Electronic Payments Acceptance Incentives Literature Review and Country Examples APRIL 2020 CONTENTS Abbreviations 2 I. Introduction 3 II. Summary of findings 5 Annex 1: Literature Covering Electronic Payments Acceptance Incentives 10 Annex 2: Country EPA Incentives Examples 22 DISCLAIMER The Financial Inclusion Global Initiative led in partnership by the World Bank Group (WBG), Interna- tional Telecommunication Union (ITU), and the Committee on Payments and Market Infrastructures (CPMI), with the support of Bill & Melinda Gates Foundation (BMGF). The FIGI program is a three-year investment funding national implementations in three countries (China, Egypt, and Mexico), supporting topical working groups to tackle 3 sets of outstanding challenges in closing the global financial inclusion gap, and hosting 3 annual symposia to gather the engaged public on topics relevant to the grant and share intermediary learnings from its efforts. This work has been prepared for the Financial Inclusion Global Initiative by the FIGI Electronic Payments Acceptance (EPA) Working Group. The work is a product of the staff of the World Bank with external contributions prepared for the Financial Inclusion Global Initiative. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Financial Inclusion Global Initiative partners partners including The World Bank, its Board of Executive Directors, or the govern- ments they represent, or the views of the Committee for Payments and Market Infrastructure, Interna- tional Telecommunications Union, or the Bill & Melinda Gates Foundation. The World Bank does not guarantee the accuracy of the data included in this work. 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Electronic Payments Acceptance Incentives Literature Review and Country Examples APRIL 2020 Abbreviations AFIP Administración Federal de Ingresos Públicos MMO Mobile Money Operators (Fiscal Authority of Argentina) MSM Micro and Small Merchants AML/CFT Anti-Money Laundering / Combating the MSME Micro, Small and Medium Enterprise Financing of Terrorism MSP Merchant Services Providers ARS Argentine Peso MXN Mexican Peso AUH Asignación Universal por Hijo (Social NGN Nigeria Naira protection program) NPAC National Payments Advisory Council B2B Business to Business (Malaysia) BIS Bank for International Settlements NPCI National Payments Corporation of India BMGF Bill and Melinda Gates Foundation P2B Person to Business BNM Bank Negara Malaysia P2G Person to Government BTCA Better Than Cash Alliance PCRF Payment Card Reform Framework (Malaysia) CFDI Comprobante Fiscal Digital por Internet POS Point of Sale (Digital tax receipt) PPM Plataforma de Pagos Móviles (Argentina) CNBV Comisión Nacional Bancaria y de Valores PSP Payments Service Providers (National Banking Commission) QR Quick Response DNB De Nederlandsche Bank (Netherlands Central Bank) RBI Reserve Bank of India EMV Europay MasterCard VISA (Interoperability RM Malaysian Ringgit standard) SHCP Secretaría de Hacienda y Crédito Público EPA Electronic Payments Acceptance (Mexico Finance Ministry) EU European Union SMB Small and microbusinesses FIGI Financial Inclusion Global Initiative SME Small and Medium Enterprises G2P Government to Person TIETP Tax Incentive for Electronically Traceable Payments (Korea) GDP Gross Domestic Product UPI Unified Payments Interface GPFI Global Partnership for Financial Inclusion USD United States Dollar IDB Inter-American Development Bank VAT Value-Added Tax IMF International Monetary Fund WBG World Bank Group ITU International Telecommunication Union WEF World Economic Forum KYC Know Your Customer MDF Market Development Fund MDR Merchant Discount Rate 2 • FINANCIAL INCLUSION GLOBAL INITIATIVE I. Introduction The Financial Inclusion Global Initiative (FIGI) is a e-commerce, and on unserved and underserved groups. three-year program funded by the Bill & Melinda Gates One of the Working Group’s work streams is incentives to Foundation (BMGF) to support and accelerate the electronic payments acceptance. implementation of country-led reform actions to meet The FIGI Working Group on Electronic Payments national financial inclusion targets, and ultimately the Acceptance is premised on the concept that giving indi- global ‘Universal Financial Access 2020’ goal, imple- viduals access to transaction accounts is not sufficient. mented by the World Bank along with the International Beyond achieving universal access—whereby all adults Telecommunications Union (ITU). FIGI aims to enable worldwide will be able to have access to a transaction national authorities in developing and emerging mar- account or an electronic instrument to store money, kets to better harness the potential of digital technol- send and receive payments—there is also the key issue of ogies for financial inclusion, and to manage associated whether a transaction account actually provides benefits risks. FIGI funds national implementations in three coun- to its users, which is very often reflected in how frequently tries, supports topical working groups to tackle three that account is used, including to access other financial sets of outstanding challenges (one of them being elec- services. Wide acceptance of non-cash payments is a tronic payment acceptance) in closing the global finan- pre-condition to uptake and effective usage of trans- cial inclusion gap, and hosts three annual symposia to action accounts to: (i) perform most, if not all, payment gather the engaged public on topics relevant to the needs; (ii) to safely store some value; and (iii) to serve as grant and share intermediary learnings from its efforts. a gateway to other financial services. The FIGI Working Group on Electronic Payments Accep- Yet, acceptance of electronic payments remains lim- tance is comprised of national authorities, international ited among merchants: it has been estimated that P2B financial institutions, donors, standard setting bodies, and payments worldwide to medium, small and micro retailers a wide range of private sector stakeholders. Its objective amount to USD 18.8 trillion, only 37% of which are made is to foster effective practices for enabling and encourag- electronically. Cash received for the purchase of goods ing acceptance and use of electronic payments, with an and services is reused along the supply chain: worldwide, emphasis on person-to-business (P2B) payments, both the share of electronic B2B payments by medium, small for proximity payments at the point of interaction and and micro retailers is 53%, and as low as 31% in South Asia. FIGI ELECTRONIC PAYMENTS ACCEPTANCE WORKING GROUP  • 3 This note aims to present a mapping of the most rele- understanding of a specific incentive. The compilation of vant literature on incentives to expand electronic pay- publications does not aim to be an exhaustive list of refer- ments acceptance (EPA) and some country examples ences for the topic, but rather highlights those more rele- where these incentives have been implemented. The vant to the EPA WG. goal is to identify the gaps in the literature to assist the Country examples included are those which have imple- FIGI Electronic Payments Acceptance Working Group mented EPA incentives and were all collected through (EPA WG) in defining deliverables to contribute to the desk research. Within each country, an effort was made literature and to policymakers’ resources. to include all documented incentives implemented. How- This note takes stock of the literature and some coun- ever, neither the incentives documented in each example, try examples of direct incentives to merchants and indi- nor the list of countries should be considered exhaustive. rect incentives to EPA through incentives to customers. When available, information on the effect or estimated The literature review presents the most relevant publica- impact of the incentive is presented. tions that give a broad overview of the topic or a greater 4 • FINANCIAL INCLUSION GLOBAL INITIATIVE II. Summary of findings The literature on electronic payments focusing specifi- regulating interchange fees and merchant discount rates, cally on incentives to acceptance is limited. However, mandating the use of cash registers and mandating the there is a wealth of insights embedded in broader elec- disbursement of wages and salaries by electronic pay- tronic payments ecosystem development reports as well ments. We also find that these incentives have been as in the academic literature. Based on the literature widely used across countries, but with mixed or undocu- and on examples of policies and initiatives implemented mented results. across the world, this note lists and catalogues the var- The third category comprises ecosystem development ious types of incentives that can be used to incentivize incentives that are usually implemented jointly by the pri- electronic payments acceptance (EPA). The incentives vate and public sector. These include working on interop- were catalogued based on whether they were imple- erability and standardization, establishing consumer mented by the public or private sector (or a collabora- protection, promoting financial literacy, strengthening tion between both), and then on five broad categories telecommunication infrastructure and digitizing the sup- based on the type of incentive. ply chain. These incentives are generally indirect incen- The first category is the fiscal and financial incentives tives to EPA, as their goals are usually broader or otherwise which include merchant fiscal incentives, subsidies to focused. However, the literature supports the role these retailers to install POS terminals, lotteries for consumers incentives play in promoting EPA. and merchants and consumer fiscal incentives. In general, The fourth category includes value-added services the literature has a relatively good coverage of these that have been shown to be critical in the cost-benefit incentives as they’ve been among the most widely imple- analysis merchants undergo when deciding whether to mented incentives to EPA and in many cases they have adopt electronic payments. Some of the documented documented positive impacts on EPA. value-added services that incentivize EPA include credit The second category comprises regulatory measures supported by electronic payments flow data, productivity to incentivize or mandate EPA. This category includes solutions, revenue generating services and client relation- encouraging merchant formalization, implementing disin- ship management all embedded on electronic payments centives for cash usage including cash transaction limits, acceptance solutions. FIGI ELECTRONIC PAYMENTS ACCEPTANCE WORKING GROUP  • 5 The fifth category comprises technology innovations • Public sector incentives mostly focus on fiscal incen- and new business models that have enabled the cost of tives, merchant subsidies and regulations discouraging electronic payments acceptance to drop while also allow- cash use. Private sector incentives are mostly focused ing acquirers to onboard previously hard-to-reach retail- on product innovation including added-value services ers. Some of these incentives include broadly defined new • When conducting research on incentives it is useful to products and services, efforts to improve the product divide the market into different classes of retailers and experience, non-traditional partnerships among providers consumers, as each of them display different needs, and the figure of payment aggregators. behaviors and challenges. Table 1 presents an overview of the literature reviewed in this note and the incentives analyzed in each publication. The main gaps identified in the literature are two: Firstly, The main findings of these documents are later summa- there is no guidance on the regulatory and political con- rized in Annex I of this note. Table 2 presents an overview text in which each of the incentives where implemented of the identified incentives that were implemented in each and how this context influenced their effectiveness. Sec- country included in this note. A description of each of ondly, the documentation on the impact of the incentives these incentives, and the impact information where avail- is scant mainly due to lack of impact evaluation embed- able, are presented in Annex II. ded into the interventions/ programs. From the analysis of the literature and country exam- Based on the findings of this stock taking note, the ples, the following common threads or potential conclu- Electronic Payments Acceptance Incentives workstream sions were found: will be developing a toolkit to guide authorities, interna- tional organizations and electronic payment ecosystem • There is no single best incentive, but rather countries stakeholders (e.g. PSPs, payment and card networks) in seem to implement a set of incentives. the design and implementation of incentives to increase • The best set of incentives could be related to the level electronic payments acceptance. The toolkit will be of development in the market. comprising an assessment tool, a menu of incentives mapped to the assessment, and an implementation note • Incentives have different effects in different countries; documenting in detail country cases that can exemplify the implementation process seems to be crucial. the incentive implementation challenges and keys to success. 