Study Indicates Shift from Cash in South Africa’s Informal Economy

According to a new Mastercard study, the informal sector in South Africa is moving away from cash. In a white paper titled ‘Driving Financial Inclusion In South Africa’s Informal Economy: The Landscape At The Bottom Of The Pyramid,’ Mastercard interviewed underserved consumers as well as Small, Medium, and Micro Enterprises (SMMEs) in South Africa’s informal sector to identify factors that would democratize and broaden financial access and enable equitable financial inclusion.

With a population of over 61 million, South Africa has the continent’s second largest economy and a large informal sector, with an estimated 3.3 million micro and informal businesses. This informal sector serves marginalized communities such as women, youth, and those who have previously been disadvantaged. More than 60% of people who start an informal business do so because they are unemployed and have no other way of earning a living.

The study focused on the “bottom of the pyramid,” where consumers and small and medium-sized businesses (SMEs) primarily use cash to make or receive payments. These are also consumers who do not use bank accounts, have inactive bank accounts, or have access to facilities such as credit and digital banking but choose not to use them. As a result, many people remain marginalized and financially excluded from the digital economy’s growth.

“As the digital economy becomes a more connected place where commerce thrives due to the safe, simple, and secure exchange of value, it’s essential that everyone has access to it. Mastercard has been passionate about driving financial inclusion in locally relevant ways so people, communities, and businesses can benefit – a mission we continue to champion in South Africa’s informal sector too. When consumers and micro enterprises can digitize their commercial exchanges – and eventually switch from cash – they can be included, and empowered, in a formal financial ecosystem,” said Gabriel Swanepoel, Country Manager for Mastercard in Southern Africa.

Consumers in the informal sector continue to use cash, but their perception of its convenience is deteriorating.

Almost half (44%) of the informal sector consumer respondents in the study worked full-time, while 21% were unemployed, 15% worked part-time, and 10% were retired. Retail, hospitality, tourism, government/public service, oil and gas, healthcare, manufacturing, and domestic work were all common employment sectors. The majority of people used Android phones, while 3% used iPhones. The study found that smartphone apps, particularly WhatsApp, Facebook, and TikTok, were popular among informal sector consumers.

In general, consumers in the informal sector were aware of bank accounts. Half of all households had a bank account in 2022, and nearly a third used a digital wallet or electronic wallet. High costs (37%), low trust (21%), limited knowledge of financial products (19%), lack of understanding how it works (18%), or inability to provide proof of address (16%) were cited as reasons for not having a bank account.

Although cash is still widely used, the traditional reasons for using cash when shopping have become less prominent year after year. The perceived convenience of cash fell from 51% to 34%, using cash out of habit fell by 9%, and concerns about hidden costs of bank cards fell from 43% to 29%.

According to the study, there appears to be a strong movement away from cash – 65% said they are likely to start paying with something other than cash in the coming year. They would switch to an alternative for added security and if they were persuaded of greater convenience, lower costs, and loyalty offers.

Many respondents stated that safety is what will motivate them to convert from cash, as cash can be stolen. However, the year-long study also shows that the convenience of non-cash methods is increasing: originally, 48% of informal sector consumer respondents cited convenience using credit cards, a figure that increased to 60% a year later.

More forced entrepreneurs and small business owners emerged in South Africa’s townships and rural settings as a result of the COVID-19 pandemic. Corner groceries, spazas, takeaways, restaurants, tavern operators, liquor shops, beauty parlors, clothing stores, hardware outlets, health services, education providers, mechanics, and transportation providers are examples of informal businesses and micro enterprises. Two-thirds (67%) of these businesses had up to five employees.

The SMME respondents, like the consumer respondents, had a high level of banking awareness, but the study found a decline in respondents’ ownership of a traditional bank account. By the end of 2022, 45 percent of people had a personal bank account, while only 25 percent had a business bank account. All of them provided cash options to customers, with only 2% providing a card machine or phone tap and 1% providing contactless QR codes. In general, the reasons for limited payment options included mentions of usage difficulty and excessive data costs.

“There is clearly a need to develop simple, affordable, and easy-to-understand fintech solutions that can displace cash and enable greater inclusion for all parties involved in a transaction.” Regardless of size, turnover, headcount, or customer segments, convenient digital solutions backed by secure technology level the playing field, allowing disadvantaged communities to participate meaningfully in the economy,” Swanepoel continued.

The study also advocates for customer-centric designs and market-specific solutions in a language that is understandable to those who use it. Furthermore, consumers must understand the value, which can help drive critical mass to effect behavioral change and widespread adoption. Financial literacy initiatives and education through radio, newspapers, television, and schools continue to be important in getting people to trust and feel comfortable with a new way of doing things.

Micro and informal businesses are an important component of the National Development Plan (NDP 2030) for economic transformation, job creation, and poverty reduction. Financial inclusion, according to the World Bank, means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit, and insurance – that are delivered responsibly and sustainably. Mastercard has committed to connecting one billion people worldwide to the digital economy by 2025, including 50 million small businesses, with a specific focus on providing 25 million female entrepreneurs with the tools they need to succeed.

Credit: Africabusinesscommunities