Friday, October 14, 2011

Different classes of retailers in emerging markets, requires fresh merchant thinking.

Merchants are clearly defined in card payment terminology. A merchant is someone that accepts a card from a client and then initiate a payment request/authorisation. A merchant usually have a relationship with a specific bank (called an acquiring bank) and should have secure infrastructure (terminals) that can accept a card and initiate the authorisation transaction. This model is proven and tested and works well in many markets. Trillions of dollars are processed in this way and these merchants form the foundation of retail economies of the world.

However, in many emerging markets, large volumes of transactions are processed (usually in cash) by retailers looking very different and operating within a very different economic model. These traders often do not do business in permanent structures and work irregular hours and with much more flexible business models. These merchants generally cannot afford terminals, do not have connectivity, nor have reliable electricity available. The needs for reconciliation and cashier management are also significantly different for these retailers.

It is inconceivable that these merchants be served in a model that does not consist of the four parties (as is the case with interoperable, open card payment models). However, digital payment models for this sector (most likely based on mobile phones), will have to be designed with very different liability structures, different fees and less overhead. At the same time, these solutions would also offer less utility and features compared to the established schemes.

The time is ripe for the development and prototyping of these type of payment solutions.


B Png said...

Dear Hannes,

In the case of our company, who has developed mobile phone based solutions to support transactions between merchants and acquiring banks, what will be the most likely effective way to identify integrationg partners to work with banks, by your suggestion? Our operations model will be teleco independent for FI or banks.

/BJ at

B Png said...

Dear Hannes,

In the case of our company, who has developed mobile based solutions handling transactions among the acquiring banks and merchants, and with the capabilities to turn the mobile into a POS, what is the most effective way to identify integrations partners, in your opinion? Our operations model will be MNO independent, with bank grade security implementation for FI and banks.

/BJ at

Victor Asemota said...

I wrote a PhD proposal on on the unique business models that characterize retail distribution in Nigeria and never sent it in to my Professors at Sheffield because I saw things start to evolve in a very interesting way with the introduction of mobile phones and airtime sales.

MTN Nigeria leveraged on existing retail distribution channels to sell airtime with resounding success. They also succeeded because according to their slogan "MTN Everywhere You Go" they had ubiquitous service so there was demand which was met by supply.

The unique thing about the existing retail distribution model in Nigeria was merchant hierarchy and the relationships between the different levels of this hierarchy which was based largely on trust. MTN did not need to do anything more than focus on the top layer of this hierarchy and the airtime was distributed efficiently without little effort from them.

This worked well as airtime was treated as a commodity and distributed the same way all other commodities were distributed. What plays a huge role in the retail distribution model is "trust" especially as most of the transactions between the different distribution levels before the final retailer were not cash based but on credit

I see mobile payments as a catalyst to further grow transaction volumes especially as this trust is backed by quick movement of funds between merchant layers in the hierarchy as well as being a more efficient and secure means of exchange value between the customer and retailer.

For this to succeed "trust" between the retailer and the customer has to first be established and this comes from widespread acceptance. The demand and supply sides of the equation has to be balanced just as it was in the case of airtime, once a transaction is performed both sides must get instant "value".

I believe once the basic foundation of trust is built, many more interesting retail models will evolve leveraging on the informal relationships in the retail sector of emerging markets.

The only way to fight cash effectively is with trust and any of these new prototypes for payment solutions must take that first into consideration as these models continue to evolve and move closer to current card payment models