6 • FINANCIAL INCLUSION GLOBAL INITIATIVE TABLE 1.1 Overview of incentives covered in each publication Institutional author and year of publication 2018 2018 2018 2017a 2017b 2016a 2016 2016b 2016 2016 2015 2014 2014 WEF WBG, Institution leading / Master- Master- and BMGF, type of incentive Incentive category Visa WBG BTCA card card Visa WBG Visa ITU DNB USAID BTCA GSMA Fiscal and Merchant fiscal financial incentives x     x x x         x     incentives Subsidized POS terminals x         x         x     Consumer fiscal incentives (VAT & income tax reductions) x   x   x x               Lotteries x   x   x x               Regulatory Encourage merchant formalization         x   x             Public sector Disincentives for cash— cash transaction limits         x x               Interchange fees and merchant discount rates           x               Mandated acceptance of electronic payments         x x               Mandated cash registers         x                 Mandated disbursement of wages and salaries by electronic payments         x                 Other Government adoption of electronic payments x   x   x x           x   Awareness campaigns                   x x     Acceptance development funds           x               Ecosystem Interoperability and development Standardization x x x x     x x x     x   Mixed Consumer protection and Financial Literacy x   x x       x       x x Telecommunication infrastructure x x x x   x ` x x     x   Supply chain digitization x x   x     x x     x   x Value-added Credit x x x x     x x x   x   x services Productivity Solutions x     x   x x x     x   x Revenue generating service       x     x x x   x     Client relationship Private sector management x     x     x       x     Technology New products and innovations services x x   x   x x x x   x x   and new Improving the product business models experience x x x x   x x x x x x x x Non-traditional part- nerships x     x     x x x       x Payment aggregators x   x x     x             FIGI ELECTRONIC PAYMENTS ACCEPTANCE WORKING GROUP  • 7 TABLE 2.1 Overview of incentives implemented in each country example Country / Jurisdiction Kazakhstan Argentina Indonesia Colombia Greece Japan China Institution leading / India EU type of incentive Incentive category Fiscal and Merchant fiscal incentives x                 financial incentives Subsidized POS terminals x         x   x   Consumer fiscal incentives (VAT reductions, income tax reductions) x   x   x       Lotteries         x x                     Public sector Regulatory Encourage merchant formalization Disincentives for cash–cash transaction limits       x x x     Interchange fees and merchant discount rates           x     Mandated acceptance of electronic payments x       x     x Mandated cash registers                 Mandated disbursement of wages and salaries by electronic payments                 Other Government adoption of electronic payments                 Awareness campaigns                 Acceptance development funds             x   Ecosystem Interoperability and Standardization x x             Mixed development Consumer protection and Financial Literacy                 Telecommunication infrastructure   x       x     Supply chain digitization                 Value-added Credit   x       x     services Productivity Solutions                 Revenue generating service                 Private sector Client relationship management                 Technology New products and services x         x     innovations and new Improving the product experience   x             business Non-traditional partnerships                 models Payment aggregators                 8 • FINANCIAL INCLUSION GLOBAL INITIATIVE TABLE 2.2 Overview of incentives implemented in each country example Country / Jurisdiction Netherlands Malaysia Uruguay S. Korea Nigeria Mexico Kenya Institution leading / USA type of incentive Incentive category Fiscal and Merchant fiscal incentives           x     financial incentives Subsidized POS terminals     x x     x   Consumer fiscal incentives (VAT reductions, income tax reductions)     x     x x   Lotteries     x x x x                     Public sector Regulatory Encourage merchant formalization Disincentives for cash–cash transaction limits     x x     x   Interchange fees and merchant discount rates   x   x     x   Mandated acceptance of electronic payments           x     Mandated cash registers                 Mandated disbursement of wages and salaries by electronic payments             x   Other Government adoption of electronic payments       x         Awareness campaigns     x x x       Acceptance development funds   x x   x       Ecosystem Interoperability and Standardization                 Mixed development Consumer protection and Financial Literacy                 Telecommunication infrastructure                 Supply chain digitization                 Value-added Credit x             x services Productivity Solutions               x Revenue generating service               x Private sector Client relationship management               x Technology New products and services x               innovations and new Improving the product experience x             x business Non-traditional partnerships     x           models Payment aggregators     x           FIGI ELECTRONIC PAYMENTS ACCEPTANCE WORKING GROUP  • 9 ANNEX I Literature Covering Electronic Payments Acceptance Incentives # Year Organization Title (link) Country Focus 1 2017a Mastercard Building Electronic Payment International Analyzes barriers to small and microbusinesses Acceptance at the Base of the EPA from the merchant and PSP perspective, and Pyramid to Advance Financial Inclusion 2 2018 Visa Maximizing the Impact of Financial International / Insights on the importance of the merchant- Inclusion: Merchant-Centered China centered design as an approach to incentivize Design and the Last Mile in China electronic payments acceptance among the smallest merchants. 3 2018 World Bank Supporting Payment Sector International/ Guidance on the foundations required to support Group Development: B2B corporate Indonesia B2B payments in the retail sector and analysis payments requirements in the of behavior, needs and challenges for different traditional retail sector retailer profiles. 4 2018 Better than Achieving Development and International High-level review of policy options and practical Cash Alliance Acceptance of an Open and action that can help moving toward developing Inclusive Digital Payments open and inclusive digital payment infrastructures Infrastructure and incentivize EPA and use. 5 2017b Mastercard Reducing the Shadow Economy Central and Analyzes and quantifies the costs and benefits of through Electronic Payments Southern Europe different policies to reduce the shadow economy, many of which incentivize electronic payments. 6 2016a Visa Perspectives on Accelerating International Comprehensive review of EPA incentives including Global Payment Acceptance case studies and recommendations of best incentives depending on market development stage. 10 • FINANCIAL INCLUSION GLOBAL INITIATIVE # Year Organization Title (link) Country Focus 7 2016 World Economic Innovation in Electronic Payment International Reviews of main barriers to and incentives for EPA Forum and Adoption: The case of small acceptance, from the perspective of micro, small World Bank retailers and medium retailers, including innovation trends Group and case studies. 8 2016 ITU Digital Enabling Merchant Payments International Review and analysis of models to support Financial Services Acceptance in the Digital merchant acceptance of eMoney payments. FG Ecosystems 9 2016b Visa Small Merchants, Big Opportunity: International Analysis of barriers to EPA for micro and small The Forgotten Path to Financial merchants based on qualitative surveys and Inclusion recommendations of incremental improvements for the various market stakeholders. 10 2016 De Nederlansche Payment behavior: the role of Netherlands Academic paper on the socio-psychological Bank socio-psychological factors determinants of choosing cash versus electronic payment instruments. 11 2015 USAID Beyond Cash: Why India Loves India Compendium of merchant and consumer Cash and Why That Matters for quantitative survey insights into electronic Financial Inclusion payment acceptance and use. 12 2014 GPFI The opportunities of digitizing International High-level guidelines covering payment payments digitization benefits and challenges for governments, recipients and providers. 13 2014 GSMA Setting up shop: Strategies for International Insights into successful approaches to merchant building effective merchant acquisition and management from the mobile payment networks merchant provider perspective. Building Electronic Payment Acceptance at the 1. “ i) New products and services—Make useful additions to Base of the Pyramid to Advance Financial Inclusion”, product propositions to make electronic payment solu- Mastercard. 2017. tions attractive and relevant to SMBs. These include technological and process innovations that enhance This report from Mastercard focuses on small and micro- value propositions to merchants, and improve the over- businesses’ (SMBs) challenges to accepting electronic all product experience. The report includes examples payments and some potential solutions. The report of lending programs using transaction data for credit groups the main barriers around four themes, with some decisions such as Square Capital, and merchant of them affecting the merchants and others the payment rewards programs such as Eeziklik Global. service providers: ii) New business models—Design new business models i) Economics—cost of acceptance, lack of compelling to reduce costs and increase the viability of business product value proposition, cost of merchant sales and models servicing SMBs, focusing on driving collabora- service, regulatory overhead, and tax liability; tion among payment service providers and deploying ii) Risk—financial risk, process risk, and regulatory ambi- new partnership models. These include new models of guity and inconsistency; collaboration and cooperation among payment service providers, and new partnership models that incorpo- Distribution—disengaged MSPs, and misaligned distri- iii) rate digitization across supply chains. bution model; iii) Market development initiatives—Invest in market Friction—cultural affinity to cash, lack of relevant rules, iv) development initiatives through collaboration with the and poor infrastructure. public and private sectors to overcome structural bar- The report identifies three approaches to address the riers to acceptance and to incent market participation challenges: and innovation. FIGI ELECTRONIC PAYMENTS ACCEPTANCE WORKING GROUP  • 11 FIGURE 1. Mastercard: Summary of Approaches and Levers to Drive Electronic Payments Approach Objective Potential