Page 235 - The Digital Financial Services (DFS) Ecosystem

ITU-T Focus Group Digital Financial Services
Ecosystem

3 Are payment-enabled agricultural value chains a solution for digital
liquidity?

Appealing characteristics

eMoney is a good fit for tight value chains.

• Bulk payments: A single entity typically pays the SHF. This entity may be a farmers’ group distributing
payments from a larger buyer or a large buyer that contracted directly with SHFs. eMoney provides an
audit trail and reduces cash handling costs. Cash handling costs include theft /shrinkage, lost advances
due to lack of proper record keeping, bank withdrawal fees, insurance, employee fuel and time costs
for making bank withdrawals and delivering payments, security guards, shortages of appropriate cash
denominations to make exact payments, and soft costs such as fear of robbery and physical harm from
robbery.

• Payment flow complexity: Value chains do not always follow a simple cash transaction process at each
step – i.e., input suppliers sell to farmers, followed by farmers selling to traders, etc. Payments can
leapfrog or be split between value chain participants. For example, a contract may require a farmer group
to divide sales proceeds between lenders, input suppliers, and farmers. eMoney with an accompanying
management system can automate this process and provide an audit trail.
• Importance of credit: There are significant cash flow constraints up and down agricultural value chains.
For example, dairy farmers need inputs to better feed their cows, but the input providers don’t necessarily
get paid right away. Dairy farmers will sell their milk to collectors and co-ops that will in turn onsell their
milk to coolers that will in turn onsell the milk to processors that will in turn sell products to distributors.
Every step of this process results in delays in payments after goods are already delivered. Smoothing out
uneven payments through credit can have a substantial impact. eMoney can help in various ways. For
example, transaction histories facilitate credit decisions. An eMoney platform can also ensure that money
lent is actually spent on a borrower’s intended use (e.g., farming inputs). Additionally, repayments can
be enforced by automatically deducting payments, or even cutting off access to the market in the event
of non-payment.
Not a silver bullet

eMoney is clearly valuable, but will it improve digital liquidity? For meaningful improvement to occur, eMoney
within value chains would need to reach critical mass and continue circulating in digital form. Otherwise, digital
liquidity would be small and temporary. For a number of years into the future, critical mass and electronic
circulation seem unlikely.

Several issues attenuate the potential:

#1 – Low participation in tight value chains

Only seven per cent of SHFs participate in tight value chains – thus, the reach is limited. While there are efforts
4
to increase participation in these value chains, progress will take time. It is noteworthy that 60 per cent of SHFs
are non-commercial (i.e., grow food for subsistence), so there is limited cash flow to digitize.

4 Christen, Robert Peck, and Jamie Anderson. Segmentation of Smallholder Households: Meeting the Range of Financial Needs in
Agricultural Families. Focus Note 85. Washington, D.C.: CGAP, April, 2013.

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