Weighing the Benefits and Drawbacks of e-Payments: Insights from Small Businesses in Mexico
Alexandra Wall, Senior Program Associate for CEGA’s Digital Credit Observatory (DCO), and Sean Higgins, postdoctoral fellow at CEGA, share key takeaways from a series of recent focus group discussions in Mexico.
Over the past five years, the Mexican government has worked hard to encourage the use of card payments by consumers and the adoption of e-payment systems by small businesses.
Many agree that small businesses are systematically missing out on the financial benefits that come with using digital payment technologies — including the ability to easily manage inventory, keep shelves stocked and hire more employees. The government has its own incentive for wanting to increase adoption among small businesses owners: Mexico’s high rate of informality represents a missed opportunity to collect tax revenue.
CEGA postdoc Sean Higgins and I traveled to Mexico City and Guadalajara in April to speak with (mostly informal) small business owners about the perceived benefits of and barriers to using e-payment technologies. We organized six focus groups with 19 merchants — including florists, dentists, café owners, and tour guides. All were either active or inactive users of an e-payment system offered by iZettle, a financial technology company that was recently acquired by PayPal. Participants shared characteristics of their businesses, factors that lead to them use (or not use) iZettle’s card reader, and the advantages and disadvantages of accepting cash and/or card payments. Here’s what we learned:
“If you want your business to prosper, you can’t only operate in cash” — hairstylist
- Increased security — Accepting card payments adds a level of increased security for businesses by reducing the amount of physical cash on hand (and the potential for robbery), making it more difficult for employees to steal from transactions, and decreasing the chance of receiving fake bills.
- Convenience — Electronic payments eliminate the need to physically travel to a bank to deposit sales. This is especially convenient for businesses that are located far from a bank branch.
- Better business management — The iZettle Go mobile application and online software allows business owners to keep an electronic catalogue of products and prices, analyze weekly and monthly sales trends, and keep track of inventory and receipts. Some merchants shared that this report feature of the product was the “wow!” moment: the reports offer insights into business activities that the owners never closely monitored before, for example the busiest times of day.
- Increase in sales (or not losing sales) — Merchants almost unanimously agreed that by having a card reader on hand, their businesses benefited from increased sale volume. They shared stories of capturing clients from a nearby business that doesn’t accept card payments, and attracting new clients (with the help of a sticker in the window advertising the acceptance of electronic payments) who prefer to pay with card. Now with a card reader, businesses shared that they no longer lose clients who “go to an ATM to get cash” only to never return.
“If you don’t accept cards, people will look for other places where it’s easier to pay” — restaurant owner
- Commission fee — The most frequently mentioned drawback of using e-payments is the associated commission charged. Several merchants mentioned that they pass the commission fee onto their clients or increase the price of their products to absorb the commission. But this depended on the type of the business: most restaurant and cafe owners agreed that it wasn’t customary (and likely wouldn’t be well received) if they charged their customers the commission fee.
- Higher taxes — When operating only with cash payments, merchants can underreport their earnings or forgo registering cash sales entirely. But with card payments, every transaction is automatically registered and fair game to be taxed. A few merchants shared the sentiment that larger businesses can afford to pay taxes, but as micro businesses (that aren’t getting any support from the government) paying taxes isn’t fair. Several other merchants said they prefer to deal in cash so they can leave fewer traces in the financial system.
“The cost of the iZettle card reader might be expensive for some small businesses, but it’s more expensive for a small business not to have it” — dentist
Do the Benefits Outweigh the Drawbacks?
For the merchants we spoke with (urban business owners who willingly chose to adopt a card reader), the benefits to accepting card payments seem to outweigh the drawbacks. Even those who we categorized as “inactive” users (who hadn’t registered a card payment in the last 6 months) acknowledged that urban customers increasingly want to pay by card. Ultimately, while micro businesses may be frustrated with the commission rates and increase in registered transactions, these factors aren’t enough of a deterrent to abandon e-payment technology entirely.
Insights from these focus group discussions will be used to inform a large-scale field experiment by CEGA affiliates Paul Gertler, Sean Higgins, Ulrike Malmendier, and Waldo Ojeda analyzing the returns of e-payments to small businesses and network effects in its adoption and usage.
Want to learn more about financial inclusion and technology adoption by micro and small business owners? Check out a separate field study in the Dominican Republic on incentivizing adoption, and CEGA’s Financial Inclusion initiative.