levers New products Deploy new products and services to: Provide enhanced value propositions & services • Provide enhanced value proposition i. Credit • Improve product experience ii. Productivity solutions iii. Revenue generating services iv. Loyalty programs Improve the product experience i. Digital ID solutions ii. Smartphone app-based solutions iii. Real-time, push-payments iv. Improved and robust transaction processing v. Streamlined, variable, risk management practices vi. Technical interoperability in products and services New business Pursue innovative business model Collaboration and cooperation among payment service providers models approached to: i. Grow both sides of the market simultaneously Increase collaboration and cooperation •  ii. Resolve the “last mile” distribution challenge among providers iii. Enable interoperability Overcome various acceptance barriers •  iv. Share resources with utility characteristics New partnership models i. Cross subsidize acceptance costs ii. Digitize supply chains Market Pursue initiatives and partnerships to: Overcome structural barriers development •  Overcome structural barriers to i. Establish an enabling policy and regulatory environment initiatives acceptance ii. Enable coordination and alignment amongst ecosystem participants •  Incent market participation and iii. Investments in payments enabling public goods innovation Incent market participation and innovation i. Establish collaborative facilities to mitigate business risk ii. Market enablement of new ecosystem participants Source: Mastercard, 2017a. Regarding the last approach, market development initia- • Enabling new ecosystem participants through new tives, the authors argue the government plays a key role rules to develop and leverage technology innovation, in creating a competitive level playing field, addressing including proportional risk-based merchant validation barriers to innovation, and in ensuring optimal prices by processes. allowing market forces to determine them. They also note that policies aiming to drive merchant adoption should Maximizing the Impact of Financial Inclusion: 2.  focus on: i) providing incentives for adoption; and ii) mini- Merchant-Centered Design and the Last Mile in mizing the economic advantages of informality. China”, Visa. 2018. The authors mention the following government-led ini- This white paper presents the importance of the mer- tiatives to incentivize electronic payments adoption: chant-centered design as an approach to incentivize • Digitizing government flows to contribute to a critical electronic payments acceptance among the smallest mer- payment mass; chants and uses the last-mile challenges faced by China to illustrate the analysis. • Subsidizing the cost of acceptance at early stages of The paper defines three main challenges for the corner development; store: i) not having a bank account; ii) not seeing cash as • Creating collaboration opportunities between PSPs to a problem; and, iii) operating with thin margins and low- ensure interoperability; value transactions. The paper proposes merchant-center design as the solution. • Investing in financial literacy; Digital systems with the corner store in mind are sim- • Establishing collaborative facilities to mitigate business pler and cheaper. Thanks to technology and innovative risk; regulations, POS hardware has been simplified and made readily accessible to merchants. The payment experience 12 • FINANCIAL INCLUSION GLOBAL INITIATIVE has also been simplified through phone to phone push ers and retailers, for example deferred payment or credit payment features, for example, through QR codes. Sim- terms for retailers. plified KYC accounts and interoperability contribute to The report also highlights specific needs, behaviors and increased accessibility and use. challenges that traditional retailers display and encounter By linking the acceptance of digital payments to other in relation to B2B payments. For this purpose, the report financial services, merchants can increase sales, exploit classifies retailers into a four stylized profiles matrix by new revenue streams (e.g. phone top-ups and bill pa) and size and automation level. access other financial services (e.g. credit). The authors analyze how business payments fit into the A huge incentive for merchants to go digital, is digi- larger purchase end-to-end process, and then parse out tizing their ordering, purchasing and payment to suppli- the different steps involved in the payment itself focusing ers. This also opens the opportunity for financial service on the key aspects for buyer and seller. They conclude providers to offer complementary services such as opera- that to incentivize the use of electronic payments, these tions and decision making based on data analytics. most include benefits in the form of firm- and sector-level According to the paper, reaching the tipping point in efficiency gains from automation and supply chain inte- the market is key. Visa estimates small merchants more gration. Furthermore, the report notes that payment ser- readily take up digital payments when about 40 percent vices need to be designed in a manner that supports the of their surrounding environment, or their top 3 to 4 sup- aims of sales and commercial development where pro- pliers are digital. To reach the tipping point, on top of cess automation and data collection steps are needed. digitizing mid-sized enterprises and those serving higher Building the capacity of small retailers and wholesalers, income clients, Visa identifies the following actions: and facilitating their adoption of digitization and process automation (e.g. using electronic inventory and manage- • Removing barriers that make onboarding unnecessar- ment tools), will reduce the barriers and enhance the ben- ily complicated and/or time consuming (e.g. through efits of adopting electronic payments. Government can creation of payment aggregators); play a key role in providing incentives to adopt these busi- • Creating a policy and regulatory environment that pro- ness practices and through e-invoicing and tax reforms. motes electronic payment acceptance, through direct incentives to merchants and customers, sound infra- Achieving Development and Acceptance of an 4. “ structure and a framework that enables and encour- Open and Inclusive Digital Payments Infrastructure: ages innovation; Guidance Note for the G20/GPFI Markets and Payment Systems Subgroup”, Better than Cash • Supporting merchants in building their financial liter- Alliance. 2018. acy and business skills. This guidance note was drafted as an input for the GPFI Supporting Payment Sector Development: 3. “ Policy Guide for the G20 Argentine Presidency of 2018. B2B corporate payments requirements in the The note focuses on policy options and practical actions traditional retail sector”, World Bank Group, 2016. that can lead to open and inclusive digital payment infra- structures, while incentivizing the use and acceptance According to the authors, focusing on retailers’ and of digital payments. The note concludes that opening wholesalers’ payments to their suppliers (B2B) provides and modernizing payments infrastructures will lead to a a pragmatic way to use economic incentives to expand higher number of suppliers offering payments services to electronic payment adoption. Suppliers to small and tra- merchants and end users. To directly incentivize digital ditional retailers are often banked and interested in reduc- payment uptake the note mentions the following policy ing their reliance on cash. Therefore, unlike P2B payments, options: in the case of B2B payments only one party needs to be incentivized and assisted in the transition away from cash. • Prioritizing large-scale use cases to build momentum, To encourage the adoption of electronic payments in for example, through G2P payments digitization; this market segment, the report outlines three require- • Incentivizing merchant adoption through standardiza- ments: i) Digital solutions should be as easy to use as tion, interoperability and direct incentives to adoption cash, and should consider the potential mismatch with as incentivizing the cost of acceptance at early stages cash inflow, as well as digital versus paper monitoring of development, or tax incentives; business practices; ii) Payment networks should be interoperable at every stage of the process, including • Incentivize consumers by focusing on increasing util- payment confirmation and account reconciliations; iii) ity, affordability and trust. This includes reducing fees, Non-payment benefits need to be available for suppli- ensuring consumer protection, and providing direct financial incentives (e.g. lotteries, tax incentives). FIGI ELECTRONIC PAYMENTS ACCEPTANCE WORKING GROUP  • 13 5. “ Reducing the Shadow Economy through Electronic Perspectives on Accelerating Global Payment 6. “ Payments”, Mastercard. 2017b. Acceptance”, Visa. 2016a. The report analyzes and quantifies the costs and bene- This report includes a comprehensive overview of incen- fits of different policies to reduce the shadow economy tives to electronic payment acceptance, both from the in the Central and Southern European countries. Most of public and the private sector. these policies incentivize digital payments to reduce the In its first section, the report discusses the barriers that shadow economy. In particular, an increase in the total slow the growth of EPA (infrastructure, economic, regu- value of card payments at physical terminals in relation to latory). The rest of the document goes on to analyze the GDP by 1% led, on average in the analyzed sample period, different policy approaches to overcome the barriers and to a decrease in the passive shadow economy by 0.037 their suitability for different market development stages. percentage points of GDP. In order to identify the market development stage, and The authors differentiate between passive shadow map these to the most suitable policy approaches, the economy (where consumers pay with cash without inten- authors create 4 market categories based on the level tion of concealing the transaction) which can be reduced of consumer adoption and acceptance penetration as through incentivizing electronic payments, and commit- shown in Figure 2. These are Cash-centric, Transition (lim- ted shadow economy (where both merchant and con- ited acceptance), Transition (limited consumer adoption), sumer want to conceal the transaction) and electronic and Electronic. payment incentives would have no impact. To evaluate the success of programs and policies the To quantify the benefits and costs of the policies the authors base their analysis on i) number and volume of authors perform ad-hoc calculations using elasticities or electronic payments; ii) electronic payment volume as benchmarks from the literature and/or making conserva- percentage of consumer spend; iii) average ticket value; tive assumptions. For some policies they use regression and iv) number of merchants and acceptance point/ POS analysis and for others simple calculations. terminals. However, some of the programs are evaluated Policies to incentivize electronic payments (and thus indirectly by presenting the results of existing evaluations reduce passive shadow economy) include the following. in the literature or by deriving conclusions from individual For each policy the authors estimate the potential reduc- case studies. tion in passive shadow economy in each country. The report presents a wealth of case studies and examples of different policy approaches and incentives i) Obligation to make an electronic payment of wages to reduce EPA barriers. The following is an overview of and salaries (increases perceived cost to get cash for the incentives included in the report and in which market consumers); development stage they could be best suited for. ii) Obligation to make an electronic payment of social security benefits (increases perceived cost to get I. Regulatory and Market Support cash for consumers); i) Merchant incentives—Subsidies for POS and tax re- iii) Threshold for consumer cash payments (illegal to pay ductions (VAT credits) are successful in cash-cen- in cash over certain threshold); tric or transition (limited acceptance) markets where payment infrastructure is limited but card base is suf- iv) Obligation to possess cash registers (indirectly incen- ficient. To develop network acceptance, policies tar- tivizes POS installation); geting SMEs or specific geographies are well suited. v) Obligation to operate POS terminals for selected For countries with enough POS base but low EP usage, types of businesses (increases POS installation); volume-based incentives have proven effective. vi) Tax incentives for consumers (cash-back awarded to ii) Regulation of market economics—Reducing merchant card payments); costs of EPA (through capping MDR, interchange fees) create imbalances and might reduce acquirer motiva- vii) Tax incentives to merchants (reduces effective cost of tion to expand network or invest in innovations. accepting cards); iii) Consumer incentives—Includes VAT rebates, income viii. Receipt lotteries tax deductions or lottery promotions based on card The report includes good diagrams of the channels of usage. Lotteries work well in early stages of EPA. transmission or theory of change of each of these policies. 