Fiat Money versus Digital Money: The preferred payment medium of the informal economy

No matter which culture you’re from, you by now the important role money plays in our economy; We use it in various ways – as a unit of account, means of payment and store of value. Even though money has the same function in all cultures, it may not necessarily be in the same form. What you call money in your culture may vary from what is called money in another culture. Milton Friedman (1991) in his paper titled “The Island of Stone Money” gave an account of how people of the Yap Island used large stone quarried and shaped with holes at the centre as money. This you will probably find weird!In Africa, the development of money can be traced through four eras: a) the precolonial period, where money was locally produced and acquired, and others imported through dehumanising intercontinental trades, such as the Atlantic slave trade; b) the colonial period, where precolonial monies, in some places, still circulated with official monies; c) postcolonial national monies for the new African states; and finally d) the most recent phase, due to migration and cross border trades as well as to the use of new technologies, such as mobile money. Money is any good that is widely used and accepted in transactions involving the transfer of goods and services from one person to another.3 This means that in whatever form – fiat or digital – that it is being used, money must be broadly valued, standardised, scarce, durable, hard to counterfeit and easy to handle.nbsp; In most African countries, money remains largely in fiat (cash) form than in digital despite the massive investment, regulatory reforms and innovations happening in the digital space. As a result, around 95 per cent of retail transactions taking place on the continent are in cash.4 This has been attributed mainly to low banking penetration and a widespread informal economy. Better Than Cash Alliance in its 2017 report titled “Building an Inclusive Digital Payments Ecosystem: The Way Forward” shows that 63 per cent of all the payments by value made in Ghana were through cash while 37 percent was made through digital payments.5 This is quite intriguing for a country that is described as the fastest growing mobile money market in Africa.6 nbsp; The number of registered mobile money accounts as of December 2017 was 23,947,437 representing a growth rate of 21.34 percent over the 2016 position of 19,735,098. Similarly, the number of active mobile money accounts increased by 33.75 percent from 8,313,283 in 2016 to 11,119,376.7. So why is the development in mobile money not translating significantly into less dependency on cash? I went speaking with street vendors to learn more about the type of money widely used for payment in the informal economy and to understand key user issues. I used a random sampling method to interview 15 vendors (all women) using open-ended questions. I analysed and presented the data collected using both qualitative and quantitative approaches.Vendors are an integral part of urban economies around the world, offering easy access to a wide range of goods and services in public spaces. They sell everything from fresh vegetables to prepared foods, from building materials to garments and crafts, from consumer electronics to auto repairs to haircuts. Vendors operate within the informal economy which is not taxed, monitored by any form of government, or included in any gross national product (GNP).8 In Ghana, over 80 percent of the workforce is in the informal economy. The vendors I interacted with ply their trade on the streets of Osu and Madina, all are busy suburbs in Accra Ghana.nbsp; All the vendors I interacted with own mobile phones and have mobile money accounts. Approximately 60 per cent have bank accounts. On average, they’ve been selling in the street for 5 years and make about GHS 250 daily.33 per cent accept payment from their customers through mobile money. The remaining 67 per cent accept only fiat money (cash). In terms of payment to suppliers, 100 per cent of the vendors use cash payment. The decision to accept mobile money payments from customers is driven by the value per sale and the customer’s willingness to pay the mobile money charges for cash out. Fiat money (cash) is widely accepted because the vendors want to avoid the complex user interface, the problem of interoperability, the time used to locate a cash-in cash-out agent, the probability of the agent not having cash, and the charges incurred on cash-outs or transfers.nbsp; The decision to pay suppliers cash is driven by the transactional nature of their business relationship, and the fact that suppliers prefer cash payments. In all transaction types, cash remains the preferred medium.100 per cent of the vendors prefer fiat money (cash) over cheque when it comes to accepting paper-based payments for sales made. In analysing the perceived benefits of this choice, 65 per cent stated the immediate liquidity of cash, 20 percent stated no extra charges on accepting cash, and 15 percent stated ease of use of cash. The pain points identified for using cash are security, counterfeiting, and difficulty in tracking spending.nbsp;33 percent of vendors prefer accepting payment made through mobile money over cheque payments. Analysis of the perceived benefits of their choice shows the following in order of ranking: security (55%), ease of use (35%), immediate liquidity (15%), and earn interest (5%). The pain points to accepting mobile money are charges on all transactions (1% on-network, and 1.5% off-network), difficulties in sending payment from one network to another, difficulties in navigating the user interface, and time to make cash out. It is worth noting that none of the vendors have the ability to accept card payments or understand how it works. The issue of Mobile Money fraud came up strongly. Cheque payment is least preferred because of the fear of dud cheque situations, the time taken for cheque to clear, and the lack of immediate recourse to the issuer in case of any eventuality. Additionally, most of these vendors do not have bank accounts to enable the acceptance cheque or are able to understand how it worksIn summary, fiat money (cash) remains “king” even though there is a digital alternative available. This is simply because fiat money (cash) provides convenience – immediate liquidity, no transactional charges, and ease of use. The pain points, however, are that fiat money (cash) can easily be lost, spent and counterfeited. Digital money is used because it is less bulky, can’t be counterfeited, secured, reconcilable, and relatively easy to use. The pain points however are the transaction charges, difficulties in navigating the user menu, and the time it’ll take to locate a CICO agent to transact. I am of the considered opinion that, efforts towards a cashless or cash-lite society can only be achieved when Mobile Money Operators, Banks and Regulators work together to address the pain points customers face when using digital money, especially the fees. More digital money issuers should be allowed in the market to drive healthy competition that will ultimately benefit customers. Currently, there are only three Mobile Money Operators in Ghana, with news of two more entering soon. This will help deepen adoption and widen usage of digital money. The government must also lead in digitising payments for key services procured or offered. The Bank of Ghana should also consider issuing digital money. Customer education to encourage digital payment is also very important. A consolidated national identification system is needed to drive a cashless or cash-lite society.