Page 178 - The Digital Financial Services (DFS) Ecosystem

ITU-T Focus Group Digital Financial Services
Ecosystem

4 Payments Acceptance Economic Models

The question of the economic model, or business case, for merchants and other payments acceptors in
emerging markets is challenging. In the developed world, provider revenues from merchant payments – often
in the form of merchant discount fees – is sufficient to cover many of the overall costs, and profit requirements,
of providers. Some of this is distributed to consumer providers through the mechanism known as interchange.

Applying this business model to developing markets will work in some cases, and not in others. The biggest
obstacle is the very large base of small merchants (segments M0 through M3), who are unlikely to pay a fee
simply for electronic payments, and may be unwilling to pay a fee under any circumstances. Given a financial
inclusion objective of reaching "digital liquidity" and the eventual move away from cash, this is a problem that
needs to be solved.

4.1 Merchant Payments Revenue Sources

4.1.1 Merchant Pays

• The most obvious source of revenue is a simple fee charged to the merchant by the merchant services
provider. Often, this is expressed as a "percent of value"; sometimes as a combination of a fixed fee and
a "percent of value". The merchant, of course, will compare this cost to his or her cost of accepting cash,
and may not factor in the "hidden" costs of cash (theft, lost sales, etc.)

• If a merchant is accepting a payment from a digital wallet being used in a P2P mode, or in a merchant
payment mode, the merchant may incur "cash-out" fees when turning the received digital payment into
cash. (This is why, in another report by this ITU Focus Group, the use of digital funds for B2B supplier
payments is investigated as a means of reducing merchant costs and improving digital liquidity.)

4.1.2 Buyer Pays

• In the developed world, there is rarely an explicit fee for a consumer to use a payment method at a
merchant. However, in both developed and developing world, a merchant may pass on part of their
costs to a buyer – either as a "surcharge" or as a simple increase in the purchase price. These practices
may or may not be permissible according to the rules of the payment system the merchant is using, or
according to law and regulation.
• If the buyer is using a digital wallet in a P2P mode to buy something at the merchant, the buyer may
incur transfer fees for making the payment.
• Note that a related issue is the fact that many merchants also act as agents, and can earn a cash-out
commission; this leads some merchants to refuse to take eMoney, as they hope a buying consumer will
cash-out, and then pay for a purchase in cash.

4.1.3 Subsidies

There are a number of examples in the payments industry of the costs of payments being absorbed by a
provider in exchange for the ability to realize revenues from other customers or from other products sold to
the customer (in this case, the merchant) in question. Some of these subsidies are:

• Airtime Subsidy – a merchant services provider may realize sufficient revenue from its voice and data
business with a merchant to absorb some costs of providing merchant services.
• Merchant Lending – a merchant services provider may be able to lend to a merchant, or provide various
other value-added merchant services. Merchant lending in particular is emerging as an important
consideration.

• Consumer Lending – a merchant services provider may be able to lend to a merchant’s customers – either
directly or in partnership with another DFS provider.

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