14 • FINANCIAL INCLUSION GLOBAL INITIATIVE FIGURE 2. Visa: Framework for Categorizing Markets LOW Acceptance Penetration HIGH HIGH Transition Electronic (Limited Acceptance) • Progression along Acceptance Development • Electronic payments are "top of wallet" Lifecycle • Electronic payments not yet used for everyday • Specific niches of cash payments remain spend Consumer Adoption United Arab Emirates, Saudi Arabia, South Africa, Taiwan, Australia, South Korea, Hong Kong, United Kingdom, Malaysia, Uruguay, Venezuela, Poland, Czech Republic Sweden, France, Canada, United States Cash-centric Transition (Limited Consumer Adoption) • Heavily dependent upon cash payments • Consumers resistant to electronic payments • Early stages of electronic payments ecosystem • Need to demonstrate utility of electronic payments , Egypt, Morocco, Myanmar, India, Vietnam Japan, Greece, Spain, Italy LOW Indonesia, Guatemala, Romania, Ukraine Markets listed are illustrative examples for each category; it is not intended to be an exhaustive list . Source: Visa (2016a). iv) Disincentives for cash—Includes taxes or bans on cash merchant segments where EPA is less developed are withdrawals or deposits over certain threshold, and effective in markets with sufficient card issuance scale works well in markets with significant shadow econo- but persistent gaps. mies, but not very effective as a standalone measure. III. New technologies and Channels v) Government adoption of electronic payments—Includ- es G2P and P2G, and have the highest incremental i) New platforms for payment and acceptance—New impact in markets with a card base but low EPA. modes of access and omnichannel (“card-on-file” accounts), wireless networks and mPOS devices, II. Increased Private Investment Opportunities growth of new payment facilitator networks, benefit all types of markets. i) Issuer-funded investments for acceptance—card issu- ers contribute funds to direct terminal subsidies, tech- ii) Enhancing and securing the costumer experience— nology development or market education; successful Fostering “responsible innovation” through EMV chips, primarily in transition and electronic markets. tokenization, biometric authentication, is relevant for all markets. ii) Specific merchant segment initiatives—Lower inter- change fees or different operating rules for specific FIGI ELECTRONIC PAYMENTS ACCEPTANCE WORKING GROUP  • 15 FIGURE 3. Visa: Summary of Recommended Policy Lever Applicability by Market Type Cash-centric Transition Electronic Limited Limited consumer acceptance adoption Egypt UAE Israel Myanmar Indonesia Greece Hong Kong Illustrative Markets Guatemala Uruguay Japan Canada Merchant incentives ● ●     A.  Regulatory and Consumer incentives ● ● ● ● Market Support Disincentives for cash ● ●   Policy levels Government adoption of electronic payments ● ● B.  Increased Investment Issuer-funded investments for acceptance   ●   ● Opportunities Specific merchant segment initiatives   ● ● C.  New Technologies & New platforms for payment and acceptance ● ● ● ● Channels Enhancing and securing the customer experience ● ● ● ● Source: Visa (2016a). Innovation in Electronic Payment Adoption: 7. “ to formalize could help remove a key obstacle to expand- The case of small retailers”, WEF and WBG. 2016. ing the acceptance network as some payment schemes only serve formal businesses. One recommendation is to The report reviews the main barriers to and incentives for simplify tax codes to encourage informal merchants to the acceptance and use of electronic payments, from the formalize. perspective of micro, small and medium retailers (mer- The report presents several disruptive models across chants) and presents innovation trends and cases. the world that are making progress in small merchant The authors identify six main obstacles to the adoption electronic payment acceptance. Many of the case studies of electronic payments by merchants, of which the first presented focus on offering a range of value-added ser- four could be primarily targeted by the industry, while the vices to the merchants including through combined solu- last two obstacles could be targeted by policymakers. tions that help manage and grow their business, through i) Inadequate value proposition for merchants including use of data, and through simplifying the supplier chain inadequate product design; payments. Examples of these solutions include Kopo Kopo in Kenya, and Grupo Bimbo in Mexico. ii) Weak product and stakeholder economics in tradi- tional card models; Small Merchants, Big Opportunity: The Forgotten 8. “ iii) Insufficient aggregate customer demand and supply Path to Financial Inclusion”, Dalberg commissioned to reach ‘tipping point’; Visa. 2016b. iv) Inconsistent technological infrastructure and regula- The report analysis the existing barriers for Micro and tory environment in developing markets to support Small Merchants (MSMs) to accept digital payments and electronic payments; offers recommendations of incremental improvements for the various market stakeholders. It includes several MSMs v) Ineffective distribution models to serve hard-to-reach anecdotes from qualitative interviews to 300 MSMs mer- merchants; chants and 70 key stakeholders across Colombia, Peru, vi)  Difficulty in formalizing enterprises and reluctance of Indonesia, Philippines, Nigeria and South Africa. merchants to pay full taxes on sales. The identified barriers to cashless acceptance which should be considered when designing incentives are: For policymakers, suggested actions are grouped in three categories: e-payment infrastructure, formalization of i) Traditional benefits do not apply—MSMs do not expe- enterprises, and partnership and alliances. On formaliza- rience or expect increased sales with cashless accep- tion of enterprises, the report mentions incentivizing firms tance, and costs and risks associated to cash handling are perceived as small. In some cases, merchants even 16 • FINANCIAL INCLUSION GLOBAL INITIATIVE FIGURE 4. Key obstacles and the roles of industry and policy-makers in addressing them 2. Product Economics 1. Merchant value 3. Customer proposition demand INDUS TRY PO LIC YMA KERS 6. Business 4. Distribution formalization modes 5. Technology & regulatory infrastructure Source: WEF and WBG, 2016. FIGURE 5. Key innovation trends for merchant payment solutions Payment service provider Data Payments 3. The use of data: 1. Comprehensive business solutions: providing value-added expanding retailer acceptance services to merchants Customer MERCHANT PAYMENT 2. Non-card payment models: reaching retailers in Merchant 4. The supplier’s role: locating developing markets merchange adoption of electronic payments Supplier 5. Partnerships: reaching merchants via non-traditional payment above Source: WEF and WBG, 2016. FIGI ELECTRONIC PAYMENTS ACCEPTANCE WORKING GROUP  • 17 perceive fraud risk to be higher with elec- FIGURE 6. Visa: Potential Incremental Improvements to the product tronic payments. Losing clients due to offering lack of EPA is not a high concern. ii) Poor product experience—MSMs need cash for their daily operations and to pay CORE suppliers; accepting electronic payments FUNCTIONALITY introduces logistical problems. They also • Simple user interface consider digital payment process to be • Fast and reliable processing complicated and prone to error. MSMs • Merchange protections also find it difficult to understand how to • Convertability get a POS and there is market exclusion towards informal merchants. iii) Fees and financial risks are high—Trans- ADDED FEATURES action fees erode thin profit margins and • Access to capital unanticipated fees create hardship that • New revenue streams does not exist when accepting cash. • Improved business Some of the underlying drivers leading to operations these barriers are that payments systems and business models were not designed to serve MSMs, traditional payment service PRICING PREREQUISITES providers have low incentives to serve them, Dramatically reduced No requirement for cost to the merchant formal bank account and stringent financial sector regulations are rarely designed with MSMs in mind. To expand MSM EPA, the authors identify Source: Visa, 2016b. the following requirements: i) Incremental improvements—For MSMs ready to accept Enabling Merchant Payment Acceptance in the 9. “ digital payments (younger, better educated, formal, Digital Financial Ecosystems”, ITU Focus Group on urban), the industry should develop simpler, less expen- Digital Financial Services, 2016. sive and more robust card terminals, better merchant protections against chargebacks or fraud, shorter The second section of this report analyses the merchant settlement times, enhanced access and service and acceptance of eMoney payments focusing on four dimen- reduced costs. Adding features that support business sions: i) business models; ii) deployment openness; iii) growth, such as access to capital, access to new reve- transaction flow; and iv) pricing. nue streams or add-on features to facilitate improved In terms of business model, the in-house model repre- business operations can also be incentives for EPA. sented by ZAAD and M-PESA does not provide a path to scale because it is difficult, without a dominant market ii) Radical innovations—For MSMS not ready to accept player, to create the necessary network effect in-house digital payments, the industry should offer innovative to create compelling value for merchant acceptance. On solutions that are inexpensive or even (initially) free the other hand, the merchant services provider (MSP) and which don’t require a formal bank account. These model is a driver of new technology adoption leading radical innovations will likely require the participation to merchant acceptance and creates pressure to move of new players and partnerships. For regulators, pro- towards open loop or interoperable structures. Finally, moting competition, interoperability and reforming merchant acquirer models allow mobile money opera- regulatory requirement which might act as barriers tors (MMOs) to pursue a card centric approach with a (KYC requirements, for example) are also key require- physical point of interaction to drive merchant accep- ments for innovation. tance. While the approach may present an opportunity iii) Growing the cashless ecosystem around MSMs—Involv- to scale merchant acceptance, a further evaluation is es creating more cashless ‘outflows’ for merchants (e.g. required. utility and supplier payments) and increasing cashless customers with easy-to-use payment accounts. 18 • FINANCIAL INCLUSION GLOBAL INITIATIVE FIGURE 7. Model of payment behavior: summary of regression results +*** Perceived attributes Attitude Actual control Injunctive norms + +*** +* Descriptive norms +*** Roles +*** +*** + Intention Behavior Personal norm +*** Emotions +* Perceived control +*** Note: *** p <0.01, ** p<0.05, * p<0.01 Habit Source: De Nederlandsche Bank, 2016. 