South Africa’s informal economy is going cashless


South Africa’s informal economy, worth an estimated R750 billion, is going cashless and digitising faster than the formal economy thanks to social grant payments and the proliferation of payment services in the informal market. 

Lesaka Technologies recently released its South African Informal Economy Digitalisation Index, which revealed the rapid growth of cashless payment channels in the informal economy. 

Informal economy expert GG Alcock said a significant driver of the informal economy’s digitalisation is that most social grant payments are now made through digital channels and not at Post Office branches. 

Lesaka’s data shows that 58% of social grant payments are now made through financial service providers.

This has only grown following the collapse of the South African Post Office (SAPO) and the deteriorating service provided by the Postbank. 

The shift to digital channels, even from the SAPO to debit cards and the Postbank card, has pushed businesses in this sector to accept forms of payment besides cash. 

Source: Department of Social Development, via Centre for Risk Analysis

Another major driving force behind the digital shift is the enhanced safety it offers for consumers and business owners, as it reduces the likelihood of physical robbery. 

Alcock expects this trend to accelerate as traditional financial providers follow fintechs into the informal economy or launch fintechs of their own to compete. 

The acceleration can be seen in the data collected by Lesaka through its point-of-sale system called Kazang which has over 1 million users.

This data was used to create the South African Informal Economy Digitalisation Index.

The Index shows that the proportion of Kazang wallets topped up digitally has rapidly grown from 0% in the first quarter of Lesaka’s 2021 financial year to 42% in the first quarter of the 2024 financial year. 

In addition, 90% of transactions are conducted by bank cards from South Africa’s traditional banking sector. 

This shows that consumers in the informal economy have shifted away from drawing cash at ATMs to conduct transactions and are just using already-existing cashless payment channels. 

On the other hand, the formal economy has been sluggish in transitioning to digital payment channels. 

This is exemplified by data from South Africa’s largest retailer by footprint, Pepkor, which said in a recent trading update that 90% of its sales are still made in cash.

Pepkor offers alternatives to cash payments, and its results indicate that these alternatives are gradually replacing cash. 

Credit sales increased by 35.6%, but it is not a material sales enabler for the company.

The growth in credit sales is due to the implementation of Pepkor’s credit interoperability strategy in the South African-based clothing, footwear and home retail brands. 

As a result, the overall group credit sales mix increased to 10% from 8% in the prior year. 

While 90% of the company’s sales are still generated in cash, this is a slight decrease from the start of the year.

In its interim results for the six months ended March 2023, Pepkor reported that 93% of group sales were conducted in cash. 

Earlier this year, BankservAfrica found that nine out of ten transactions in South Africa are still made in cash, with 95% of informal small business customers and 63% of formal business customers opting to pay in cash.

Many South Africans view paying in cash as safer and more convenient, while fees on digital platforms are seen as too high.