Old Problems in the New World: Banking and Payments Make Global E-commerce Surprisingly Local

By Sara Holmberg, Research Assistant at ECIPE

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Imagine a small village in rural Kenya. Imagine 20 women who make traditional jewellery. Now, imagine the solar panels on their roofs, the laptops and phones in their hands and the online platform from where they sell their handcrafted artisanal goods to customers all over the world. Not too far from there, in Kampala the capital of Uganda, a women’s collective make bags to sell in their shop on the main street. Recently a tourist taught them how to sell their items online which has led to new customers from countries new locations.

Western firms have penetrated new markets in developing countries, new business models have spurred from these emerging economies and the Internet enables for a company anywhere to reach customers everywhere. Yet, in many cases a country’s lack of financial infrastructure or a business’s inability to use international financial systems constrains their ability to grow or trade.

This is showcased in the examples above. Where in reality the small community in the rural Kenya cannot run the online shop by themselves, because the way in which they receive money from sales is not synchronized with M-pesa, a common platform for mobile payments in the country. In order for them to get actual hold of the money they earn, they still need a bank account and/or a credit card. Whereas a majority of Kenyans own a mobile phone, bank offices are not situated in small rural villages, and public transport is not easily accessible from the abovementioned location. In Uganda, the women face a similar problem as they cannot renew the fee to the online marketplace without a credit card – which none of them owns.

The latest study from UNCTAD on e-commerce in developing countries highlights how the use of online payments varies between developing and developed markets: In developing countries, the use of credit cards is generally low and only 1.6% of the Ugandan and 6.1% of the Kenyan population own a credit card. Alternative solutions have been designed to better fit these markets, such as cash on delivery or mobile payment systems. It should also be mentioned that payment preferences also vary in mature markets such as within the EU: in the UK, France and the Nordic countries, debit and credit cards are the main forms of payments, whereas customers in Italy, Spain and Germany tend to use third-party payment systems such as PayPal.

Evidence shows that payment and banking structures are often still local and fragmented with different national solutions, and foreign market access to domestic online payment markets has a problematic history. In 2010, the United States raised a WTO dispute against China, where the state-owned enterprise UnionPay, has the monopoly to clear domestic interbank payments, and foreign card companies cannot process online payments in China on their own. Further, Turkey has introduced severe restrictions on foreign online payment solutions and the limited availability of popular third-party payment systems from the West is restricting possibilities for the retailers in Sub-Saharan Africa to receive international payments from foreign markets.

There are numerous new, novel and innovative solutions for online payments. But old problems of North-South trade keep constraining the SMEs in developing countries. The internet has sometimes made countries jump directly into the digital revolution and bypass the necessity of building costly services infrastructures, which has led to underdeveloped financial systems and a lack of access to credit cards. For developing country firms to access customers in the North, they need to use e-commerce platforms popular in those markets – which mean that they also must use payment systems established by these countries.

Card payments could become redundant as new solutions for mobile banking evolve, but until then, a basic financial infrastructure is still a necessity. Its importance in developing countries is often underplayed, forgotten or even deemed unnecessary as digital solutions became accessible before traditional banking – but, as it turns out, basic infrastructure is necessary for micro-exporters to engage in cross-border e-commerce. There is a lack of interoperability between “global” and local payment systems, and the former are not always designed to match the needs of developing country SMEs without access to banking systems or credit cards. This is why the old problems and barriers still need to be resolved for large parts of the world.

Sara Holmberg is visiting ECIPE during her Master programme at Copenhagen Business School, currently writing a thesis on e-commerce possibilities and constraints in Sub-Saharan Africa. She has previously worked with e-commerce at the Swedish Ministry for Foreign Affairs and served as a fellow at Twitter’s public policy team in Washington DC.