10. “ Payment behavior: the role of socio-psychological Beyond Cash: Why India Loves Cash and Why 11. “ factors”, Carin van der Cruijsen and Frank van der That Matters for Financial Inclusion”, Dalberg Horst, De Nederlandsche Bank. 2016. commissioned by USAID. 2015. This academic paper examines the role of socio-psycho- The two presentation and online executive summary logical factors on consumer’s choice between cash and present the findings of an ethnographic and quantita- electronic payment instruments, in particular, debit cards. tive study in India targeting consumers and merchants The authors use a theoretical model of payment behav- to understand the low penetration of digital transaction ior and test it empirically with data from a representative instruments. One of the slide decks presents a categori- panel survey of Dutch consumers. zation of merchants into six different merchant personas, The authors show that payment behavior depends on and identifies key insights and design principles to incen- three main variables: payment intentions, habit and actual tivize electronic payment adoption for each category. control. The study found several stylized facts on merchant They paper concludes payment intentions can be influ- electronic payment acceptance, including: enced through: i) strengthening positive attitude towards • Merchants who accept digital payments are highly sat- the instrument by improving perceived attributes of isfied with the experience with the vast majority willing the payment instrument, in particular their safety and to recommend to other merchants; acceptance; ii) creating the feeling that it’s an appro- priate instrument for one’s age or lifestyle, for example, • Among merchants who do not accept digital pay- through media campaigns; iii) social norms by increasing ments, awareness and interest is low; people’s perception of others using the same instrument; • Merchants, like consumers, are trapped in cash ecosys- iv) reinforcing a pleasant, familiar and simple experience; tems, which inhibits their interest; v) increasing the degree of perceived control over the instrument. • Merchants highlight the high cost of trying out digital payment acceptance as a barrier; • Vast unmet demand for credit can be used as a “hook” for digital payments acceptance; FIGI ELECTRONIC PAYMENTS ACCEPTANCE WORKING GROUP  • 19 FIGURE 8. Cumulative ranking scores of most attractive incentives for merchants (answered by non-digital payment accepting merchants, % indexed to the highest ranked option) 93% 79% 59% 58% 55% 54% 35% 35% 35% 31% 26% 17% Credit for Customers Easy/ Inventory Incentive Account Tax Targeted It was Automatic If I could Someone Agent for business demanded low cost management on sales management rebates consumer easy payroll start selling taught ecommerce investments working system done system marketing to use management my goods me how companies capital digitally online to use it N= 687 (1) Merchants were asked to give points from 1–5 (5 being the most attractive) to incentives, and then rank the top 3 incentives that they assigned a 4 or 5 to. We then allotted scores to normalize rankings from 1–3. Rank 1 was allotted a score of 3 , 2 was allotted a score of 2 and 3 was allotted a score of 1. The scores were then totalled, and indexed against the highest ranking incentive Source: “A partnership to Support Financial Inclusion Through Expanded Payments Acceptance Networks and Other Efforts”, USAID. 2015. Available online. The study concludes by offering incentive recommenda- From the supply side, the report mentions the follow- tions which include: ing challenges: i) safety and reliability; ii) interoperabil- ity of bank and nonbank service providers; iii) physical • Enabling merchants to try digital payments accep- infrastructure; iv) increasing cash-out points; v) sticky tance at low or no cost, for example, by having PSPs prices; vi) building a digital ecosystem; vii) political econ- remove upfront fees and device installation charges omy issues. From the demand side, it lists the following and moving towards pay-per-use models; challenges: i) customer experience; ii) product design; iii) • Incentivizing retailers to pay distributers digitally to consumer education; iv) usage of accounts; v) gender dis- reduce the need for cash payments; parities in mobile ownership. • Using transaction-based credit as a “hook” for accep- The report then offers a vision on the role that the tance; government should play in promoting digitization. For the government, the report mentions i) constructing a • Incentivizing existing merchants to further use digital supportive regulatory environment which includes clear payments through tax and monetary incentives for regulatory framework for new players; ii) establishing an their digital sales, and providing discounts and incen- appropriate financial consumer protection framework; tives for recommending others to onboard; iii) playing a catalytic role in building a digital ecosys- • Communicating the benefits of digital payments that tem through G2P payments; and iv) promoting product could offset cost liabilities through joint campaign by understanding. all stakeholders (government, banks, PSPs). Finally, the document outlines the importance of the government as an enabler for the private sector to inno- 12. “ The Opportunities of Digitizing Payments”, vate and offer inclusive solutions. In particular, the gov- GPFI. 2014. ernment should i) support private-sector investment in infrastructure and the massive scale-up of cash-out This report covers high-level guidelines presented to the points (agent networks); ii) enable the private sector to G20 Global Partnership for Financial Inclusion (GPFI) cov- develop networks that are convenient, reliable, secure and ering payment digitization benefits and challenges for private; iii) foster the development of innovative business governments, recipients and providers. models; and, iv) create opportunities and an environment for cooperation. 20 • FINANCIAL INCLUSION GLOBAL INITIATIVE Setting up shop: Strategies for building effective 13. “ The report uses Kopo Kopo (Kenya) as an example of a merchant payment networks”, A. Katakam, GSMA. merchant service company employing this strategy. After 2014. realizing they were signing up merchants rapidly without much increase in transaction volumes they changed their This report is based on insights from the 2013 State of approach: the company segmented their market and tar- the Industry Report on Mobile Financial Services to gain geted merchants with strongest pain points that could a better understanding of the successful approaches to be solved by mobile money and changed their commis- merchant acquisition and management from the mobile sion structure for sales representatives to one rewarding merchant provider perspective. not only sign up but also merchant activity. Furthermore, One of the main takeaways is that having a strong Kopo Kopo introduced Kopo Kopo Grow—a cash advance value proposition is essential to hold merchant’s inter- service targeting business development needs with est. This includes using segmentation to attract the right repayments based on electronic sales. The repayments merchants with an appropriate commission structure, are perfectly aligned to cash flows with higher deductions and providing merchants with a complete experience when sales are higher, and no deductions when there are (fast settlement and access to their transaction data) to no sales. The strategy allowed them to quadruple their increase their confidence in the system. merchant active rate while cutting acquiring costs. FIGI ELECTRONIC PAYMENTS ACCEPTANCE WORKING GROUP  • 21 ANNEX II Country EPA Incentives Examples 1. ARGENTINA In 2001 Argentina’s Finance Ministry introduced a 5 per- Per Article 10 of Law 27.253, the Argentinian fiscal cent VAT refund on debit card purchases under ARS authority AFIP announced in 2016 that by the end of 2017 $1,000 (~51 USD) to promote electronic payment use. The all merchants and service providers to final consumers incentive was extended to credit cards in 2003, with a 3 would have to accept debit card payments. Up to 50% percent VAT refund that was later eliminated in 2009. The of the POS monthly rent fee could be computed as fiscal debit card transaction tax refund was eliminated in 2017 credit by merchants. AFIP would also reduce by 50% all when the administration deemed it as a subsidy to the VAT retentions completed by debit cards. Furthermore, most affluent population (those who have debit cards) for small merchants (monotributista) transactions with and expected savings from eliminating the incentive. debit card would have no transaction fees and the leasing In 2016 the Central Bank of Argentina introduced cost for the POS machine would be waived for the first the Plataforma de Pagos Moviles (PPM) innovations to two years. promote digital payments. The platform includes two Per Decree 858, social benefit recipients from four gov- main innovations that could impact electronic payment ernment programs (AUH, minimum pension, pregnancy acceptance: transfer and pension with no contribution) will be able to claim up to 15% of basic food basket purchases up to • POS Movil—Financial institutions must offer to their a ARS $300 (~USD $15) monthly cap only if completed clients the possibility to receive/send immediate through debit or prepaid cards. transactions through dongles (that must be offered by the institution but also must be compatible with References: third party dongles). The solution currently offered has fees per transaction and no monthly fixed rate. [i] Banco Central de la República Argentina (2016). Circular SINAP 1 -48: Transferencias inmediatas de fondos por el • Boton de pago—Financial institutions must offer a canal ‘Plataforma de Pagos Móviles – (PPM)’. . “Payment Button” software solution enabling consum- [ii] Bloomberg BNA. January 5, 2017. Argentina Ends 5 percent ers to send immediate transfers in e-commerce. VAT Rebate on Debit Cards. All financial institutions with homebanking must offer [iii] Sung, M. J., R. Awasthi, and H. C. Lee. 2017. Can Tax Incen- the services and all payments for goods and services must tives for Electronic Payments Reduce the Shadow Econ- be free of charge up to a monthly amount equivalent to omy? Korea’s Attempt to Reduce Underreporting in Retail Businesses. Policy Research Working Papers: 7936. one-twelfth of the maximum annual sales of a micro- enterprise in the services sector [iv] AFIP. Operaciones con tarjeta de débito. 22 • FINANCIAL INCLUSION GLOBAL INITIATIVE 2. CHINA China has created a sound payments system infrastruc- The penetration of individual electronic payments ture and an enabling environment to innovate. Govern- is high: almost four out of five Chinese make payments ment policy has been key in creating this environment. through their mobile phones. The use intensity has seen For example, the regulatory framework allows a class an incredible growth with 3.7 billion transactions made of individually operated business to use personal pay- through non-banking mobile apps in 2013, to over 97 bil- ment products which simplifies and encourages banking lion in 2016. onboarding through a streamlined KYC verification and The use of big data has enabled market participants to lower costs. The country has one of the largest agent offer value-added services. One such example is Indus- networks in the world with almost one million banking trial and Commercial Bank of China’s (ICBC) “Corporate agents throughout 90% of China’s villages. It also has a Easy Loan” targeted at micro and small merchants which widespread mobile and internet infrastructure that’s price assess creditworthiness through big data analysis of mer- accessible to consumers. With over 753 million inter- chant transactions and business operations. Their loans net users in China by 2017, internet penetration reached do not require traditional security deposit or guarantee. almost 56 percent in the country. [i] Visa (2017). Maximizing the Impact of Financial Inclusion: Merchant-Centered Design and the Last Mile in China. Paper available upon request. 