So apparently 80% of purchases made in an African household each year is from an informal retailer.
By ‘informal’ I mean the small-scale retailer who is most likely ‘undocumented’ — no formal business registration, receives payments in Cash and pays for services in Cash, doesn’t remit any tax to the government. Yeah, them guys.
Some numbers say about 100 million of them exist across Africa and are responsible for $800B worth of sales each year to African households.
Perhaps what’s so fascinating is how much of their daily life is difficult to trace out, hidden underneath the opaque informal sector. Life for them rarely ever extends outside the informal sector because most interactions are with other ‘undocumented’ service providers — their barbers, pharmacists, tailors, bus conductors, loan sharks etc.
So now you can understand why I couldn’t resist the temptation to take a trip down to Balogun Market this past week, just to simply observe and document?
I came away with 4 simple recommendations for FinTech Product Designers & Managers trying to build for the poorly understood informal sector:
‘Move or be moved’
Every single interaction at the market is super FAST-PACED — getting on the bus, getting off the bus, hurtling past a gazillion moving bodies, dodging zig-zagging motorcycles etc. On all sides, you are surrounded by an energetic maze of CONSTANT activity. Every square inch of space is colonized by a trader tending to his/her wares with barely two steps separating one trader from the next. It’s a rare luxury to find stalls with enough room to invite customers in to sit as they wait to be attended to. For the most part, most of the exchange is done with the customer standing within a very tight square patch of store space belonging to the merchant.
- Design Recommendation: Ultra, Mega, Super, Lightning Speed — The time between the customer sending out a payment and when the merchant receives the payment must be as fast (or faster?) than the time it takes to blink. Do something for me, will ya? Okay, Imma need you to blink, GBAM! Transaction complete. You get the point?
‘Success rate must be ON FLEEK with instant digital receipts’
Traders DETEST the scourge of ‘Payment reversals’.
Here’s a cropped out photo of the trader that I purchased 2 packs of Baby Wipes from:
I had run out of cash by the time I walked up to her stall so I offered to pay via Bank Transfer using my Wema Bank Mobile App. But before I could complete my request, she stood up abruptly, motioned for me to wait, and ran in search of the mobile Cash agent whose kiosk was a few stalls away. Not finding her, she returned with visible disappointment on her face.
“You don’t accept Bank Transfers?” I asked her,
“I dey take but e fi reverse and sometimes e no dey enter on time. Market wey I sell this morning, na just now I dey see am” she responded (I accept Bank Transfers but sometimes the transfers are reversed without warning and it can take a while to receive the payment confirmation. In fact, some of the goods I sold this morning that the customer paid for with a Bank Transfer, I received the payment confirmation alert very late”)
- Design Recommendation: You know how the prevailing sentiment about the Big U.S Banks pre-2008 was “too Big to fail”? Well, Payments must be too good to fail. Nothing like ‘Amaka disappoint’. The payment confirmation alerts must be instantaneous, arriving barely seconds after the payment is sent out.
Part of the allure of Cash in the informal sector is that no one ever rejects it. Bus drivers won’t turn it down, neither will mallams*, street-side hawkers, road-side barbers, agberos* that auction off parking spaces at weddings etc. Try a debit card or Bank Transfer, and the rate of rejection starts to creep up.
To illustrate this point better, it’s time I introduce this kind lady who sat next to me on the bus. She may look a little grumpy in the image, but that was just because the Bus conductor had held on to her change for a little too long…
She’s a trader at Balogun Market that sells roasted Catfish. Let’s run through a typical day for her and trace all the points she’s had to exchange value.
Despite there being 1 point at which a Bank Transfer may have been acceptable, it exists along a chain that’s littered with many more points of exchange where Cash is the only acceptable form of value. In fact, these types of ‘Cash-only’ exchanges actually dominate much of her every-day life outside the marketplace.
- Design Recommendation A: So you say you want to bring my kind lady friend into the digital economy? Well then, give her something that will be readily accepted by other informal service providers i.e Bus conductors, abokis, other traders, street hawkers etc. All these other regular folk that she naturally exchanges value with on a near-daily basis.
- Design Recommendation B: Today cards require specialized payment equipment like POS machines for acceptance. Introducing specialized equipment like these often increases the barriers to adoption within the informal sector. Because devices cost munaaaaay! One of the easiest ways to lower these barriers could be to consider using Mobile phones as a payment acceptance terminal — in essence literally turning any informal service provider into a potential digital payment terminal.
- By the way, notice how I said mobile phones and not smartphones? (E get why!) → Nigeria — Mobile phone penetration: 90% , Smartphone penetration: 32%
Today, each payment collection method that a merchant opts for, comes at a unique cost:
- Cash — (FREEE!)
- POS — (One-time purchase fee: N50,000 — N90,000) + (Commissions: 0.75%, capped at N2,000)
- Web gateway — (Commissions: 1.4%-1.5%, capped at N2,000)
The informal market sees ALOT of micro-transactions. And by micro, I mean transactions within the range of $1-$5.
Case in point: I had to hop about 4 different buses to get to the market and back. Each bus driver did not charge more than N150–N200 ($0.26-$0.35).
The more structured retailers in the formal economy (i.e hotels, restaurants, bars, supermarkets etc) see transactions within much higher value bands. These guys are thus better able to absorb a 1%+ commission charge on payments received from customers.
The tale is entirely different with informal service providers: every N1.00 foregone, for them is a complete ‘rip off’.
- Design Recommendations (more so questions to resolve/consider):
- Would a commission based model work for informal merchants the way it has with formal merchants?
- Or would a one-time monthly charge be more appropriate?
- Could this one-time monthly charge be estimated on a merchant-by-merchant basis determined by the level of transaction traffic generated per merchant?
- Alot of experimentation will likely be necessary to discover where the sweet spot lies for pricing across different subsectors.
And, we are done.
I promise as I started to draft this week’s piece, I kept telling myself, “Nchy, let’s make it no longer than a 5 mins read,” yet here you are 7 mins later, with words still left to be read.
Oh sigh! I owe you a chilled bottle of water (…with lemons)
Come back next week, I promise it will be shorter!
Adios, mis amigos!
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Sources: Data Reportal
*Agberos — Street touts who colonize certain sections of a locality and demand payments for use of public facilities such as land, parking space etc in that locality.
*Mallams — Male northern merchants that sell small perishable items from small kiosks.