How digital payments are enabling a shift away from the cash economy

In Indonesia, as in other commodities-based economies, a majority of transactions between smallholder producers and buyers are still carried out with cash payments. This is risky for many reasons. First, carrying large amounts of cash poses a security risk, making transaction points vulnerable to theft. Miscounted cash, misplaced payments and robbery are all very real risks for commodities buyers and sellers. Lack of traceability of cash transactions makes all stakeholders vulnerable to errors and fraud, and obscures valuable data on transaction history.

And yet, an estimated 35% of Indonesian farmers on the PemPem platform do not have a bank account able to receive digital payments, maintaining cash’s primacy as the default option for commodities transactions. PemPem is an organization empowering smallholder farmers and traders in key commodity supply chains to become more sustainable and profitable. They build mobile supply chain management software for micro-enterprises in rural areas, introducing practical technologies to promote sustainability and bring greater access to the value chain.

According to the World Bank’s 2017 figures on payments for agricultural products, only one in five recipients of agricultural payments in developing regions reported receiving them into an account.

With cash payments dominating agricultural transactions, farmers cannot build the credit history necessary to obtain a loan from a traditional banking institution. The COVID-19 pandemic has only served to exacerbate smallholder farmers’ access to banking, as major banks revise their credit requirements to reflect increased market volatility.

Digital payment systems are now set to disrupt cash-based economies, much as the rapid adoption of cellphone technology in the early aughts (2000s) enabled a “great leap forward” in telecommunications for historically underserved rural communities.

Potential for market transformation, from cash to digital payments

Figures from 2018 from Badan Pusat Statistik, Indonesia’s Central Statistics Agency, show that approximately 62% of the population use a cell phone; among the rural population, the number of cellphone users is 54%. These numbers are likely to have increased since then. Cellphones are currently primarily used to obtain information and to access social media; only 7.54% of smartphone use is for buying and selling online, and less than 2% use their smartphone to obtain financial products, such as online banking.

This indicates a tremendous potential for market transformation from cash to digital payments. In order for that transformation to occur, stakeholders must first become aware of the advantages of performing transactions online.

● Access to mobile technology. Once a barrier, mobile technology is now sufficiently widespread as to be able to assume familiarity, if not ubiquity. From accessing social media and obtaining information, to using mobile applications such as PemPem to access price information, track crop sales and generate traceability data, integrating digital payment is the next logical step.

● Payment security. Demonstrating payment security is top priority for digital payment models; the ability to receive payments and to access the money easily both need to be demonstrated infallibly. Any perception of uncertainty will drive users back to the tangibility of cash transactions, with its own risks of theft, loss and error.

● Building credit history. Mobile applications for digital payments that do not require a bank account will enable unbanked smallholder farmers to track their transactions and to build credit history. By eliminating the barriers associated with obtaining traditional bank loans, digital payment systems have the potential to enable the unbanked majority to access credit, opening up the possibility of securing better loans at better rates.

As traditional banking institutions become increasingly interested in onboarding the unbanked population, the drive to build and promote digital payment systems for rural populations will receive an influx of competitive offerings. Regulation will be essential to ensuring that proper standards are maintained with regards to transaction security. The end result of competitive interest will be an increased availability of payment options for agricultural buyers and sellers in developing markets, opening up opportunities for greater financial literacy and autonomy, and greater access to market information and to credit.

The use of cellphones by smallholder farmers to access essential market information has already had a demonstrable beneficial impact on their operations and profitability. A recent paper published on the World Economic Forum platform shows that in rural Pakistan, the focus area of the paper, farmers’ income increased by 10 - 15% when they had access to mobile phones. Another study published by the World Agroforestry Centre specifies that thanks to mobile phones, farmers in Uganda had better access to price information and were better able to negotiate prices with buyers, resulting in improved livelihoods for the farmers.

The potential of mobile technology to improve livelihoods by opening up access to information was only a first step. Its potential to disrupt engrained transactional systems that are dependent on the limited ability to communicate and transact directly is now being tapped, for the greater benefit of smallholder farmers, and ultimately, for all stakeholders. Safe payments and the ability to build credit are major factors contributing to the financial security of smallholder farmers, creating greater financial autonomy and providing farmers with the incentive to continue making choices in favour of sustainable farming practices: a win for producers, for consumers, and for the planet.

PemPem is an UpLink Top Innovator of the Tropical Forest Commodities Challenge. Visit UpLink to learn more.