South Africa’s informal economy shows signs of movement to switch away from cash

• Mastercard launches white paper exploring attitudes and behaviors of consumers and Small, Medium and Micro Enterprises (SMMEs) in South Africa’s informal sector
• Convenience and safety identified as key alternatives to cash as a preferred form of payment in the informal economy
• Study examines how consumers and micro-enterprises can be incentivized for digitizing their commercial exchanges – and switching from cash

Johannesburg, South Africa – Friday, May 5, 2023 – The informal sector in South Africa is showing signs of a movement away from cash, a new Mastercard study has found. 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 and Small, Medium and Micro Enterprises (SMMEs) in the informal sector in South Africa to establish factors that would democratize and widen financial access and enable equitable financial inclusion.

South Africa, the continent’s second biggest economy, with a population of over 61 million, has a large informal sector with an estimated at 3.3 million micro and informal businesses. This informal sector accommodates marginalized communities such as women, youth and the previously disadvantaged. More than 60% of the people who start an informal business do so because they are unemployed and have no alternative source of income.

The study looked at the ‘bottom of the pyramid’ where consumers and SMMEs primarily use cash when making or receiving payments. These are also consumers who either do not use bank accounts, or have bank accounts that are inactive, or have access to facilities such as credit and digital banking but choose not to make use of them. As a result, many stay marginalized and financially excluded from the growth happening in the digital economy.

“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 informal sector still use cash, but perception of cash’s convenience is declining

 Nearly half (44%) of the study’s informal sector consumer respondents worked full-time, while 21% were unemployed, 15% worked part-time, and 10% were retired. Common employment sectors included retail, hospitality, tourism, government/public service, oil and gas, healthcare, manufacturing, and domestic work. The majority used an Android phone, while 3% used an Apple phone. The study recorded high usage of smartphone apps among informal sector consumers, particularly WhatsApp, Facebook and TikTok.

Overall, consumers in the informal sector showed high awareness of bank accounts. In 2022, half of households had a bank account, and nearly a third used a digital wallet or electronic wallet. Those that did not use a bank account cited 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%).

Although cash is still in mainstream use, the traditional reasons cited for using cash when shopping, were less pronounced year on year. The perceived convenience of cash dropped from 51% to 34%, using cash out of habit experienced a 9% decline, and concerns related to hidden costs of bank cards reduced from 43% to 29%.

Move to switch from cash is driven by convenience and safety

 The study showed that there seemed to be a strong movement to switch from cash – 65% claimed they are likely to start paying with something other than cash in the year ahead. They would change to an alternative for extra security, and if they were convinced of higher convenience, minimal costs, and loyalty offers.

Many respondents said safety is what will push them to convert from cash, given cash can get stolen. But notably, the year-long study also highlights that the convenience of non-cash methods is growing in importance: originally 48% of informal sector consumer respondents cited convenience using credit cards, a figure that grew to 60% a year later.

Financial behavior of informal sector SMMEs indicates need for simpler solutions and lower data costs

 The COVID-19 pandemic saw more forced entrepreneurs and small business owners surfacing in South Africa’s townships and rural settings. These informal businesses and micro enterprises include corner groceries, spazas, takeaways, restaurants, tavern operators, liquor shops, beauty parlors, clothing stores, hardware outlets, health services, educare providers, mechanics, and transport providers. Two thirds (67%) of these businesses employed up to five people.

As with the consumer respondents, the SMME respondents also had a high awareness of banking, but the study showed a decline in respondents’ ownership of a traditional bank account. By the end of 2022, 45% had a personal bank account, while only 25% had a business bank account. All of them offered cash options to customers, with only 2% offering a card machine or tap on phone, and 1% offering contactless QR codes. In general, reasons for limited payment options included mentions of usage difficulty, and that data costs were too high.

Catering to the community, gaining trust, and unlocking inclusion

 “There is clearly a need to develop simple, affordable, easily understood fintech solutions that can displace cash and unlock wider inclusion for everyone involved in a transaction. Regardless of size, turnover, headcount, or customer segments, convenient digital solutions underpinned by secure technology level the playing field, ensuring that disadvantaged communities can participate meaningfully in the economy,” continued Swanepoel.

The study also calls for customer-centric designs and solutions that are market-specific in a language relevant to those using it. Furthermore, consumers need to understand the value, which can help drive critical mass to effect changed behavior and large-scale adoption. Financial literacy initiatives and education via radio, newspapers, TV and schools remain important to get people to trust a new way of doing things and get comfortable doing it.

Micro enterprises and informal businesses are a crucial part of the National Development Plan (NDP 2030) for economic transformation, job creation, and poverty reduction. According to the World Bank, financial inclusion 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 – delivered in a responsible and sustainable way. Mastercard has pledged to connect one billion people globally to the digital economy by 2025, including 50 million small businesses, with a direct focus on providing 25 million women entrepreneurs with the tools they need to succeed.

Download the full paper here