumers to be more open to online shopping, due to the government’s social distancing measures and many private sector firms having their employees work from home, along with fears of the virus spreading through the handling of cash.

According to a report by Oxford Business Group (OBG), this has caused demand for digital banking services across Egypt to increase significantly. Since March, many banks have upped their online service capabilities, including mobile bank transfers and online banking.

On June 15, Mohamed El Feky, CEO of EFG Hermes’ consumer finance service, valU, said their online sales have exceeded 50 percent during the COVID-19 crisis, up from 22 percent before.

From the several shoppers interviewed by Business Forward who had preferred cash before COVID-19, more than half said they mostly or exclusively switched to paying by card after the crisis hit, with just under half saying they still preferred cash. With online deliveries, about half said they still paid with cash on delivery, citing trust issues and missing orders in their deliveries as main reasons.

What are other lower-middle-income countries doing?

Since the Philippines imposed stringent COVID-19 measures in March, the country’s central bank waived the fees for its digital transactions service to encourage more citizens to use it.

It reported that 8.8 million fund transfers were conducted during the month of April, jumping from 10 to 32 percent growth from the previous month.

Many of the Philippines’ biggest banks also expedited their digitization plans since the start of the pandemic, reporting dramatic increases in the uses of their online services.

In March, Kenya’s largest telecoms company, Safaricom, announced that it would remove service fees for its mobile money platform for all transactions under certain limits while also increasing daily transaction limits for SMEs.

Bright future?

Ismail believes that current efforts look promising. “Today, the Central Bank of Egypt, along with many fintech startups are promoting the expansion of these applications through SMEs.”

Meanwhile, strengthening the security of online payments must be a focus, says Ibrahim AlSahouly, an assistant professor at the AUC School of Business who specializes in e-commerce, adding that the “process of payment and security needs to be explained well” through mediums that appeal to all age groups.

AlSahouly also stresses the need for helping SMEs to compete with the big names. “One of the major challenges for several companies is competition from many giant e-commerce companies such as Souq.com, Jumia.com and recently, Noon.com.”

Another major challenge is the cost of starting up online operations “which can be overcome if banks provided funds for small and medium-sized businesses that can create an equal opportunity for every business to exist in the online world.”

El Hajj believes the banks have not done enough on financial inclusion, claiming that they mostly cater to “bigger names. Banks are not after the small and medium-sized businesses.”

However, he adds that startups such as his are filling the gap by cutting out many of the obstacles and catering their services to smaller players.

El Hajj thinks most of the talk about financial inclusion in the country is too focused on consumers. “Financial inclusion doesn’t make any sense if everyone is holding cards or whichever tool and then the businesses don’t have tools to accept these payments.”

There is still a cultural barrier and a lot of pushback from consumers and businesses. El Hajj says many still do not see the benefits of going cashless, which he attributes to a lack of awareness and how Egyptians perceive digital money.

Many do not feel how much money they have if it is in a digital format in a bank account, he says. While this perception and lack of trust in financial systems is normal in cash-based economies and emerging markets, it can be changed with a little innovation.

“The kinds of tactics that we as startups or as third parties can provide could be a bit challenging for the banks to do so and that’s why we exist. We’re not competition; we’re actually tackling the businesses that the banks cannot really reach or they’re not really after. We’re after the people who are aspiring to get into the financial ecosystem and they see the benefit of it.”

This article was edited on June 28, 2020 to add that Professor Ayman Ismail is the Abdul Latif Jameel Endowed Chair of Entrepreneurship.

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