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What Behaviour Drives Cashless Payments in Africa?

Categories : Cash connects people, Cash is a social network, Cash is the most widely used payment instrument
August 18, 2023
Tags : Africa, Behaviour, Cash, Digital payments
A new paper explores the behavioral drivers for using cash or digital payments in Africa. The emotional driver is the only trait determining payment methods' use. Thus, policy should ensure the availability of payment alternatives, including cash.
Bernardo Bátiz-Lazo, Northumbria University; J. Carles Maixé-Altés, Universidade da Coruna and David Peón, Universidade da Coruna

This post is also available in: Spanish

The success of mobile payments, particularly the launch of M-Pesa in Kenya in 2006, led to a growing interest in better understanding the dynamics of technology fuelling retail payments across the globe. For instance, a search in one of the leading databases of academic publications (called Scopus) returned nearly 1,000 articles for the years 2020 to 2022 using the keywords’ payment method’, ‘means of payment,’ or ‘mobile payment.’

Various factors have been shown to determine consumer preferences for cash in retail transactions. These include consumers’ payment preferences, easy access and acceptance, service fees and buyers’ economic incentives, consumer demographics and income, and payment innovation diffusion. Reasons to hold cash have also been identified to include the context of the transaction, store of wealth, availability of alternative means of payment, the size of the shadow economy, demand by non-residents, and the social environment – that is, the diffusion and transmission of norms through social channels.

To better inform such forecasts, recent empirical research has considered the impact of different cognitive feedback profiles on using new payment methods based on the behavioural finance framework. The main contribution to his debate explores how choice context (i.e., “nudging” and mental accounting) impacts consumer decisions. However, a common criticism of behavioural finance is that researchers have frequently neglected emotional and social factors. We incorporated emotional drivers into our analysis to offer new insights into the behavioural dynamics in the African region’s increasing use of electronic payment retail systems.

Our sample considered 2,009 unique email addresses. These were individuals with continued residence in Africa during the previous five years to the launch of the research instrument in 2022. We received usable responses from 24 African countries, including 22 of the 34 sub-Saharan African countries, Egypt, and Morocco. However, five countries – Nigeria, Ghana, South Africa, Uganda, and Zambia – represented 61% of the sample.

In collecting that sample, we considered that many contributions that analyze retail payments focus on determinants of financial inclusion and other dynamics at the base of the pyramid’. Instead, we collected responses amongst – preferred the payment method that best fits the transaction context. We also found interesting results between our measure of income and the respondent’s predisposition to use cash.

Participants were offered four alternatives: cash, debit card, credit card, and a broad category for electronic payments (mobile app, text message payments, etc.). Two measures were used as personal income proxies: food and leisure expenditures. These proxies enabled a workaround for the well-known bias of underestimating personal income in self-reporting surveys.

Preferences for payment alternatives in our sample described similar patterns to those previously observed in the literature. Hence, the debit card was the preferred payment method for 40% of the sample. Cash was the second (27% of the preferences) or the third (37%) alternative. Credit cards were the least preferred alternative in all contexts. However, cash was king when considering small transactions. Debit cards and electronic options were selected for larger payments. Still, respondents’ intention to use e-payments in our sample was higher than the share of digital payment channels in Africa – only 5% to 7% on average of all payment transactions, despite the record growth in e-payments after Covid-19.

As mentioned, the survey included a series of tests in determining the profile of each respondent based on five behavioural traits – mental accounting, fungibility perception, loss aversion, the tendency to form habits, and the affect heuristic.

The main result was the impact of the affect heuristic on payment preference: the emotional driver associated with a reduction in the average probability of using cash by 0.12. This result suggested that a reduction in the use of cash emerged not from perceived risk (“risk as feelings”) but from some other emotional driver. In this regard, no evidence of habit heuristic led to any preferred payment method.

Perhaps the most surprising result was an increase in the personal income proxy (ultimately a measure of consumption) associated with lower use of electronic payment methods. This result should be taken with caution, among other things, because of the sample size and diversity of the respondents. But also because we measured the emotional predisposition to use a payment method (while other studies measure actual or reported transactions through surveys and diaries).

Controlling for countries also allowed us to identify a lower-than-average preference for cash in Nigeria and South Africa (a probability of 0.25 lower than average). The same countries show a lower preference for credit cards – offset by a clear preference for debit card payments.

In summary, within the extant literature, recommendations are for government policy to “invest more in nudging,” that is, to use psychological behaviour and habits to influence, for instance, greater use of electronic payment methods or eliminate cash transactions. However, most people in our sample declared no preferred payment method. Instead, they choose according to transaction context in specific situations.

In our view, these results suggest that authorities should ensure that a wide variety of payment alternatives is available for people to use, including cash, and let them choose. This option is aligned with the position of the leading central banks and the Bank of International Settlements’ recent joint proposal to launch CBDCs shortly. These recommendations thus support a view to managing the downsizing but not the total elimination of the cash management infrastructure.

This post is also available in: Spanish