H A N D B MERCHANT PAYMENTS AND DIGITAL FINANCIAL O SERVICES O K International Finance Corporation IFC—a member of the World Bank Group—is the largest global development institution focused on the private sector in emerging markets. We work in more than 100 countries, using our capital, expertise, and influence to create markets and opportunities in developing countries. In fiscal year 2020, we invested $22 billion in private companies and financial institutions in developing countries, leveraging the power of the private sector to end extreme poverty and boost shared prosperity. For more information, visit www.ifc.org. © International Finance Corporation 2020. All rights reserved. 2121 Pennsylvania Avenue, N.W. Washington, D.C. 20433 Internet: www.ifc.org The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. IFC does not guarantee the accuracy, reliability or completeness of the content included in this work, or for the conclusions or judgments described herein, and accepts no responsibility or liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon. First Edition 2020 2 | Merchant Payments and Digital Financial Services Handbook ACKNOWLEDGEMENTS Merchant Payments and Digital Financial Services IFC would like to thank the United Kingdom’s Foreign, Commonwealth & Development Office (FCDO) for the continuous support of the Harnessing Innovation for Financial Inclusion (HiFi) program, aimed at scaling up financial inclusion through technology and innovation. Special thanks are also extended to the authors Lesley Denyes, Minakshi Ramji, Paul Makin, Keith Davies, Nicholas Lesher, and Rachel Coleman, as well as to the reviewers and contributors Riadh Naouar, Momina Aijazuddin, Omoneka Musa, Margarete Biallas, Matthew Saal and Joseck Mudiri. Merchant Payments and Digital Financial Services Handbook | 3 FOREWORD This handbook is intended to disseminate lessons learned through Transforming retail payments from cash to digital also creates a IFC’s global projects and experiences, and it is designed for digital unique and transformative opportunity for financial inclusion. financial service (DFS) providers who are interested in building and One of the most important developments is the improvement managing a merchant acceptance network. Such DFS providers of data analytic methodologies. As a result, financial service typically include financial institutions, mobile network operators, providers are now able to more accurately assess the credit fintechs, payment service providers and others. The objective risks of potential customers and confidently provide a range of of the handbook is to provide a framework for development financial services to individuals and families who previously were of new merchant payment services, highlighting key risks and excluded from opening accounts, borrowing money, transferring considerations for both the customer value proposition and the funds and actively engaging with the formal financial economy. merchant value proposition, as well as the business case for the The benefits for clients extend well beyond finance. Increasingly, provider. The handbook aims to share success stories and best access to this digital highway promotes economic and social practices for product development, with the caveat that digital inclusiveness, spurs the development of new business models merchant payments in emerging markets is largely in the early and drives communal prosperity and wellbeing. Larger businesses stages of development and a single formula for success has not have begun to institute changes to adapt to the digital age and yet emerged. While risks and nuances of product specifications, apply technology to improve operations and business models. incentive schemes and pricing play a key role in the ultimate The use of data in order to provide a higher quality of service success of a merchant payment product, the authors would also and improved products for clients throughout one’s network is like to highlight the massive untapped opportunity for digitizing becoming an integral part of business for retailers, suppliers, and payments and the benefits it can provide for the market and the others in the value chain. DFS providers. Smaller businesses and individuals at the base of the economic The growth of digital finance in emerging markets has continued pyramid have largely been excluded from these changes even to increase the usage of financial services by traditionally though they stand to significantly benefit. These new digital tools financially excluded groups such low-income individuals, will allow them to become part of the formal financial system farmers, women, small and medium enterprises (SMEs), and and gain access to banking services such as credit and savings others. In these markets, digitizing retail payments represents accounts. Furthermore, these small businesses reach individuals the new frontier for expansion. The customer base understands who are unbanked or underbanked. These businesses generate and appreciates the promise of a digital ecosystem for financial an enormous number of transactions which are predominantly services. For digital financial service providers, digitizing made in cash. Thus, these transactions need to be part of the merchant payments implies a bigger ecosystem of products and solution to reach unbanked and underbanked individuals. services for existing customers of DFS providers and thus new revenue streams. This handbook provides resources and tools The opportunity to digitize cash payments to merchants, on digitizing merchant payments for all digital financial service especially in emerging markets, holds a great deal of promise for providers who are in the process of launching or expanding their digital financial service providers. Currently, cash is by far the most existing merchant payments network in emerging markets to common method of transacting with retailers. A study conducted complement their core business of retail financial services. jointly by the World Bank Group and World Economic Forum estimates that micro, small, and medium retailers make and accept payments of about at US$34 trillion annually in the form of supplier payments, wages and salaries, and receipts from consumers1. 1 World Bank (2020). “Electronic payments Acceptance Incentives – Literature Review and Country Examples 4 | Merchant Payments and Digital Financial Services Handbook Of this amount, US$15 trillion of which are estimated to be Delivery Channels and Technology Handbook, provides a done electronically and the rest, US$19 trillion, is through cash comprehensive guide to the components of digital financial or checks. Unsurprisingly, developed economies have a greater technology with focus on the hardware and software building share of electronic payments. blocks for successful deployment. The second handbook, Digital Financial Services and Risk Management is a guide to the risks Converting even a fraction of those payments into digital associated with mobile money and agent banking and offers transactions has the potential to transform the financial services a framework for managing these risks. The Data Analytics and industry by bolstering revenues for providers and delivering a Digital Financial Services handbook, the third in the series, is wealth of untapped transaction data that can be used to create intended to provide useful guidance and support on how to apply new and lucrative financial products and services. The results data analytics to expand and improve the quality of financial are likely to benefit underserved communities and lead to more services. The fourth handbook focused on Digital Financial widespread financial inclusion. Services for Agriculture. The Covid-19 pandemic that emerged throughout the world in This handbook is organized as follows: 2020 further strengthened the demand for cash-less payments. Many retailers sought to move away from cash to touchless The Introduction provides the rationale for merchant payments payments by customers, while businesses and individuals looked and creates the foundation for the sections that follow. for alternatives to send money when bank branches and retail outlets were closed. Governments began social cash transfer Section 1: The Customer Product provides a summary of payment programs to add new liquidity into the economies experiences and illustrative examples in delivering a robust value and sought ways to transfer funds to beneficiaries using digital proposition to customers, paying close attention to the reasons financial services that would provide touch free and cashless why certain products resonate with customers. transactions. This surge in demand for digital payments created further opportunities for potential providers to address this Section 2: The Merchant Product focuses on how to market gap. While the full effects of the pandemic may take incentivize merchants to use value-added services. The size of the years to fully understand, it was immediately apparent that merchant and the segment of customer that she/he serves plays the presence of merchant payment capabilities are a required a significant role in determining which value-added service will infrastructure in todays market. be appealing to them. Keeping the opportunity in mind, many digital financial services Section 3: The Merchant Lifecycle