The Digital Surge Transforming South Africa’s Informal Economy

Card payments are increasingly displacing cash in South Africa’s informal economy, signalling a significant shift in consumer behaviour, Lesaka Informal Economy Digitalisation Index shows. Conducted by Lesaka Technologies, the study involved collaboration with informal economy expert GG Alcock, utilizing data from over 70,000 merchant devices.

The index exposes a substantial increase, from 0 percent to 42 percent, in the share of monthly transaction volumes amounting to ZAR 2 B (~USD 106 M) that are now card-based, specifically dominated by debit cards (over 90 percent). This transformation is crucial in the context of the estimated ZAR 600 B (~USD 32 B) annual value of the informal economy (commonly called kasi economy), primarily comprising businesses in townships, rural, and outlying areas.

Various factors contribute to this digitisation trend in the informal sector. Fintech companies offering affordable merchant services, coupled with the widespread availability of “free” point-of-sale (POS) devices, coincide with the growing demand for digital payment methods. The more formalised segments of the informal economy, including larger cash and carries, independent wholesalers, and medium-sized walk-in stores, are witnessing this digital payment surge.

Safety concerns are a significant driver for merchants embracing digital payment methods, as outlined by Alcock, author of “Kasinomics – African Informal Economies and the People Who Inhabit Them.” Beyond safety, merchants also benefit from reduced employee fraud and lower costs associated with moving money compared to cash transactions.

Government initiatives, such as transitioning Sassa grant recipients from cash to card payments, further contribute to the momentum of digital transactions in the informal economy. According to Lesaka Technologies South Africa CEO Lincoln Mali, the majority (58 percent) of grant recipients now receive their funds through digital financial services.

The impact of the COVID-19 pandemic is evident in the broader economy, where digital payments through in-app services like Zapper, Apple Pay, and Samsung Pay saw growth. However, the safety factor plays a more substantial role in the informal market, where even older individuals feel comfortable tapping cards but are wary of using banking apps in public.

Trust factors also play a crucial role in determining the success of digital payment methods in the informal market. Recognizable brands instill confidence, while unfamiliar brands or methods like phone scanning face resistance.

The digital crime landscape in the informal economy differs from the formal market, with safety concerns prompting a preference for card payments. The ability to block a card in case of theft enhances the perceived safety of this payment method.

Notably, the shift towards digitization is positively impacting tax collection visibility, though there is a cautionary note. As businesses formalise, tax liabilities may offset previous state savings from unregistered businesses not claiming VAT.

Merchants embracing digitalisation discover additional benefits, including a reliable money trail that opens up financing opportunities, ultimately contributing to the overall growth of the sector. Despite the historical perception that cash offers invisibility to the taxman, the value of safety and convenience appears to outweigh associated costs for many merchants in the informal economy.

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