South Africans dumping cash

South Africa’s informal economy is increasingly using technology to boost its growth, with many fintech companies and established financial institutions looking to enter the sector. 

The informal economy is tremendously valuable in South Africa, generating billions of rands in economic value and employing over seven million people. 

In recent years, its growth has outpaced that of its formal peer as South Africa’s economy stagnated. The informal economy has also become more sophisticated. 

The R197 billion spaza shop sector has proven particularly attractive to large formal companies, and established retailers are entering this market. 

Financial institutions are not far behind, with many looking to capture value from the billions of rands flowing through the informal economy.

However, this has proven difficult, with many participants in this sector preferring cash for its ease and trustworthiness. 

New research from Trade Intelligence indicates that this might be changing as fintechs move into this sector. 

Trade Intelligence’s Kerry Elliot said technology has been the largest driver of positive change in the informal retail market of late, promising to create billions in value for companies. 

Elliot explained that digital adoption is increasing across all areas of the informal economy, from the supply of stock, to marketing, eCommerce, and payment systems. 

As an example, Shoprite now facilitates online ordering and delivery from its cash and carry stores to supply spaza shops with stock. 

Spar has also enabled delivery in townships with third-party providers, such as Delivery KA Speed and KasiD. 

Trade Intelligence’s data shows that 26% of spaza shoppers order via online platforms, with WhatsApp being the dominant platform, followed by Uber Eats. 

Aside from retailers, payment providers have shown particularly strong growth, and online channels are becoming increasingly popular. 

There is the proliferation of fintech companies offering cheaper merchant services with often free point-of-sale devices. 

This has coincided with growing demand for digital payment methods in the more formalised portions of the township economy including larger cash and carries, independent wholesalers and superettes.

The growing trend of digital payments in the informal economy can be seen in the graph below, courtesy of Lesaka Technologies, which produces a quarterly index tracking digitalisation in the sector through its Kazang payment service. 

Lesaka’s data shows that the informal economy is increasingly digital and has been driven partly by the collapse of the South African Post Office. 

The company said 58% of social grant payments are now made through private financial service providers. 

This shift has pushed more businesses in this sector to accept forms of payment besides cash, giving fintechs a window of opportunity to provide payment services. 

Digital payments are also growing as a result of their enhanced safety for consumers and business owners.

Informal economy expert GG Alcock said this trend is likely to continue and pick up pace as traditional financial services providers follow fintechs into this sector. 

These institutions have proven adept at moving millions of customers onto digital channels, with over 90% of transactions through formal banks being conducted by debit or credit card. 

However, much work must be done to transition the informal economy away from cash. 

BankservAfrica’s data indicates that nine out of ten transactions in South Africa are still made in cash, with 95% of informal businesses still preferring to receive payment in cash. 

Some of the major challenges to digital adoption flagged by the Reserve Bank  are –

• Low bank account usage.
• High cash usage.
• Transactional costs.
• Infrastructure.
• Regulatory framework.

The bank has published a digital payments roadmap to overcome these barriers as part of its mission to reduce cash usage in the country.