March 25, 2020

Opportunities in Digitizing Payments in Agricultural Value Chains

In 2004, I had the opportunity to collaborate with the Government of Uganda in making improvements to the country's agriculture sector, which is the sector where most Ugandans make their living. During our assessment, my colleagues and I witnessed a variety of inefficiencies including the low yield per hectare as a result of poor utilization of technology that farmers in developed countries had long utilized, lack of dry or cold storage facilities (and the lack of reliable electricity to power the latter) that led to a high rate of produce spoilage, and the glacial transfer of payment process within the typical agricultural value chain.

While much has improved over the past 16 years, I continue to see inefficiencies during my more recent trips to Africa, Asia, and Latin America. Therefore, I read with great interest a report, Digitizing payments in agricultural value chains: The revenue opportunity to 2025, published by the GSMA, a UK-based trade organization.

Focusing on countries with an agricultural value-add (percentage of GDP) greater than 10 percent in 2017 as determined by The World Bank (with Mexico, Peru and Sri Lanka being exceptions and have been included to show the potential of digitizing payments in the agricultural value chain), the report explains that it "is aimed at mobile money providers, which have the opportunity to drive growth in rural areas in developing countries by digitizing agricultural payments. Two types of payments are ripe for digitization: procurement payments from agribusinesses to smallholder farmers in formal value chains and subsidies paid out by governments to smallholder farmers. Both offer mobile money providers an entry point to digitize agricultural payments and enhance financial inclusion for smallholder farmers."

Furthermore, "Using proprietary methodology, this report looks at the growing opportunity to digitize business-to-person (B2P) payments (typically between agribusinesses and farmers) and government-to-person (G2P) payments (typically between governments and farmers) in agriculture in 72 developing countries. The revenue opportunity for mobile money providers from digital B2P payments is expected to increase from $2.4 billion in 2021 to $3.2 billion in 2025, while the revenue opportunity for digitizing G2P payments is expected to rise from $152 million in 2021 to $210 million in 2025."

Importantly, "Digitization can reduce transactional costs and make agricultural value chains more efficient, safe and transparent. This report examines the opportunity to digitize agricultural payments and lays out the foundational elements that must be in place for mobile money providers to realize this opportunity. Prerequisites for digitization include an enabling regulatory environment, the availability of active and liquid agents in rural areas and the presence of agribusinesses and government bodies willing and able to deploy digital tools. While initiatives to digitize B2P payments are beginning to emerge, there are much fewer examples of digital G2P schemes. This report highlights the challenges that have constrained the growth of digital G2P payments."

Below are the report's key findings and recommendations regarding B2P payments:
  • The revenue opportunity for mobile money providers in digitizing agricultural B2P payments is expected to reach $3.2 billion by 2025.
  • Asia offers almost 80 percent of the global opportunity to digitize agricultural B2P payments due to the large volume of formal agricultural B2P cash payments available. Sub-Saharan Africa has a smaller revenue opportunity, but strong mobile money uptake, especially in East Africa, means that the region is ripe for digitization.
  • To digitize B2P payments to smallholder farmers, mobile money providers should work with agribusinesses in formal value chains.
  • If operating in an enabling regulatory environment, mobile money providers should ensure they have active rural agents with sufficient liquidity for cash-outs when farmers receive agricultural payments.
  • Mobile money providers should also allow agritechs to integrate real-time payments solutions to create holistic digital agricultural tools that can add value for both farmers and agribusinesses, such as digital farmer records and advisory services.

The report also presents the following key findings and recommendations with respect to G2P payments:
  • The revenue opportunity for mobile money providers in digitizing G2P payments in agriculture is expected to grow to $210 million by 2025.
  • With established traditional subsidy schemes, most notably in India and Pakistan, East Asia and South Asia together offer the highest revenue opportunity in G2P digitization. However, there is a significant opportunity in digitizing G2P payments in Sub-Saharan Africa too, particularly in larger markets, such as Ethiopia and Nigeria – with the former having implemented a nationwide scheme to digitize fertilizer and seed subsidies to farmers in 2012.
  • Assuming the presence of an enabling regulatory environment, digitizing G2P payments in agriculture offers mobile money providers a significant revenue opportunity, especially in countries with large, established, cash-based subsidy schemes.
  • However, digitizing G2P payments presents a different set of challenges than B2P payments, primarily dealing with complex governmental procurement processes and the risk of shifting government priorities.

In addition to my work in Sub-Saharan Africa, I had the privilege advising government agencies and agribusinesses in Afghanistan, Iraq, and Uzbekistan. These experiences provided me with the opportunity to understand the challenge of getting "payments to farmers in the last mile of agriculture value chains, as well as government subsidy payments to farmers." According to the report, "In agricultural value chains, the 'last mile' is the web of relationships and transactions between buyers of crops, such as agribusinesses, cooperatives and middlemen, and the farmers who produce and sell them." A digital payment system could provide a remedy.

As the report encouragingly explains, "With 290 live mobile money services in 95 countries (as of December 2019), there is an opportunity for mobile money providers to digitize payments to farmers in the last mile of agricultural value chains, as well as government subsidy payments to farmers. The benefits for mobile money providers and mobile network operators (MNOs) can be both direct and indirect":

Direct benefits of digitization
  • Revenue from payment transaction fees
  • New mobile money customers in rural areas
  • New mobile network service users
  • Increased loyalty or stickiness of existing users
  • Licences for payment platforms and management systems

Indirect benefits of digitization
  • Higher use among existing mobile money users
  • Mobile money ecosystem use by new customers
  • Increased network use (SMS, calls, data)
  • Increased agent activity – ecosystem development
  • Uptake of adjacent products (loans and insurance)

What solutions do you think will help improve efficiencies in the agricultural value chain?
Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.

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