3. COLOMBIA In 2004, the Colombia government introduced a 2 per- FIGURE 9. Purchases and withdrawals per type of card cent VAT rebate for purchases made with cards. The tax per year, 2001–2012, Colombia incentive was eliminated in 2014 shortly after the issu- 30 ance of a Fiscal Reform. Approximately 3 million peo- 28.35 No. of Transactions ple received the rebate during each year of the program. 25 According to BTCA (2015) the rebate had little impact on 20 consumers’ motivations to use cards for payment. Per the Banking Association in Colombia, the policy was success- 15 13.24 ful but its potential was hindered by a complicated pro- 10 9.13 cess to claim the rebate both for consumers and for the fiscal authorities. 5 2.51 The Colombian government later introduced restric- 0 tions on deductibles in the 2014 Fiscal Reform. Expenses 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 that are deductible for tax purposes are those made Debit purch Credit purch through deposits in bank accounts, bank transfers, checks, Debit withd Credit withd or credit/debit cards. Cash payments are only deductible Source: Author’s calculations based on data from Banco de la República, Reporte Sistema below certain thresholds. de Pagos BTCA, Source: 2012. 2015. References: [i] Marulanda, B. and Bankable Frontier Associates (2015). Country Diagnostic: Colombia. BTCA. [ii] Asobancaria (2015). Incentivos tributarios: una buena estrategia para promover el uso de los medios de pago elec- trónicos. [iii] Estatuto Tributario Nacional. Art. 771-5 Medios de pago para efectos de la aceptación de costos, deducciones, pasivos e impuestos descontables. FIGI ELECTRONIC PAYMENTS ACCEPTANCE WORKING GROUP  • 23 4. EUROPEAN UNION In January 2017, the European Commission introduced References: an Inception Impact Assessment for the Proposal for an [i] European Commission (2017). Inception Impact Assessment: EU initiative on restrictions on payments in cash. The Proposal for an EU initiative on restrictions on payments in proposal would establish cash payment caps across the cash. . European Union for AML-CFT purposes. [ii] Beretta, E. (2014). The Irreplaceability of Cash and Recent Some European countries already have cash payment Limitations on its Use: Why Europe is Off the Track. Interna- limits the highest being Czech Republic 12,700 euros tional cash conference on ‘The usage, costs and benefits of and lowest being Denmark 1,300 euros. France, Turkey, cash revisited’ Deutsche Bundesbank. Greece, Italy, Sweden, Norway, and the Netherlands also [iii] Sung, M. J., R. Awasthi, and H. C. Lee. 2017. Can Tax Incen- have cash payment caps and legally require merchants tives for Electronic Payments Reduce the Shadow Econ- to issue receipts for each transaction. They also allowed omy? Korea’s Attempt to Reduce Underreporting in Retail merchants to refuse payment in cash to compel the use Businesses. Policy Research Working Papers: 7936. of cards at the POS. 5. GREECE The Greek authorities capped cash transactions to no Additionally, a law mandating card acceptance for more than 1,500 euros since 2011. Additionally, in June firms was issued in December 2015 and sole proprietors 2015, Greek authorities restricted the amount that could were added as of July 2017. The law also outlined con- be withdrawn from banks to 420 euros a week to halt sumer incentives to use electronic payments such as pub- capital flights in the midst of the crisis. An unintended lic lottery and tax deductions. positive consequence was a sharp rise in electronic trans- actions. According to Reuters, in the second half of 2015, References: 1.8 million debit cards were issued (in a population of 11 [i] Daley, S., December 4, 2015. In Greece, Shift From Cash to million), POS installation raised by 15 percent. According Plastic Could Undercut Shadow Economy. The New York to the New York Times, the change was immediate – in the Times. first week after capital controls supermarkets were seeing [ii] Georgiopoulos, G., May 12, 2016. Greece capital controls 90 percent of their transaction through cards, versus 10 to have silver lining: more tax revenues. Reuters. 14 percent before the controls. The restriction was eased [iii] European Payments Council. September 21, 2017. Greece’s in September 2017, with the cap on withdrawals increas- progress towards a ‘less cash’ society: An interview with ing to 1,800 euros per calendar month. Vassilis Panagiotidis, Hellenic Bank Association. 6. INDIA In November 2016, the Government of India announced and 0.3 and 0.8 percent respectively for transactions via the demonetization of all Rs 500 (7.80 USD) and Rs 1,000 QR code. In order to continue supporting a cash-less (16 USD) banknotes. The main purpose was to reduce the economy, starting on January 1st 2018 the Government shadow economy and to crack down on the use of illicit will subsidize the MDR on transactions made through and counterfeit cash to fund illegal activities and terror- debit cards, UPI and Aadhaar-enabled payment systems ism. Cash in circulation fell by two-thirds after the demon- on transactions up to Rs 2,000 (~31.2 USD) for the next etization. By March 2016 digital transactions had grown two years. by 33% in volume and 59% in value (however this calcula- In parallel, two lotteries targeting consumers and mer- tion is not adjusted for seasonality). chants were implemented by the National Payment Cor- Following the 2016 demonetization, the Reserve Bank poration of India (NPCI) in 2016 to incentivize electronic of India (RBI) capped the Merchant Discount Rate (MDR) payment use and acceptance: to 0.25 or 0.5 percent of the transaction depending on • Lucky Grahak Yojana—Daily and weekly lottery among the value. However, starting on 2018, MDR charges caps consumers with transactions of Rs 50 to Rs 3,000 were scheduled to increase to 0.40 percent for small mer- (~0.78 to 47 USD) with rewards up to Rs 1 Lakh (~ 1,566 chants and 0.90 for all merchants for swipe transactions, USD). 24 • FINANCIAL INCLUSION GLOBAL INITIATIVE • Digi-Dhan Vyapar Yojana—Lottery for merchants accept- References: ing digital transactions with weekly rewards up to Rs [i] Creehan, S. (2017). Demonetization is Catalyzing Digital Pay- 50,000 (~783 USD). ments Growth in India. Federal Reserve Bank of San Fran- On the private sector side, several startups have been cisco, Pacific Exchange Blog. disrupting the Indian market for electronic payments [ii] Bloomberg Quint. December 16, 2017. Government to Bear acceptance. One such startup is ftcash, a mobile-based MDR on Debit Card Payments up to Rs 2,000 for Two Years. payment and lending platform with an onboarding [iii] Business Standard. December 15, 2016. Niti Ayog announces record time of 5 minutes for merchants to join. Ftcash incentive schemes to boost digital payments. allows clients to choose how to settle their payment: the [iv] Press Information Bureau, Government of India (2016). merchant can send them a text with a link; the client can Incentivizing Digital Payments. check out in its mobile app; or they can scan a QR code. [v] Shah, A., et al. (2016). Digital Payments 2020: The Making Using the payment data trends, fitcash also offers loans of a $500 Billion Ecosystem in India. The Boston Consulting Group and Google. to merchants through an undisclosed financial partner. The platform acquired 25,000 merchants in their first 18 [vi] Chakravorti, B. February 3, 2017. The less cash budget: Pro- posals add up to a series of mutually reinforcing moves to months. build a digital payments ecosystem. The Indian Express. [vii] Mastercard Blog, September 1, 2017. Fridays With Fintechs: Enabling India to Transact Digitally. 7. INDONESIA In 2011, Indonesia launched an acceptance development cific merchant segments; and, iv) Quality assurance, with fund through an agreement among institutions and with programs aiming to improve acquiring industry practices Visa. Contributions were made both by the institutions and sophistication. and Visa, proportional to payment volumes.The fund According to Visa, the program has been highly suc- created over 20 EPA programs under four main pillars: cessful, with the deployment of 88,000 new POS termi- i) Geographic expansion with programs aiming to incen- nals and expansion in new channels spurring a 30-percent tivze POS adoption among new metchants in Tier 2 cities; acceleration in payment volume growth. ii) New acceptance channels with programs promoting emerging channels including eCommerce, mCommerce, References: mPos and contactless; iii) Segment development aiming [i] Govil, S. (2016). Perspectives on Accelerating Global Pay- to broaden acceptance through programs targeting spe- ment Acceptance. Visa. 8. JAPAN In 2017, the Japanese government set a target to reach cashless-payment equipment and 5 percent rebates for a ratio of cashless payments to private final consump- the consumers making cashless purchases at registered tion expenditures of 40 percent by 2025. As part of a businesses. “Cashless Vision” published by the Ministry of Economy, The cashless payments reward program was allo- Trade and Investment in 2018, a Commission for the cated a budget of 280 billion yen (~2.6 billion USD) for Promotion of Cashless Settlements will bring together the first six months. There are approximately 2 million the industry, academia and government sectors to col- eligible small and medium-sized businesses in the coun- laborate in advancing efforts towards the goal. One of try to receive the cashless payment terminal subsidies. their first activities was the standardization of QR code By November 21, 2019, approximately 39% of these payments. (770,000 retailers) had used the subsidy to install cash- A two-percentage point consumer sales tax increase less payment terminals. Furthermore, from October 1 to was introduced in October 2019 and to ensure this didn’t November 4 the daily rebates averaged 1.2 billion yen. affect consumption the Japanese government bet on According to Bloomberg calculations, at this pace, the mobile payments. The government set up a nine-month budget allocated for rebates would run out by Febru- program to offer points redeemable for future discounts ary. The Government might be planning to extend the to shoppers who use QR codes and other cashless pay- program as part of a stimulus package. The IMF has ments. The program provides subsidies to installing underlined the importance of extending consumption FIGI ELECTRONIC PAYMENTS ACCEPTANCE WORKING GROUP  • 25 tax countermeasures in 2020, including the cashless [iii] White, S., July 2, 2019. Hoping to boost spending, japan tries payment reward program. to sell shoppers on cashless purchases. Reuters. [iv] IMF, November 25, 2019. Japan: Staff Concluding Statement [i] JapanGov (2018). Abenomics: For future growth, for future of the 2019 Article IV Mission. generations, and for future Japan. [ii] Nohara, Y. and Urabe, E., November 26, 2019. Japan Cash- less Incentives Could Be Extended as Part of Stimulus. Bloomberg. 9. KAZAKHSTAN According to Article 39 of the Law of the Republic of References: Kazakhstan on Payments and Payment Systems, all indi- [i] Kaz TAG, February 26, 2014. Vice Minister of Finance Ruslan vidual entrepreneurs operating under the “patent” or Dalenov: Tax Receipts are Growing in Kazakhstan Along with “simplified tax regime” had to install and use POS-termi- Arrears. nals to by January 2014. The enforcement was postponed [ii] Kazakhstan e-gov, Public Services and Information Online. several times up to January 2016. Exemptions apply to The use of equipment (device) intended for accepting pay- entities operating in the trade of agricultural products and ments using payment cards (POS-terminal). aquaculture; entities trading from mobile shops, stalls, kiosks, containers; and people working in areas that lack public telecommunications networks. 