In the current digital era, there are many reasons for Micro, Small, and Medium-sized Enterprises (MSMEs) to go cashless. Transitioning to a cashless society has many benefits for small enterprises, including helping many micro and small enterprises go from the informal to the formal financial sector, increasing their access to finance and new markets. Hence, many African governments have introduced cashless policies to promote digital payments over using cash for transactions.
Cashless options include mobile banking, Internet banking, point-of-sales terminals, Automated Teller Machines (ATMs), and other fintech applications. Africa’s domestic e-payments market is expected to see revenues grow by approximately 20 percent per year. In Kenya, M-Pesa, a mobile phone-based money transfer service, has expanded to Tanzania, Mozambique, the Democratic Republic of Congo, Lesotho, and other African countries and has become one of the forerunners in African mobile payments. In Liberia, mobile wallet use has been increasing.
Similarly, multiple digital payment methods are used across Nigeria, Rwanda, Ghana, Senegal, South Africa, and around Africa. It is a fact; digital payment is the future.
While many entrepreneurs in Africa have discovered the benefits behind the usage of cashless payments methods and how it can quickly turn around the efficiency of their businesses, there are still many business owners, especially those in the informal sectors, who are still holding on to cash and prefer to transact business with cash. On average, only 5 to 7 percent of all payment transactions in Africa were made via electronic or digital channels, compared with 50 percent or more in Turkey.
To support the transition to cashless operations, governments must confront the challenges and provide targeted support to enable more micro and small businesses to transition.
MSMEs benefit from transitioning to a cashless economy. For one, they can keep up with the current trend worldwide where digital payments are preferred. By transitioning to cashless, small businesses can tap into the global economy. Going cashless can help with increased efficiency. Small businesses find it easier to transact with customers and other companies using digital payments. Small enterprises can reduce transaction errors and make accounting easier using digital payment methods. The improved efficiency in the operational processes can help MSMEs increase returns.
Another benefit Micro, Small, and Medium Enterprises can derive from cashless is improved security. By utilizing channels of cashless payments, business enterprises can carry out their activities with less fear of robbery of their cash. The usage of physical money can increase the risk of theft. When adopting a cashless policy, the need for security measures such as safes and security guards also reduces. Furthermore, digital payment systems use encryption and other security measures to protect sensitive financial information, reducing the risk of data breaches and ensuring the confidentiality of customer information.
In addition, MSMEs benefit from transitioning to cashless operations as it improves tracking. Digital payment systems provide real-time tracking of transactions, allowing businesses to monitor sales and cash flow in real-time. Proper cash flow monitoring can assist in making better financial decisions. With cashless operations, the record-keeping process can be more precise. Accurate record-keeping leads to clear financial reports, which can improve access to finance, a significant obstacle that small businesses face.
Challenges affecting African MSMEs’ transition to Cashless.
There are several challenges that MSMEs face that affect their transition to a cashless society.
Poor-quality Infrastructure is a significant challenge affecting small enterprises’ transition to cashless operations. The quality of supporting Infrastructure in Africa is poor or non-existent. While infrastructure development has been improving around the continent, there is still more work to improve access to the Internet and other technology tools. Africa has the lowest number of Internet connections—only 22 percent of the continent has access. Countries such as the Central African Republic, Eritrea, Comoros, South Sudan, and Somalia do not even have up to 20% internet penetration.
Furthermore, many communities still have little or no access to electricity, which is an essential infrastructure for cashless payment processes. Over 640 million Africans have no access to energy, and countries such as South Sudan, Central African Republic, Niger, Malawi, Burkina Faso, and Chad have the lowest electricity access in Africa.
Low Financial literacy is another challenge facing the transition to cashless amongst African businesses. Financial literacy refers to the knowledge and skills required to make effective decisions regarding managing personal and business finances. It involves understanding the basic concepts of personal finance, such as budgeting, saving, using credit, and applying this knowledge to make informed money decisions. Financial literacy helps individuals understand the different types of digital payment methods, such as mobile money, digital wallets, and online banking, and how to use them effectively.
