The Evolving Financial Ecosystem for Micro-Merchants in India

Principal Investigators: Parul Agarwal, Anisha Singh, Suraj Nair
Research Team: Parul Agarwal, Anisha Singh, Suraj Nair
LEAD Centre: Centre for Microfinance (CMF)
Focus Area: Financial Inclusion
Project Geography: Uttar Pradesh, Rajasthan, Maharashtra, Gujarat
Partner: Mastercard Center for Inclusive Growth
Status: Completed


Digital payments have the potential to reduce transaction costs, while increasing efficiency and transparency, thus surmounting many of the traditional barriers (physical, cost etc.) that have hindered financial inclusion efforts in India. While the digital payments revolution in India has gathered significant steam in the last few years, cash still remains a dominant medium of transaction. A seamless transition to a less-cash ecosystem requires all stakeholders to adopt and accept digital financial services. Particularly, greater adoption of digital platforms by ‘micro-merchants’, who account for an overwhelming proportion of daily financial transactions, can give a significant push to digital payments at the last-mile. However, merchants continue to operate in an ecosystem where cash is still king. Given this context, we undertook a study to gain deeper insights into the financial needs of micro-merchants and identify skill and capacity gaps that need to be addressed in order to ease their adoption of digital payments. The Study involved a survey of 547 merchants in five cities: Jaipur, Kanpur, Indore, Nagpur and Surat. The sample also reflected diverse business profiles of merchants in terms of cash flows and asset ownership, credit profiles, and the adoption and usage of digital financial services (DFS) for merchants.

Key Findings

•     Merchants predominantly conduct daily investment activities through reinvestment of daily savings and income; very few merchants have an outstanding working capital loan. Merchants in these areas also experience high seasonal variation in cash flows determined by fluctuations in demand due to weather and festivals. Thus, the scope for growth of enterprises is low.
•     Few merchants rely on formal lenders to access credit and two out of three merchants are not satisfied with their current formal lenders mainly due to the indirect costs of making multiple visits to a branch that is not located within walking distance, and the lengthy disbursement process. This has implications for the financial inclusion assumption that once formally banked, individuals will remain formally banked.
•     Although awareness of traditional digital platforms is high, only one in two merchants are aware of mobile and Internet banking, with an even fewer number using any of these platforms.

Thus, the Study suggests that there is significant potential to explore innovations in product design, and adoption drives that can influence the usage of digital platforms by micro-merchants.

Related Resources
Report : Evolving Financial Ecosystem