10. KENYA Kopo Kopo is a start-up that started operations in 2012 In 2017, Kopo Kopo partnered with Mastercard to offer in Kenya offering electronic payments acceptance plat- Masterpass QR across 11 markets is Sub-Saharan Africa. form to merchants. Kopo Kopo saw a business opportu- In Kenya, the Masterpass QR is being offered to Dia- nity in a growing mobile money service adoption: by 2011, mond Trust Bank clients who wish to pay at Kopo Kopo M-PESA had nearly 70% of Kenya’s adult population reg- acquired businesses. Masterpass QR enables the clients istered and yet merchant electronic payment acceptance to scan with their smartphones a merchant-specific QR remained extremely low. A year after launching, Safaricom code to complete the payments at checkout. The solution launched its own merchant payment acceptance platform eliminates the need to invest in POS devices Mastercard called Lipa Na M-PESA. This forced Kopo Kopo to fur- anticipated reaching 150,000 MSMEs in Kenya on their ther innovate and differentiate itself. Kopo Kopo started first year. offering value-added services targeting merchant pain points such as business intelligence and targeted SMS References: marketing. However, their biggest innovation was using [i] Mastercard Press Release, July 7, 2017. DTB and Mastercard predictive analytics on payment processing and customer Partner to Enhance Digital Payments in Kenya. relationship data to offer a cash-advance product called [ii] World Bank Group and World Economic Forum. (2016). Grow. The loan decisions are made almost immediately Innovation in Electronic Payment Adoption: The case of and repayment is ensured through direct deductions to small retailers. the merchant’s cash flows. By 2015, Grow had approxi- mately a thousand merchants and had disbursed $3 mil- lion in loans. 26 • FINANCIAL INCLUSION GLOBAL INITIATIVE 11. MALAYSIA Bank Negara Malaysia (BNM) developed a comprehen- TABLE 3. Malaysia: Payment card reform framework sive plan to promote the use of electronic payments focus areas in the country. BNM’s Financial Sector Blueprint (2011- Focus areas Measures undertaken 2020) set the direction for the transformation of the 1. Price signal • Reduced Interchange Fee (IF)1 for Debit Card country’s payment landscape. A National Payments • Fostering a competitive payment card market Advisory Council was instrumental in the design of the – Differentiated Merchant Discount Rates strategy. In 2015, the NPAC became more inclusive by (MDRs)2 incorporating a Service Provider Consultative Group and – Disclosure of MDR and IF rates to merchants a User Consultative Group. – Empowering merchanges to choose the lower cost debit network The strategy focused on two key instruments: (i) electronic fund transfers to displace cheque, and (ii) 2. Quality Migration from signature to PIN verification for •  and value added security debit cards to displace cash. For the latter, in December proposition Adoption of contactless functionality for greater •  2014, BNM issued the Payment Card Reform Framework convenience (PCRF) to promote payment card use through a set of Access points 3.  • 44 mil ATM cards which double up as debit carts actions including objective and transparent mechanism • 800,000 POS terminals by 2020 (25 terminals for setting interchange fees. Five focus areas determined per 1,000 inhabitants) the measures undertaken. 4. Market Market Development Fund (MDF) to fund the •  Within this framework, operators of payment card incentive expansion of POS terminal network networks are given the option to establish a Market structure Development Fund (MDF) to manage an additional 0.1% Awareness and • E-payments roadshow and township campaigns 5.  interchange fee over credit card transactions which is confidence • Strenghtening security requirements allowed only in networks with MDF. These additional funds Interchange fee is an interbank fee payable between banks in a payment card 1.  are managed by the network operators with the purpose transaction and is priced into the merchant fee (MDR) paid by card-accepting merchant to the merchant's bank. of funding the deployment of POS terminals by the par- 2. MDR is the merchant fee paid by a card-accepting mechant to the merchant's bank ticipants in the payment card network of said operator. for every payment card transaction. Funds are made available to issuers who are able to cover Source: Bank Negara Malaysia. FIGURE 10.1 Average MDR by card type FIGURE 10.2 Number of POS FIGURE 10.3 Transaction volume of 1.6% terminals payment cards 900 Million 1.4% 600 0.9% 1.2% 800 0.8% 700 500 28.2% 1.0% 0.9% Introduction of 1.0% 21.8% 0.8% 600 PCRF and MDF 400 19.8% 16.5% 500 AAGR: 20.4% 0.6% 300 0.4% 400 200 70.9% 77.4% 0.2% 300 82.5% 79.3% AAGR: 6.8% 0.0% 100 200 2014 2015 1H 2016 100 0 Domestic brand debit card 2014 2015 2016 2017 International brand debit card 0 Credit card 2011 2014 2015 2017 Credit card Debit card Charge card Source: Bank Negara Malaysia . FIGI ELECTRONIC PAYMENTS ACCEPTANCE WORKING GROUP  • 27 the shortfall in POS terminal deployment. The MDF spe- 2017. The average MDR had been decreasing for all card cific rules on how the funds are spent may be determined types. Thea verage annual POS terminal growth tripled by the operator with approval of BNM. from 6.8% (2011–2014) to 20.4% (2015–2017). Debit card According to BNM, two major payment card schemes transactions have been growing at record rates and by have established the MDF, which is expected to chan- 2017 represented 28% of total payment card transactions. nel approximately RM 455 million (~115 million USD) to increase the number of POS terminals from 240 thousand References: in 2014 to 800 thousand by 2020. [i] Bokhari, N.A.M. (2016). Strategy to Accelerate Migration to The data suggest there have been a positive policy e-Payments in Malaysia. Bank Negara Malaysia. impact in POS terminals and debit card transactions. By 12. MEXICO In 2004, a presidential decree established FIMPE, a private accounting software for microenterprises registering for trust fund to expand usage of electronic payment chan- tax purposes. nels. Acquirers were free to opt-in and invest in this fund Regarding restriction on deductibles, according to for a joint program to promote POS installation and use Article 27 in the Income Tax Law (Ley de Impuesto sobre of digital payments. FIMPE was funded through acquirer la Renta), allowable deductions of a company’s expen- contributions which were returned as fiscal exemptions. ditures must be backed by a digital tax receipt issued The resulting program had two main parts: (CFDI), and payments exceeding 2,000 pesos (~107 USD) must be made through electronic transfer of funds, by i. Demand generation (Boletazo): Lotteries were orga- personal check or credit, debit, or service cards, or using nized awarding cars to payment card users (more than an electronic pocketbook to be deductible. Starting in 3,100 cars were awarded). According to FIMPE, transac- 2004, in the case of gas purchases, regardless of the tions at POS increased 167% from 2003 to 2006 and 1 amount, the transaction must also be paid by electronic out of 5 surveyed said they increased their card usage. means to be deductible. ii. Supply generation: Through the trust fund, free POS In terms of cash payment caps, starting in 2014, accord- were installed in merchants who did not have a POS ing to article 55 of the Income Tax Law, financial sector machine and they were also offered a fixed monthly institutions must report cash deposits made to taxpayers’ merchant fee up to certain transaction volume. The accounts when the accumulated monthly amount of cash program also comprised national media campaign tar- deposits exceeds 15,000 pesos (~806 USD). Furthermore, geted to merchants on the benefits of payment card Banco de Mexico issued a ceiling for checks payable to acceptance. According to FIMPE, the POS network the bearer at 5,000 pesos (~ 268 USD). increased 96.3% from 2003 to 2006. The private sector in Mexico has also incentivized elec- tronic payment acceptance through innovative products According to an IDB report, under FIMPE, 205 thousand and business models. One of the earliest examples of POS were installed for free to the merchants who usually this was Blue Label/ Red Quibo, a joint venture between had to pay 6,000–7,000 MXN (~322–376 USD). Accord- Grupo Bimbo (one of the biggest corner store suppli- ing to Banco de Mexico, POS transactions increased on ers in Mexico) and Blue Label Technologies (a payments average by 24% per year between 2005 and 2008; and processing firm). They initially installed POS solutions for stalled after FIMPE ended rising only 0.2% in 2009. corner stores to enable top-up for mobile phones and bill In 2016, the Mexican Banker’s Association, switches, payment, with no payment acceptance feature. A cou- card brands, and the Banking Supervisor (CNBV) came ple of years later they incorporated payment acceptance together to create a strategy to promote electronic pay- into their solution. While Banamex, one of the biggest ment acceptance. The group first completed a thorough banks, acts as acquirer, Blue Label acts as the payment analysis of the market to identify barriers and opportuni- aggregator acquiring small retailers and aggregating the ties, as well as international best practices. Based on the transactions on the bank’s behalf. By 2015, two years after analysis, they came up with a detailed action plan which starting operations, Blue Label had onboarded 75 thou- included improving the regulatory framework, simplify- sand retailers. By using Bimbo’s established network and ing the fiscal requirements, awareness campaigns, and trustworthy reputation with corner stores, the network enabling innovative business models. has been able to grow steadily. More recently, the Finance Ministry (SHCP) through the Another such example is iZettle, which enabled by program “Tablet para el Regimen de Incorporación Fis- the payment aggregator regulation in Mexico, offers cal” offered a subsidized tablet equipped with mPOS and electronic payment acceptance to merchants without a 28 • FINANCIAL INCLUSION GLOBAL INITIATIVE minimum number of transactions, with a simple pricing [iii] Crezcamos Juntos Afiliate. Tablet para el Regimen de Incor- scheme, and a simplified sign-up process that requires poracion Fiscal. less than 20 minutes. [iv] FIMPE (2003). Presentation available upon request. [v] Visa (2017). Maximizing the Impact of Financial Inclusion: References: Merchant-Centered Design and the Last Mile in China. [i] Borrero, U., L. Fajury, B. Marulanda, and M. Paredes (2017). [vi] World Bank Group and World Economic Forum. (2016). Sistemas de pago e inclusión financiera en América Latina: Innovation in Electronic Payment Adoption: The case of Cómo promover avances desde normativas propicias y bue- small retailers. nas prácticas. Inter American Development Bank. [vii] Asociacion de Bancos de Mexico (2016) Definicion de Opor- [ii] CPSS Red Book (2011). Payment, clearing and settlement tunidades para Incrementar el Uso de Medios de Pago Elec- systems in Mexico. CPSS, BIS. tronicos. Mimeo. 13. NETHERLANDS In 2002, the Ministry of Finance established the National In 2007, as part of this initiative, banks and retailers Forum on the Payments System to further promote the launched together a public campaign to increase debit general safety and efficiency of the payment system in card use. In an empirical study conducted by De Neder- the Netherlands. In this forum, the government, acquir- landsche Bank (2017), the authors found evidence of the ers, switches, issuers, and card brands came together to media campaign leading to increased debit card usage determine the objectives and an action plan to reduce by consumers. The biggest effect was among those who cash use and promote electronic payments. While not already used debit cards, which after the media campaign direct members, merchants and consumers were also were using their debit cards in new situations. The found no consulted when establishing the agenda. The actions difference in effect between different campaign slogans. included creating card-only cashiers at all grocery stores, [i] Jonker, N., M. Plooij and J. Verburg (2015). Does a public rewards and lotteries for consumers and merchants (and campaign influence debit card usage: Evidence from Neth- their employees). Other initiatives included shopping cen- erlands. De Nederlandsche Bank. ters that were 100% debit card areas. The percentage of [ii] Efficient Betalen (2012). Payments developments and prac- private consumption through cards passed from 40% in tices in the Netherlands. 