Ashly Hope, tralac Research Advisor, comments on the launch of the e-Trade for All initiative at UNCTAD 14 and the opportunities for e-commerce development in Africa

On 18 July the United Nations Conference on Trade and Development (UNCTAD) formally launched a new ‘e-Trade for All’ initiative on the margins of its 14th session in Nairobi.

According to the launch materials, while some 12 percent of global goods trade is conducted via international e-commerce, developing countries are yet to fully tap the potential of this channel.

The objective of this initiative is ‘to contribute more effectively – and on a much greater scale – to the efforts of developing countries to harness e-commerce as a vehicle for the implementation of Agenda 2030 for Sustainable Development.’

In African countries, there are multiple layers of opportunity for e-commerce development – both within countries and internationally. From the provision of high-end digital services as part of global supply chains, all the way to increased online shopping as a predicted 180 million Middle East and African consumers connect to the internet in the next few years[1], there are significant untapped markets.

As Africa moves towards greater integration, e-commerce can open up new and bigger markets for businesses on the continent. Sharing a border is a key determinant in cross-border e-commerce – one of the reasons why Canada is so successful at cross-border e-trade – meaning intra-African e‑commerce will have an important role to play. Africa too has a history of embracing opportunities in the digital economy – notably, in its world-leading mobile money industry – and e-commerce, like mobile money, provides an opportunity for both economic and social development.

E-trade provides an especially good opportunity for small, medium and micro sized enterprises (SMMEs) to expand. SMMEs are responsible for around 80 per cent of output, and 50 per cent of jobs in sub-Saharan Africa, and expected to drive growth and development across the continent. Efforts to support the expansion of these enterprises are therefore critical to development goals.

For SMMEs, e-trade can enable cross-border trade and access to more customers within countries without the resources needed to establish a presence in other markets or distant areas – that is, the barriers to entry via e‑trade are much lower than for traditional trade. For consumers, it offers the possibility to acquire goods, services and content not available in local markets, or at lower cost than in local markets.

Despite the potential, there are a number of barriers to the realisation of the possibilities offered by e‑commerce. The e-Trade for All initiative will consider how donors, businesses and international organizations can assist developing countries overcome barriers in five key areas – ICT infrastructure, transport and logistics, legal frameworks, payments systems and skills and awareness.

While all of these are enormously important, and are barriers to varying degrees in African countries, one of these barriers – payment systems – is particularly interesting in light of a recent World Bank and World Economic Forum study. The study is the first to estimate the volume of payments to SMMEs globally and to explore the reasons cash is still the primary payment mechanism for transactions with small businesses.

In developing countries, cash is particularly dominant. The World Bank finds that of the US$930 billion in payments to SMMEs made in sub-Saharan Africa, only 16 per cent are electronic. This compares with more than 67 per cent of payments in OECD economies.

When considering that, globally, the credit card is the preferred payment method for electronic purchases, at around 55 per cent of the transactions, with e-wallet payments coming in second, there is a significant disconnect between how people pay for goods and services in Africa, and the payments mechanisms that underpin e-commerce.

In Africa, UNCTAD estimates credit card penetration at only 3 per cent. While e-wallets are more prevalent, to fully realise the benefits of e-commerce, credit card penetration will need to increase significantly, or new digital payment methods, such as mobile money or other e-wallet services embraced and enabled by regulatory authorities, merchants and customers.

The World Bank points out that, ‘the regularity and frequency of purchases made from everyday retailers define the value of retail payment solutions to consumers…’ Supporting the uptake of electronic payments by small retailers therefore has the potential to contribute to increased e‑commerce from both the perspective of the consumer, who will value, use and demand electronic payment, which is more compatible with e-commerce than cash payment; and from the perspective of the retailer, for whom the acceptance of electronic payments in face-to-face transactions will mean she is better equipped to transition to an e-commerce environment.

Two key elements relating to payments holding businesses back from engaging in e-commerce, (particularly cross-border) is trust and complexity. While not necessarily an automatic leap, greater acceptance by merchants and use by consumers, of electronic payments can help build this trust and dismantle the complexity, contributing a digital payments ‘eco-system’ which supports both financial inclusion and the expansion of e-commerce.

The e-Trade for All initiative has a substantial task ahead to effectively channel support for developing countries in a way that enables e-commerce for sustainable development. Given the scope of the opportunity on the continent, it should be support that African countries embrace. Supporting and facilitating participation by smaller businesses in the electronic payments system is one important step towards enabling African people and businesses to harness the benefits and potential of e‑commerce. Payment mechanisms are just one component but nevertheless, a robust digital payment ecosystem is a part of the puzzle of enabling e-commerce and should be a consideration of this Initiative.

[1] CISCO Projections for Middle East and Africa internet access – 445 million (27% of the population) in 2020. See: http://www.cisco.com/c/en/us/solutions/service-provider/vni-network-traffic-forecast/infographic-middle-east.html

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Sources and further reading:

e-Trade for All Initiative. http://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=1281

World Bank and WEF Study. http://www.tralac.org/news/article/9995-small-retailers-transact-19-trillion-in-cash-annually-new-wef-world-bank-group-study-shows.html