Making mobile money more attractive to farmers
In 2015, UNCDF MM4P partnered with Kyagalanyi Coffee Ltd (KCL), a leading coffee exporter in Uganda, to digitize the payments to its 7,000 farmers around Mount Elgon. As part of this effort UNCDF MM4P, in collaboration with CGAP, contracted PHB Development to analyse the attractiveness of digital payments versus cash for stakeholders in the coffee value chain. For that purpose, PHB introduced a new approach that compares the cost of cash with the cost of digital payments for every transaction smallholder farmers and coffee traders engage in. PHB gives a name to this new approach Value Proposition Mapping (VPM), which is based on a methodology derived from accounting: Activity Based Costing.
Farmers and traders were interviewed to map their market behaviour, all their sales and purchases and where these took place. Next, for each transaction the associated costs were calculated.
Ciprian Panturu, Digital Financial Services Expert at UNCDF MM4P, explains: “If we look at payments from KCL to farmers at coffee collection points for example, the cost of cash for an average farmer is around UGX 27,000 per transaction. This includes the costs of transportation, time and the perceived risk of carrying cash back to the farm. If farmers are paid with mobile money, the cost would be reduced to around UGX 3,500 per transaction. Farmers would only have to pay for cash-out at a mobile money agent, something that is done frequently.” While this looks like a great value proposition at first sight, the situation is more complex.
“Farmers will still need to travel to the collection points even if they are paid with mobile money, simply because they need to supervise the weighing and grading of their coffee. And ensure they get the best price for their product. So, if farmers still have to travel, even when being paid digitally, the actual cost of cash is much lower, around UGX 3,500. Cash is also more versatile and the cost associated to the risk of carrying it, although acknowledged, remains theoretical.” says Ciprian.
“The analysis shows that farmers have a hard time spending the money on their mobile wallet. In some cases, they can pay school fees using mobile money or they use it to send remittances to family members, but those are limited use cases. It simply doesn’t make sense for them to pay for farm inputs or food with mobile money,” according to Ciprian. UNCDF and its partners in this project are using such insights to find ways to enhance the mobile money ecosystem. It is one thing to pay people digitally, it is another for these farmers to make their everyday payments digitally.
Nathan Were from CGAP thinks that the data collected during the VPM exercise is very valuable. “This information can be used as leverage to talk to MNOs [mobile network operators] about their current business models. Most MNOs are making profit from remittances cash-outs.” However, according to Nathan, “Mobile money can become an attractive alternative to cash, provided that merchant registration is made easier and accessible, and pricing is adjusted. When for example farmers are able to pay for their daily shopping with mobile money, digital payments can be perceived more positively, with tangible benefits for all users. Bringing a sense of security and access to financial services for people in rural Uganda, this is our ultimate goal”.
The data collected is currently being used to design new business models with the leading MNOs in Uganda to unlock the potential for day-to-day use of digital payments beyond just remittances.
By Páll Kvaran, Research Associate at PHB Development and Bram Peters, Technical Specialist at UNCDF MM4P in Uganda