How financial exclusion and lack of trust hamper e-commerce platform models

In 2018 FiDA Partnership conducted interviews with several key platforms in Africa looking at how platform business models are evolving in terms of financial services.

Faced with a customer base that lacks bank accounts or who do not trust online payments, many e-commerce platforms have developed tools and processes that allow customers to pay in cash for most transactions. In this note, I argue that while this strategy is fueling growth in transaction volumes and active customers, issues with fraud, failed deliveries and late/uncollected receivables stemming from the use of cash are opening platforms up to substantial losses. Additionally, e-commerce platforms have not been as proactive as they could be in launching strategies to onboard and pay financially excluded merchants and workers. This misstep is probably limiting the number of merchants that would be selling on e-commerce platforms if mobile money or easier conversions to cash were implemented.

In their F-1 registration statement, Jumia (Jumia Technologies AG) describes how they have overcome the challenges posed by their African markets by developing their own logistics and payment infrastructures. Jumia Logistics now includes leased warehouses and drop-off centers; more than 100 integrated, local third-party logistics providers; and Jumia’s own last-mile delivery fleet in certain cities. In 2018, Jumia logistics handled 92% of Jumia’s deliveries.

Photo source: Financial Times

Even so, the company has been subject to theft, fraud, and other risks associated with cash transactions. Late collections (when funds are not remitted from third parties back to Jumia on time) and unrecoverable receivables (when delivery agents commit fraud or become insolvent) have been particularly problematic for Jumia in countries where a large percentage of deliveries are outsourced to third-party delivery agents. In Kenya, where approximately 95% of Jumia’s consumers paid in cash-on-delivery in 2016, the company discovered in early 2018 that approximately $800,000 in cash payments was never collected. The company notes that, to mitigate this risk, they now have an automated system that allows Jumia to monitor cash transactions on a daily basis.

Nevertheless, compared to more developed markets, Jumia has experienced a higher number of failed deliveries, because customers paying in cash have to be home to provide payment at the time of delivery or the delivery will fail. After three failed attempts, Jumia returns the product to the seller. In 2018, 14.4% of Jumia’s gross merchandise volume consisted of  failed deliveries and items returned by customers.

Image: Jumia website

In addition to a financially excluded consumer base, many SME producers that might want to access e-commerce platforms like Jumia do not have bank accounts. Most platforms require producers to be paid via bank accounts. Some, including Jumia, allow workers to use mobile money accounts or interface with PayPal or Western Union. However, many platforms restrict the frequency and withdrawal destinations that participants can use to transfer money from the platform’s pocket to their own. This can create time delays between when the sale happens and when a merchant is paid. While some delays are to be expected, restrictions that severely limit the frequency by which participants receive payouts can be problematic for financially excluded workers and merchants. Moreover, because only 20% of sub-Saharan Africans have bank accounts, platforms that only support bank accounts are limiting the number of merchants that can onboard to their platforms. Paypal and Western Union withdrawals are not reasonable workarounds; they charge additional fees and create further friction because, with these services, money has to make additional hops before it reaches participants’ pockets.

In the near term, e-commerce platforms need to offer cash-on-delivery in order to scale. There’s also no guarantee that the market will shift rapidly from the current situation, where most transactions are cash, to primarily digital payments. It will take time to build trust and for banks and financial institutions to address the 80% of the market that remains financially excluded. In the meantime, early entrants like Jumia need to find ways to minimize losses that result from cash transactions to ensure their own profitability and sustainability. Moreover, e-commerce platforms need to grow sellers as much as they need to grow consumers. To do so, platforms may need to diversify how they pay workers or facilitate bank account openings.