The Evolving Financial Ecosystem for Micro-Merchants in India

This study aims 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.

Background
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, the survey sought to understand the business profiles of merchants in terms of their cash flows and asset ownership; their credit profiles in terms of previous and current borrowings, and their adoption and usage of digital financial services (DFS).
Approach
547 merchants were surveyed across five cities: Jaipur, Kanpur, Indore, Nagpur and Surat, to gather insights for this study. 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. A detailed survey instrument was used to capture all required data in order to achieve study objectives. To this end, the survey instrument captures the following information: (i) Micro-merchant profile, (ii) Financial needs and training/Skill requirements, (iii) Ease of doing business.

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. 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.

Implications

Findings from the study suggest 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. In the second phase of this study, we conducted a value chain analysis to understand the ecosystems of micro-merchants and low-income consumers.

Thematic Area

Financial Well-being and Social Protection,

Small, Growing Businesses and Employment

Project Leads

Parul Agarwal, Anisha Singh, Suraj Nair

Location

Uttar Pradesh, Rajasthan, Maharashtra, Gujarat

Partners

Mastercard Center for Inclusive Growth

Status

Completed