2003 to 59% in 2015. [iii] Asociacion de Bancos de Mexico (2016) Definicion de Opor- tunidades para Incrementar el Uso de Medios de Pago Elec- tronicos. Mimeo. 14. NIGERIA “Cashless Nigeria”, a comprehensive policy to promote According to a case study by Better than Cash Alliance digital payments, was issued in Nigeria in 2012. The policy (BTCA), after two years of implementation the conclu- was first piloted in Lagos State, and then it was scaled up sion was that a mind shift for corporates had happened. nation-wide. The policy included: There was not a question on whether to change or not to digital anymore but rather on how to make the switch. • Information campaign on benefits of digital payments; The Nigerian Government has led by example with 61 per- • POS guidelines and restrictions of cash-in-transit ser- cent (by value) of their salaries and social subsidies being vices; paid electronically, and all pension, supplier, and state and municipal payments being done electronically. However, • Cash handling charges on daily cash withdrawals or progress at the individual level seems to have been slower deposits that exceed approximately 3,000 USD for —according to a BTCA country diagnostic, by 2013 only 1 individuals and 18,000 USD for corporate bodies. The percent of P2B payments were being made digitally. Yet, a fees on excess withdrawals were as high as 5 percent more recent assessment by Quartz indicates a likely posi- for corporate bodies and 3 percent for individuals, tive impact with POS transaction volume from January to while for deposits they were 3 and 2 percent respec- November 2016 being 65 percent higher than the volume tively. The fee was collected by banks with a per- for all 2015. centage going to the Central Bank. While the policy Additionally, in 2014, the Electronic Payments Incen- specified a cash cap in practice it worked more as an tive Scheme and Awarenes Campaign was introduced. additional direct cost to cash for users. FIGI ELECTRONIC PAYMENTS ACCEPTANCE WORKING GROUP  • 29 The scheme included incentives for merchants (reduc- References: tion of merchant fee to maximum 0.75% transaction [i] Loeb, B. (2015). The response of large corporates and their value with a ceiling of NGN1,200, Commission on Turn- value chains to government policies to shift to digital pay- over exemption, rewards based on mystery shopping ments: Nigeria´s “Cashless” policy. BTCA. and promotion of cash back functionality on POS) and [ii] Dermish, A. (2015). Country Diagnostic: Nigeria. BTCA costumers (point based reward system based on fre- [iii] Kazeem, Y. January 10, 2017. More Nigerians are embracing quency of card usage, cash refund based on card usage, electronic payments. Quartz Africa. promotional gifts). [vi] Central Bank of Nigeria (2014). Electronic Payments Incen- tive Scheme and Awareness Campaign. 15. SOUTH KOREA n 1999, South Korea introduced the Tax Incentive for Elec- 2002. In 2003, the deduction rate for debit cards was set tronically Traceable Payments (TIETP) to promote pay- at a higher level than credit cards, and their use started to ments with credit cards, debit cards, and electronic cash rise sharply. receipts. TIETP offered tax deductions from taxable labor income, with a minimum and ceiling deductible amount. References: Until 2002, the deduction rate was 10 percent of electron- [i] Wang, Guogang, Gang Zeng, and Xuan Xiaoying. 2017. ically traceable payments, including credit card or debit Development of Consumer Finance in East Asia. Palgrave card payments, up to a ceiling of three million won or 10 Macmillan US. percent of total labor income. The deduction rate and [ii] Dybka, P. et al. (2017). Reducing the Shadow Economy ceiling have been revised several times since, reaching through Electronic Payments. MasterCard and EY. 30% deduction rate for some years. [iii] Sung, M. J., R. Awasthi, and H. C. Lee. 2017. Can Tax Incen- Similarly, merchants who accept electronic payments tives for Electronic Payments Reduce the Shadow Econ- have VAT deductions (and had income tax deductions up omy? Korea’s Attempt to Reduce Underreporting in Retail to 2011). The VAT deduction ratio has varied through time. Businesses. Policy Research Working Papers: 7936. In 1994, the Ministry of Finance introduced a 0.5 percent credit card sale VAT tax credit. It increased to 1% in 1996 and then introduced 3 M won ceiling in 1999. It then increased to 2 percent FIGURE 11. Credit, debit, and prepaid card transactions as percentage of GDP in 2000 with 5 million won ceiling. 45 The South Korean Government also introduced a credit card lottery 40 system in which the last Saturday of 35 each month a credit card invoice stub would be randomly chosen as the win- 30 Debit cards ner. Both the customer and the mer- Credit cards chant of the selected invoice stub won 25 a monetary prize. 20 In 2001, card acceptance was man- dated for all VAT-paying businesses in 15 the country, and in 2002 they imposed fines for card refusal. 10 According to a World Bank Work- 5 ing Paper, the incentive had a positive impact on reducing the shadow econ- 0 omy and on income redistribution. 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Furthermore, credit card transaction Source: Authors’ aggregation of data from Bank of Korea (http://ecos.bok.or.kr).   Source: Sung et al. (2017). value increased sharply after the tax Notes: a. Debit card payments include check cards. b. Electronically traceable cash receipt payments are Notes: Debit card payments include check cards. Electronically traceable cash receipt incentive program, from 4.9 percent not included. c. Payments by all consumers, including not only wage and salary income earners but also payments are not included. Payments by all consumers, including not only wage and self-employed businesses. of GDP in 1999 to 34.3 percent in salary income earners but also self-employed businesses. 30 • FINANCIAL INCLUSION GLOBAL INITIATIVE 16. URUGUAY Uruguay has implemented a series of fiscal incentives card transactions by the end of 2013, to representing to promote electronic payment acceptance in the last 29.4% by the end of 2015. decade (Figure 12). Preliminary results suggest the incen- According to CPA Ferrere, 71% of the POS transaction tives have successfully increased debit card transactions increase is due to an increase in debit card issuance and and electronic payment acceptance. activation, while 29% is due to an increase in use intensity. In 2014, Uruguay issued a Financial Inclusion Law as Furthermore, debit card transactions increased their share the culmination of several government efforts to promote of total payment instrument transactions, at the expense financial inclusion. As part of this Law and subsequent of credit card transactions and cheques (Figure 15). decrees, VAT reductions were extended to all electronic On the other hand, according to CPA Ferrere (2016), payments under a specific VAT reduction schedule (Figure the trend for credit card transactions didn’t seem to 13). Additionally, the Law created the figure of Emisores change as a result of the fiscal incentives. This could imply de Dinero Electronico (electronic money issuers) allow- the targeted bigger fiscal incentives for debit card trans- ing non-banks to enter the issuing market; interchange actions might have been the key incentive behind debit fees were regulated; a mandate for payroll to be executed card growth.1 through electronic means was issued; and, cash transac- tions over US$5000 were prohibited. Investments in POS FIGURE 14. Local debit card POS transactions expansion were also encouraged through income tax (index July 2014=100) exemptions; merchants can claim an income tax exemp- tion of up to 80% of the value of the POS investment. 500 According to a study by CPA Ferrere (2016), fiscal 400 incentives have had a strong impact on debit card use; +85% transactions debit card transactions in POS have passed from 5.6 mil- than projected 39% 300 lion in 2013 to 35.3 million in 2015. The intensity of debit card usage also increased, from representing 7.1% of all 200 61% 100 FIGURE 12. Fiscal incentives timeline 0 Dec 12 Feb 13 Apr 13 Jun 13 Aug 13 Oct 13 Dec 13 Feb 14 Apr 14 Jun 14 Aug 14 Oct 14 Dec 14 Feb 15 Apr 15 Jun 15 Aug 15 Oct 15 Dec 15 9-point VAT reduction FInancial Inclusion for card payments Law: VAT reduction in restaurant and Tax incentives for schedule for card Observed series Trend Projected trend tourist locations POS deployment payments Source: CPA Ferrere (2016). 2006 2007 2011 2012 2014 FIGURE 15. Payment instrument share Tax reduction for fuel (number of transactions) VAT exemption for purchases in border social benefit card Percent with Argentina purchases 80 75% 75% 75% 76% 76% 75% 74% 68% Source: Issued regulations. 70 64% 60% 60 FIGURE 13. VAT reduction scheme 50 5 40 Debit card and E-money 30 25% 4 21% 17% 17% 20 14% 15% 14% 13% 15% 15% 3 13% 10% 9% 10 6% 5% 6% 5% 5% 6% 7% Direct debit 2% 3% 4% 4% 5% 5% 5% 5% 5% 2 0 0% 0% 0% 0.3% 0.3% 0.4% 05% 06% 0.6% 0.8% 1st Sem 2nd Sem 1st Sem 2nd Sem 1st Sem 2nd Sem 1st Sem 2nd Sem 1st Sem 2nd Sem 1 2011 2012 2013 2014 2015 Credit card 0 Credit card Cheques Other Debit card Electronic Aug 14 Aug 15 Aug 16 Aug 17 Aug 18 Aug 19 transfers Source: Issued regulations. Source: CPA Ferrere (2016). FIGI ELECTRONIC PAYMENTS ACCEPTANCE WORKING GROUP  • 31 POS terminals grew by 38 percent from 2013 to 2016, References: according to data published by the Central Bank of Uru- [i] Govil, S. (2016). Perspectives on Accelerating Global Pay- guay. The package of electronic payment acceptance ment Acceptance. Visa. incentives didn’t only increase the number of card trans- [ii] CPA Ferrere (2016). Incentivos tributaries y pagos electróni- actions, but also likely contributed to the formalization of cos: Aprendizajes del caso Uruguay. small merchants. According to CPA Ferrere (2016) POS terminals increased most among small merchants and in Note merchant categories where cash is usually king, such as While implied, this causality cannot be confirmed with the analysis 1.  presented in CPA Ferrere, 2016. restaurants and supermarkets, therefore contributing to reducing the shadow economy. 17. UNITED STATES Square is a US-based company that disrupted the elec- businesses to look at sales trends and product popular- tronic payment acceptance market by introducing its ity. Square also offers inventory management, employee mPOS (mobile point of sale) in 2010. The company didn’t management, payroll services, customer relationship only simply the hardware requirements to accept elec- management (e.g. marketing, promotions, loyalty pro- tronic payments through a “dongle” attached to the grams) and instant, unsecured credit lines through their user’s mobile phone, but they also made the set-up pro- sister business Square Capital. cess paperless and efficient through online registration and mailed dongles. References: The years following its introduction, Square’s success- [i] World Bank Group and World Economic Forum. (2016). ful business model attracted other players to the market Innovation in Electronic Payment Adoption: The case of offering similar mPOS and services. Faced with compe- small retailers. tition, Square started providing value-added services to [ii] Better Than Cash Alliance. (2018). Achieving Development differentiate itself. This includes user business analytics and Acceptance of an Open and Inclusive Digital Payments insights generated from the electronic payments, allowing Infrastructure. 32 • FINANCIAL INCLUSION GLOBAL INITIATIVE