Download the Full-Length Case Study.
- Digital bulk payments is a potential catalyst for financial inclusion for smallholder farmers
- Cotton represents an important cash crop for rural Zambian small-holders
- Digitization efforts to date have met limited success
- A business requirements approach to digitization resulted in 8,229 farmers trained, and 477 new mobile money accounts
- Adoption lagged, however, due to last-minute pull out of key players
Of Bulk and Benefit: Lessons from Promoting Digital Payments among Cotton Ginners in Zambia
Digital payments in the agricultural sector represent a potentially catalytic driver for mobile money adoption in rural markets, particularly in Africa. In theory, a highly efficient and well functioning digital contracting and payment system will improve farmer productivity and thus financial security. This in turn should generate greater loyalty to their outgrower contracts with cotton ginners (buyers). The ginners get a better, more reliable product at a more predictable price while reducing cash in transit costs.
In practice, this is easier said than done. A number of attempts at digitizing high volume payments to farmers have been undertaken in the developing world, with limited success.Bulk payments are one-to-many payments that go from a single-payer to many payees at once. Examples of such high volume payments might be salary payments, pension contributions, and social protection cash transfers. The practice is well established but still limited in scale, with bulk payment disbursements making up 4.3% of the total product value across mobile operators in Sub-Saharan Africa in 2016 [GSMA State of Mobile Money in SSA, 2016].
In the case of cotton in Zambia, one of the largest value chains in the country, the introduction of digital payments appears to be a good fit. Bulk payments emanate from a single entity, a large buyer that contracts directly with smallholder farmers (SHFs). About half of Zambia’s 600,000 cotton farmers belong to outgrower schemes consisting of pre-arranged contracts that provide inputs on credit in exchange for exclusive selling arrangements at a pre-agreed price. As a result, Zambia undertakes an annual cash disbursement operation to deliver up to $50m in cash to over 300,000 rural farmers within a period of four to five months a year.
AgriFin Accelerate, the Zambia Cotton Ginners Association (ZCGA), and Musika, a local non-profit enterprise that stimulates private investment in the Zambian agricultural market, sought to support the cotton industry in its transition to digital payments to 1) develop business requirements and value proposition to financial partners; and then, 2) tender a pilot to deliver on digital bulk payments to farmers in selected geographies.
When Theory Meets Practice
On paper, the potential benefits for both the ginners and farmers to adopt digital payments should have made adoption an easy proposition. On the ginners’ side, the movement of high volumes of cash is costly and presents a significant security risk, as illustrated in the following real-life examples:
“The process of collecting cotton, recording the volume received, and paying farmers can be quite hectic. During my last trip, I was accosted by robbers and lost all the money I was carrying to purchase cotton from farmers.” — Distributor in Petauke, Eastern Province CFO, Lusaka smallholder farmer in Mumbwa, Central Province.
“I need to cut costs this coming season to save my business. I’ve noticed that CIT [cash in transit] costs to pay my field staff and farmers are about 60% of my operational costs! I need a solution to lower this cost without the risk of losing the farmers to the competition.” — Managing Director of a Ginning Company in Zambia
From the farmer’s perspective, the one-off bulk payment for their produce represents their largest if not only cash pay-day all year. But it may incur delays, or risks associated with handling a significant quantity of cash, as illustrated in this example:
“I have just harvested a bumper crop of cotton, but I need the money from it quickly to pay off my loan from the Village Savings and Loans Association. But the distributor sometimes takes seven days to pay me. I’m not sure where to put the money when I get it. I don’t have a bank account and the bank is too far anyway!” – a female cotton farmer in Chipata, Eastern Province
Digitization also creates the opportunity for complementary payment use cases such as school fees, savings schemes, input supply credit, and other products and services. Farmers can thus clear accumulated debts and other expenses, as well as save or make investments in durable or productive goods such as farm equipment, inputs, etc. For the ginners, digitization promises to bring a degree of stability, predictability, and traceability in their input supply and product aggregation process.
Still, for the average Zambian smallholder farmer, mobile money remains very much a city thing. The farmer may only travel to town a few times a year, to buy supplies or inputs for the farm, or to visit relatives. Typically, the cotton ginners deliver inputs and pick up cotton from the farm gate, thus the farmer doesn’t need to make the journey into town. The benefits of mobile money are largely still elusive to the farmer. Owning a phone is costly, and going to an agent to cash out takes time. Often the agent doesn’t have sufficient funds to make the entire cash payment, forcing the farmer to incur additional cash-out fees. Additionally, there may be lots of men hanging out around an agent’s kiosk, which can be intimidating for a female farmer.
At an ecosystem level, the low access and use of mobile money in Zambia, especially in the rural areas, remains a critical constraint to the adoption of digital payments. The majority of Zambia’s 16m inhabitants live in rural areas (60%) and represent a low population density of 22 people per KM2. While 60% of adult Zambians are considered financially included, only 35% actively use DFS (including both accounts and over-the-counter payments). Zambia has just over 11,000 active DFS agents, with very few in rural areas (UNCDF 2017).
