Merchants and Agents: Apples and Oranges?

As digital financial services (DFS) providers start pursuing mobile merchant payments, they find themselves having to create yet another distribution network—an acquiring network of merchants able and willing to accept payment for goods and services. This network can be perceived as similar to existing DFS agent networks, which also naturally come to mind as a quick win for onboarding onto the merchant payments service. But converting agents into an acquiring network is not straightforward.

Ghana market
Ghana market. Photo by Emilio Labrador, Flickr.

The most immediate challenge may be margins. Like airtime distributors who earn better margins and faster turnover on airtime than cash-in, an agent even if signed up for the mobile payments proposition will typically have a financial incentive to make customers withdraw cash rather than transact digitally, since that way she earns a commission. This incentive is even stronger in mobile payments schemes where merchants pay the transaction fee—why should a merchant agree to pay a 1-2% fee rather than earn a 1-2% commission?—but it holds true also if they don’t, because the merchant in that case still earns no revenue from the digital payment transaction, as opposed to the cash-out transaction.

This problem will wane as a greater share of customers ask to pay with mobile wallets: as with card acceptance, when agents see that accepting mobile payments helps to drive their core retail business, they will come around. But on current trends, we could be quite a few years away from that happening even in the more mature DFS markets.

For more forward-looking agents, the larger concern however is disintermediation from the cash in/cash out (CICO) business entirely. Just like airtime distributors have (rightly) been fearful of losing their core business to the wallet-based electronic top-ups that CICO enables, agents will (also rightly) be fearful of losing the bulk of their commissions if people start undertaking more of their daily transactions digitally. Clearly, the merchant payments proposition in the medium term undermines and in the long term poses an existential threat to the agency business, since the whole point is for people to no longer need to use cash. While initially a successful mobile payments market might actually boost the cash-in half of the business—as customers fill their wallets for spending with—over time it is likely to undermine that too, as people’s wallets are increasingly credited through electronic transfers.

This is of course not lost on providers, for whom the CICO side of the business is a major cost center: they spend considerable sums recruiting, training, branding, monitoring and servicing their agents; and still need to pay them commissions for every transaction, including cash-in which the providers typically can’t charge the customer a cent for. But merchant payments is a revenue center: whether by merchant or customer, the provider gets paid for every transaction.

While providers try to offset the cost of their agent networks through cash-out fees, it’s clear that CICO will never be a revenue driver for the business. They still employ tens of thousands of agents because they have to: if people can’t easily credit their wallets, they can’t make any of the other transactions that providers earn fee revenue from; and if they can’t easily withdraw funds, they will be less comfortable depositing it there in the first place. But what if they didn’t have to anymore? It’s no coincidence that providers the world over are trying to develop other ways for customer wallets to be credited, including bulk salary disbursal, G2P payments, international remittances, etc—nor that they are so excited about merchant payments.

So while large agent networks are a precondition for success in the early years of a DFS business, it seems inevitable that the medium to long term strategy of providers will broadly involve a shift away from agents and towards the increasing digitization of people’s transactional lives that retail payment acceptance networks personify. The notion that the type of large scale agent networks that providers have been building are a temporary feature is not new, but he emergence of mobile merchant payments is one of the earliest expressions of—and might become one of the strongest catalysts for—this shift.

In the short to medium term, however, there are also potential synergies between the agent and merchant sides of the business that providers should explore. For starters, a prime concern of merchants is how they can access and use the electronic funds they collect from customers: any extra hassle or cost compared to cash makes an already questionable value proposition—until customer uptake takes off—simply a non-starter. Establishing rebalancing mechanisms whereby a CICO agent with excess cash can trade it in for electronic value at a neighboring merchant at no cost to either side could be a win-win, as neither of them like having to close shop in search of bank branch.

Ultimately, though, the real question for providers may be a more fundamental one: Do they really want to substitute the headaches of one physical network of touch points for another, even as the prospect of being free of CICO agents appears on the (admittedly distant) horizon? Particularly a network which will in the end require a vastly larger scale, as the payments play strives to extend across the range of everyday consumer activity? Is that a piece of real estate that they care enough about owning to warrant the trouble and expense of learning yet another business: merchant acquiring?

It seems likely that at least some, and perhaps many, providers will eventually opt for focusing their own effort on the issuing side of the payments business—winning customers over as the most compelling payments instrument—while letting others do the hard work of merchant acquiring. The most obvious choice would be banks, who already know merchant acquiring intimately from the card side. Having no stake on the issuing side, these will probably tend towards an interoperable solution that allows their merchants to accept any mobile wallet in the market—eliminating another hurdle for mobile payments to catch on with customers.

Pie in the sky? Perhaps. But it’s a type of solution that just went live in Ghana, thanks to a partnership between CGAP, Ecobank and Kopo Kopo. We’ll let you know how it goes.


12 August 2015 Submitted by Tim Ogden (not verified)

There is a key point in the expansion of merchant acceptance that is glossed over here, a point which lies at the heart of digital financial services, inclusion and well-being. The reason that merchants are willing to pay for accepting cards is that there is incontrovertible evidence that customers spend more when they pay electronically. This isn't just a question of additional customers, but existing customers spend more when they don't use cash. What are the implications for those who care primarily about household financial well-being?

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