What could move daily digital merchant transaction usage?

Written By Nic Wasunna

A sharp rise in digital financial account across Sub-Saharan Africa (mostly driven by mobile money) does not automatically translate to paying merchants digitally, especially micro, who are the majority. Payment Service Providers (PSPs) struggle with one fact when it comes to DMP usage: it offers a two-sided market with asymmetric incentives. While adoption can be easily pushed through efficient distribution and onboarding, usage can only be sustained when both sides find digital payments more rewarding than cash at the point of making payment and beyond. Thus, there exists a dual decision point, an unseen, and most times unspoken contractual agreement between the paying customer and the receiving merchant that says, ‘I want to complete this transaction in the fastest, safest, most affordable and frictionless way.’

While the idea of digital payments may be a breeze to customers (mostly based on benefits that they have learned from other use cases like P2P and utility payments), for merchants it is not just about receiving the payment and offering the product or service. When the merchant is charged for a digital transaction, it carries an additional cost and operational burden often having to contend with an interplay of simultaneously competing issues: the pressure of transaction fees vs business margin, the friction of liquidity vs float, service reliability vs time, the fear of taxation, the prevalence of fraud, and other risks. In most markets merchant adoption of digital payments is high perhaps driven by curiosity, customer demand or an active sales drive by providers to sign them up. However, with time, active acceptance and usage of digital payments sharply declines, even with the awareness of the benefits that digital payments offer. Cost becomes the key driver of micro-merchant decisions as they fall back to cash.

The Real Issue with Digital Payment Arbitrage: When merchants feel cornered on cost and yet must use digital payments, they will adopt alternatives that are not typically designed for commerce i.e. agent withdrawals treated as payments to earn commissions, P2P receipts with withdrawal costs passed to customers. To them this is arbitrage of digital payment services is perfectly rational as it offers them a channel to optimize their unit economics. Besides, they are familiar or even predictable flows with minimal onboarding hurdles, offering them lower or zero net costs and immediate liquidity. But for providers, particularly MNOs, the line of sight of the economic intent is blurred, leaving them with limited ability to manage the ecosystem as a payment platform. Furthermore, they miss the opportunity to:

  • Properly segment merchants, agents and consumers and design onboarding, segment-specific incentives and pricing

  • Properly forecast transaction volumes, values and revenues by use case

  • Adequately plan financial flows accurately e.g. switching and settlement

  • Plan for future investments in innovation design and roll out e.g. of new technology channels e.g. QR codes, POS, e-commerce etc

  • Provide adequate support for liquidity, float and other VAS for merchants e.g. credit, business management tools, etc

  • Build credible P&L for the different business segments (agents, medium merchants, small and micro-merchants, etc)

The Levers of Change: Case of M-PESA, Kenya

The number active merchants has taken more than a decade, to grow from 24,000 (representing 20% activity) in the early years of launch in 2013 to reach more than half a million between 2020 and 2023. Even with the first reduction of transaction fees in 2014 from 1.5% to 0.5%, adoption rates remained low and usage even lower. During the 2020 COVID-19 pandemic, the Central Bank of Kenya instituted bold measures to increase adoption and usage of mobile money. This included zero-rating transaction fees for lower values and increasing transaction limits. The result was a steady year-on-year increase in both adoption and usage of digital money, a growth trajectory that has been sustained since then. Towards the end of the same year, M-PESA launched Pochi la Biashara, a move that was meant not only to capture the micro segment, but also address their unique needs by:

  1. Considering merchant economies by ensuring that sensitivities to fees are managed from both merchant and customer side

  2. Substituting habit inertia (using cash and/or arbitrage of other payment products as a fallback) with a more acceptable payment flow

  3. Increase the acceptance density by driving network effects

  4. Offering value adds like loans

The 2026 HY financial report states that there are 2.4 million registered merchants: 0.9 million formal merchants using Lipa na M-PESA (buy goods and paybill) and  1.5 million informal merchants using Pochi la Biashara. At the end of FY 2025 only 37% were reported as active, representing 30% of the Kenyan addressable market.

These changes in the recent years have been because of Safaricom’s pivot in merchant payments to focus on the micro segment. The activities comprised:

  1. Targeting micro segment for recruitment: A focused, sustained drive to target and recruit micro-merchants, leading to almost doubling in numbers 1 year between 2024 and 2025

  2. Product fit: Rather than fight the behavior, M-PESA worked around it to redesign payments around P2P building on familiar flows and simply adding a business wallet to an existing personal M-PESA line. Clear communication on the benefits, features, advantages and relevance of the Pochi la Biashara product increased the trust and steady growth in usage

  3. Focus on free micro-transactions (less than KES 100 for P2P and less than KES 200 for business payments), which now make up 36.8% of total M-PESA volumes.

  4. Loans: MSME can take overdrafts to complete payments whenever they run out of funds in their merchant wallets through Fuliza Biashara (Lipa na M-PESA Merchants) and Taasi Pochi (Pochi la Biashara micro-merchants)

These activities have yielded clear results within the last: Pochi la Biashara now contributes 22.4% (KES 2.2 billion) of digital merchant payment revenues as at the end of FY 2025, currently on the trajectory to surpass this number at the end of FY2026. Additionally, the latest HY report shows steady growth trend, with both volume and value of Pochi la Biashara transactions doubling in one year.

The M-PESA case may act as a proof point for two important market realities that require further exploration: 

  1. DMP fee reduction does not work in isolation to move daily DMP usage. The initial regulatory mandate was a positive kick-start to the process, but it is important to note that it happened in somewhat controlled conditions (cash usage was discouraged to prevent spread of COVID-19)

  2. DMP fee reduction must be done carefully and gradually until a ‘sweet spot’ is achieved, but also while simultaneously moving other levers. For example, following the lift of the regulatory mandate, M-PESA continued to zero-rated fees under KES 200 to cater to the lower segments, where it mattered most. Besides, providers must understand wide-spread customer payment and merchant acceptance behavior and develop products that resonate with their needs, while also simultaneously testing other levers like communication, trust, acceptance and added value.

Contrast with a Bank-Led Market: Case of Nigeria

Nigeria contrasts with Kenya in the sense that DMP is a largely bank led. Just like Kenya, it gone through several cycles of merchant payment fee adjustments where fees mandated at a fixed level by the regulator (CBN). The main objective has been to achieve a market-driven evolution of merchant payments. Prior to 2016 the merchant service fee (MSC) was set at 1.25% capped at ₦2,000, followed by a further reduction to 0.75% capped at ₦1,200 between 2016 and 2019 and finally landing at 0.05% (10 times lower than Kenya’s 0.5% for Lipa na M-PESA).

These changes have had both positive and negative outcomes:

  1. Positive Outcomes: expanded acceptance by formal merchants, increased deployment of POS terminals by banks and fintechs as price frictions reduce, positive reinforcement by CBN meant increased long-term confidence in DMP. 

  2. Negative outcomes: adoption by micro-merchants remained glaringly low with a persistence of cash dominance, while customer behavior barely shifted. Merchants used work arounds, like P2P, Cash out at agent bank or passing costs to customers, leading to customers further avoiding DMP.

The Nigeria case clearly demonstrates that even with good intentions to increase inclusion, the merchant transaction fees was never a binding constraint for the micro merchant segment. Rather, merchants may value other aspects like speed, reliability, up-time, settlement, clear processes and security to shift to daily use.

In markets like Nigeria, things may look good on the outside with a high level of POS adoption, but when it comes to usage, it may require a careful investigation into what really drives trust from both the merchant and customers. 

Nic Wasunna