Emoney payment systems can conveniently and affordably connect entrepreneurs with banks, employees, suppliers, and new markets for their goods and services.
These systems can accelerate business registration and payments for business licenses and permits by reducing travel time and expenses. Digital financial services can also improve access to savings accounts and loans.
Electronic wage payments to workers can increase security and reduce the time and cost of paying employees. Yet, there are challenges as many entrepreneurs and employees lack bank accounts, digital devices, and reliable technology infrastructure.
Digital payments improve the speed and reduce the cost of payments between entrepreneurs and suppliers, employees, customers, and governments. Digital financial systems make it easier for entrepreneurs to access credit products to start and expand their businesses, and encourage formal entrepreneurship by facilitating compliance with regulatory and tax obligations. Governments in developing countries can promote digital financial services by investing in the necessary infrastructure, collaborating with private entities to offer training for potential users, and ensuring that effective security and regulatory measures exist.
Entrepreneurship, both formal and informal, is a critical source of labor force participation and income: 11% of adults in high-income countries are self-reported entrepreneurs versus 34% of adults in developing countries, where entrepreneurial activities might be the only source of income in nations with few formal employment opportunities. Entrepreneurship also creates new wage employment and contributes to increased labor force participation.
Digital payment systems allow entrepreneurs to pay for goods or services electronically, using a mobile phone, the internet, retail point of sales, and other broadly available access points instead of using cash or checks. For entrepreneurs, especially in developing markets, access to digital payment platforms is more than just a convenience. For those starting a business, digital payments can speed up business registration and reduce the transfer time on payments for business licenses and permits. Access to digital platforms can increase participation in e-commerce. It can also improve supply-chain management as well as interactions with clients and vendors. Electronic wage payments to employees save time, reduce costs, increase transparency, and empower workers by giving them an account and access to financial services such as loans. Entrepreneurs can build a credit history that will improve their ability to access working and investment capital. For larger-scale entrepreneurs, digital applications like e-filing of business and employee taxes and social benefits can reduce the cost of tax compliance.
Emoney payments benefit customers, suppliers, and the government
Moving from cash to digital payments can increase an entrepreneur’s profitability by reducing operating costs and making it easier to manage trade contracts, delivery records, and accounts receivables. Making and receiving digital payments can increase an entrepreneur’s participation in e-commerce and improve their interactions with clients, vendors, and financial institutions. For instance, digital records can help entrepreneurs better manage their inventory stock and make cheaper procurement decisions. Small shop owners, for example, can track their sales by product type and day of the week and use this information to optimize inventory management.
Entrepreneurs can make digital payments to suppliers more frequently, lowering the number of days of extended trade credit and working capital expenses (by reducing accumulated interest on supplier loans).
Digital financial payments also facilitate record keeping and improve transparency by creating an easily traceable electronic trail that can reduce document-related fraud. Entrepreneurs receiving digital payments have less cash on their premises and therefore face a lower risk of theft.
Digital payments might be especially important for the success of female entrepreneurs. Long travel distances, social norms, and family responsibilities often prevent women from traveling to faraway suppliers or bank branches.
Digital payments can help them overcome such limits on their mobility by making it easier to access money and the marketplace.
For larger-scale entrepreneurs, digital applications like e-filing and e-payment of license fees, registration fees, income taxes, and property taxes can lower the cost of tax compliance and reduce travel time and face-to-face interactions with tax officers.
This can also encourage formalization of businesses and help create a larger tax base for governments. Greater formalization of labor contracts offers workers social benefits and protections, while digital technology can make it easier for entrepreneurs to make employment taxes and social security payments online.
Digital financial payments can improve the efficiency of government programs to support small businesses by directly transferring money into the intended beneficiaries’ accounts. This improves the transparency of financial transfers and reduces “leakages”—the tendency for small sums of money to be pilfered by middlemen.
In India, for example, researchers evaluated the impact of biometrically authenticating cash transfers to the beneficiaries of a government employment program in the state of Andhra Pradesh using only a fingerprint. They found this method of transfer was faster, less corrupt, and more predictable.
Digital payments of wages also benefit employees
For larger-scale entrepreneurs with employees, making the transition to digital forms of wage payments can save money and time.
These digital payments also give employees access to formal financial services including accounts and loans, thus giving them more control over their financial lives. A study in Bangladesh found that the average factory reduced wage distribution costs by more than 50% within two years after it began paying workers directly via digital bank accounts.
Traditionally, factory owners often spend considerable amounts of money bringing in cash-filled trucks to distribute wages to workers. Guards must be hired to safeguard the process and production time is lost when workers stand in line for their pay.
Electronic wage payments eliminate these wasteful practices. They also ensure the accuracy of workers’ payments and provide the added potential to assist with audits and supply-chain accountability—for example, the timing and amount of wage payments are already documented in the monthly digital transaction records received from the bank or the mobile payments provider. A study in Afghanistan supports these results, finding immediate and significant cost savings for employers who switch to digital wage payment methods, especially from the security benefits of eliminating cash transactions.
Furthermore, electronic wage payments produce great benefits for employees. A study in Bangladesh found employees’ satisfaction with wage payments being made into an account increased over time.
Workers reported not wanting to go back to cash payments. Digital payments can also be more secure for employees than manual cash payments, which can be more easily stolen or misappropriated. While security is always a concern when traveling with large amounts of cash, this is especially salient with respect to regular cash payments—such as wages—that are received at publicly known locations and points in time.
Electronic wage payments also allow employees to store money in traditional accounts or e-wallets. They can cash out their wages at their convenience or directly transfer funds to pay for electricity bills or school tuition for children.
Evidence from the US shows that when the government introduced the Electronic Benefit Transfer (EBT) in the mid-1990s and thus switched from delivering social cash transfers by paper checks, which needed to be cashed, to electronic debit cards, the overall crime rate over the next 20 years was reduced by almost 10% as a direct result.
Moving to digital wage payments can also contribute to women’s economic empowerment in several ways.
Socio-cultural issues and other factors might prevent women from controlling their own money and assets. But electronic payment can give recipients greater control over how their money will be used—particularly if the payment is tied to a stored-value product, such as a formal account or an e-wallet, which makes it harder for family and friends to access the funds.
Evidence suggests that digital transfers empower women within their own households: Unlike cash payments, the arrival of a digital payment is typically private information.
This allows the recipient to conceal the payment, at least temporarily, from other household members or friends who may demand money that would otherwise benefit the entire household. A large body of empirical literature suggests that income in the hands of women, compared with men, is associated with larger improvements in child health and more spending on nutritious food, health, and housing.
Electronic wage payments have the added benefit of drawing large numbers of previously unbanked workers—those who do not use the services of banks or similar financial institutions—who enjoy stable employment and verifiable monthly incomes, into the formal financial system. This allows these workers to become more financially competent by giving them a strong incentive to conduct regular formal financial transactions.
Migrating private sector employers from paying cash to making electronic wage payments would bring an estimated 280 million unbanked adults around the world into the formal financial sector. This can serve as a bridge to other digital finance products such as savings, credit, and insurance services that provide greater security, convenience, and economic opportunities, especially for low-income workers.
Digital wage payments also create the opportunity to embed workers in a system of automatic deposits, scheduled text reminders, and positive default options that can help people overcome psychological barriers to saving money.
A substantial collection of literature shows that small “nudges” may have a significant impact on forward-looking financial and nonfinancial behaviors involving defined-contribution pension accounts and commitment savings products that allow users to save money over time.