Despite these challenges, the opportunity for stimulating the digital economy in rural Zambia provided the motivation needed forge ahead. The conversion of a large and important payment stream such as cotton has the potential for kickstarting the adoption of digital financial services and products tailored for farmers, thus opening the door to other complex products such as savings, loans, and insurance.
AgriFin, with ZCGA and Musika, attempted to unlock the digital payment sector for cotton farmers by addressing both supply and demand-side requirements for digital payment adoption. On the demand side, the activity motivated contract farmers and agri-business partners to accept mobile money. On the supply side, the multiple payment solution architectures proposed addressed the low liquidity and low agent density in rural locations.
As a starting point, AFA’s support was based on the principle of ‘shared value’ in which both agribusiness and farmers mutually benefit from collaboration. For the cotton companies, they had to see the immediate benefits of increased efficiency, security, and transaction cost reduction. For the contract farmers, their needs, preferences, and financial security were paramount.
The activity took a two-phased approach. First, the project identified potential service providers in the Zambia market capable of digitizing bulk payments. AFA provided technical assistance to help the cotton ginners make informed decisions and successfully select suitable solutions/service providers. This resulted in a business requirements document (BRD) and a value proposition statement to potential financial partners. Subsequently, a set of partners was selected for the pilot based on their ability to deliver on digital bulk payments to farmers in selected geographic zones.
The pilot consisted of three districts in Central and Eastern Provinces (Mumbwa, Nyimba, and Petauke), with just under 30,000 farmers in total. To avoid issues of side-selling, the cotton ginners collectively agreed to pay contract cotton farmers in the two districts exclusively via digital. At the same time, the cotton ginners committed to paying digitally a minimum number of farmers with the payment providers to justify the cost of investment for the providers, expected transactions by farmers between 50,000 to 60,000 in transaction volumes, and a cash payout of approximately US$4m.
Four contrasting financial service providers were selected to run the pilot, just one was ultimately selected due to contracting issues. Six out of 7 ginning companies under ZCGA participated, with 8,229 farmers trained (4,573 aided by videos through mobile cinemas). As a result of the pilot, 477 new mobile money accounts were activated, but only 13 contract farmers ultimately opted in to receive their contract payouts using mobile money. Total payout value was $360, averaging $28 per transaction.
One of the key lessons learned is that, at the end of the day, shared value around efficiency and transparency is not necessarily enough to win over key stakeholders. The presumption that highly efficient and well functioning digital contracting and payment systems will improve farmer productivity may still hold, but the political will and commitment to see digital payments through remains elusive at least for the cotton sector in Zambia. More effort into understanding the political economy of payments in outgrower scheme arrangements might help to overcome key constraints in future attempts at digitizing payments.
Second, loyalty to contracts is a two-way street. Buyers must be willing to honor contracts even if commodity prices deviate from agreed purchase values. In the last three growing seasons, Zambian cotton ginners previously sought to partner with banks and MNOs to deliver digital payments to their contract farmers and manage a bulk payment solution for their members. But lack of scale as well as expertise in partnership management and contracting led to a series of sub-optimal experiments. Side-selling by contracted farmers further undermined the success of these pilots. Buyer commitment to using digital payments waned over time, with only one ginner keen to continue by the end of the exercise. Under such circumstances, farmers were eager to sell to any buyer offering cash on the spot.
Sellers must likewise resist the temptations of quick cash from spot markets and avoid side-selling. In highly organized, tight value chains such as coffee in Uganda and Kenya, and cacao in Ghana and Cote d’Ivoire, the possibility of side-selling is greatly reduced due to state/industry control over who can buy the produce. In Zambia, for cotton at least, this isn’t the case and side-selling significantly undermines the viability of contract outgrower schemes. Digitization thus won’t eliminate this phenomenon, but creates greater transparency and efficiency up and down the value chain leading to greater trust and compliance.
Lastly, some challenges are greater than others. Supply-side infrastructure constraints trump business rules and consumer demand. The combination of limited rural mobile connectivity, low energy access, and correspondingly weak mobile phone uptake in rural areas represents a binding constraint to digital payment uptake in Zambia. Mobile phone penetration appears high at a national level with 75.8% penetration as of 2017. However, only 12% of farmers claim to have ever used their phones to send or receive money (IAPRI, 2015). Connectivity is largely confined to major urban and peri-urban centers and along major transportation corridors and important secondary feeder roads.
Given these prevailing constraints, as well as weak linkages across the cotton value chain, the activity achieved far beyond what would be expected.The next planting season is upon us, November/December with harvests in May/June. One test of the suitability and fit for purpose of shared value approaches such as this is whether the industry will adopt digital payments on its own.
Download the Full-Length Case Study.
Andrew Karlyn, AFA Program Strategy and Learning Lead
Christabell Makokha, AFA Zambia Country Director
Valerie Gwinner, AFA Consultant