Resistance to technology experienced in some communities is usually connected to distrust of new technology and opposition to adopting non-traditional payment methods. Additionally, cybercrimes minimize users’ trust in new technology. Cybercrime is estimated to cost Africa $4bn a year, with the biggest cyber threats being online scams, digital extortion, email compromise, and ransomware.
Since legislation against cybercrimes is not common or not readily enforced in Africa, this adds to some users’ resistance to going cashless. Fear of cyberattacks and change makes cashless policy difficult to thrive amongst African MSMEs. Many entrepreneurs, primarily micro and small entities in rural areas, still need to learn about adopting cashless payments and how to mitigate cyberattacks to improve their trust in digital payments.
What could help MSMEs transition?
There are different ways in which African governments and stakeholders can promote the adoption of cashless systems amongst MSMEs.
Close the digital divide – In 2021, only 33 percent of the population used the Internet, meaning an estimated 871 million people do not realize digital dividends. The gender digital divide is growing in Africa, which impacts women entrepreneurs. Research shows that women comprise 58% of Africa’s self-employed population and contribute around 13% of the continent’s gross domestic product (GDP). Removing the barriers to Internet access could help women entrepreneurs transition to cashless operations.
Provide education and awareness programs that explain the importance of going digital. Literacy and education programs can play a crucial role in accessing the Internet, making users comfortable with digital tools. When looking at Africans who are educated at the university level, there is no gender difference in Internet access. Awareness programs would help tackle the challenge of negative perceptions held by users in the ecosystem. Governments should implement awareness campaigns to educate the public about the benefits of cashless transactions and digital finance.
Through this method, the number of small business owners transitioning could increase by ensuring small business owners, especially those in marginalized and rural regions, are informed about the benefits of a cashless system. Public awareness is essential to grow enthusiasm and mobilize the MSMEs ecosystem. The main aim of awareness programs would be to get users acclimated to the different cashless options, how to use the technology, and the benefits of cashless operations.
Develop modern digital infrastructure which would make it easy to adopt digital tools. Core infrastructural facilities are poor, and fewer than one-third of Africans have access to broadband connectivity. Infrastructure such as electricity and telecommunication should be developed so more people can access a seamless digital payment experience. According to the World Bank, achieving universal, good-quality internet access across Africa will require investments of US$100 billion, 80 percent of which is needed for core infrastructure to establish and maintain broadband networks. In addition, fiber-optic networks have yet to penetrate Africa fully. High-speed internet availability is sparse and mainly concentrated in large cities.
Implement a regulatory policy to help with cyber security issues and help distill the fears regarding the lack of security that comes with being online. Data privacy and protection laws need to be brought in line with global standards and implemented effectively. Legislation to govern the digital economy is essential to protect small business owners from cybersecurity threats and ensure any financial loss can be recuperated. The Convention of the African Union on Cybersecurity and Personal Data, which governs data security and breaches, has been ratified by eight out of 55 AU members. In contrast, 14 countries have signed and not ratified.
Conclusion
For many small business owners and entrepreneurs in Africa, cash provides a sense of security, it is sure. Once the money is in hand, it is easy to keep or use. The increase in cybercrimes adds to the reluctance of many micro and small business owners to let go of cash. Still, with these concerns, the transition to cashless operations has benefits that can aid small enterprises’ growth.
In addition to these benefits, the fact is that digital is here to stay, and if African small businesses are going to be competitive, they have to transition to cashless. During the COVID-19 pandemic, businesses that used technology could manage the impact of the economic fallout from the virus better than those small businesses that still needed to integrate technology into their operations.
Small businesses are an integral part of Africa’s economy, and their participation in the cashless society can promote economic growth. MSMEs can increase efficiency, strengthen business resilience, improve financial tracking, and promote financial inclusion by going cashless. However, certain challenges limit small enterprises’ wide adoption of digital payments.
These challenges, poor digital infrastructure, low level of education and awareness, cyber security issues, and resistance to adopting new technology, must be addressed in order to promote MSMEs’ transition to cashless operations. Working to implement the suggestions provided here could increase the number of Micro, Small, and Medium-sized Enterprises that transition to cashless. Small businesses contribute to job creation and economic development, and transitioning to a cashless operation could further improve their competitiveness.
