Caribbean businesses are online. But can they get paid? Businesses are building websites, using social media and reaching customers beyond their borders. Yet digital transactions still account for only a small share of business activity across the region. The problem is not simply digital adoption. We discuss.

 

The Caribbean region has spent years talking about the digital transformation of its economies. Governments have launched digital strategies, businesses have embraced social media and e-commerce platforms, consumers have become increasingly comfortable with online services, and digital technologies have become part of everyday life.

However, when it comes to actually buying and selling digitally, the region remains well behind more advanced markets. That was the stark message from Barbados’ Minister of Energy, Business Development and Consumer Affairs, Kerrie Symmonds, at a recently held Caribbean Development Bank event for micro, small and medium-sized enterprises (MSMEs). The Minister noted that only about 4—5%  of business transactions in the Caribbean are conducted digitally, compared with approximately 18—19% in the United States and 16% in Canada. He also noted that roughly 70% of retail trade in the region continues to take place through traditional stores. (Source:  Barbados Today)

Those figures should prompt more than concern about whether Caribbean businesses are sufficiently “digital”. They should force a harder question: Can Caribbean businesses participate effectively in digital commerce when the infrastructure for getting paid remains fragmented, expensive and, in many cases, dependent on systems outside the region?

 

The region’s digital commerce paradox

In a nutshell, the answer to that question is no, but at the heart of the Caribbean’s digital economy, there is a paradox. Businesses are increasingly capable of finding customers online, but converting those customers into paying customers remains difficult.

For example, a small business can build an attractive website, advertise through Instagram or Facebook, provide services remotely and reach customers across the global marketplace. However, when the customer intends to buy, the transaction cannot be completed due to several obstacles:

  • the customer’s preferred payment method may not be accepted;
  • the merchant’s bank may not support the necessary payment gateway;
  • the payment processor may not operate in the merchant’s country;
  • transaction costs may be prohibitive;
  • settlement may take too long; or
  • a cross-border transaction may simply fail.

In other words, the region has been relatively successful at building parts of the front end of digital commerce (to find and engage customers), while the back end (to close the loop and facilitate payment) remains much less developed.

 

Payments are not a minor inconvenience; it is the business

The scenario outlined above is a recurring issue across the region, and is especially prevalent among digital businesses. Historically, cash has remained deeply embedded in commerce, with access to and use of formal financial services varying considerably across the region, due to, among other things, relatively low digital maturity, uneven regulatory frameworks and the need for affordable financial and e-payment infrastructure (Source:  Caribbean Development Bank).

Moreover, for a conventional brick-and-mortar business, its payment infrastructure is largely invisible. A customer presents cash or a card, the merchant completes the transaction, and the business moves on. Digital commerce exposes all of the weaknesses in the payment system, as the means of accepting payment is fundamental to the business model. Simply put, if the payment mechanism does not work, the digital business does not just lose a sale or experience a mere inconvenience. It is missing a critical operational component to getting the venture off the ground.

 

Interoperability is becoming an economic imperative

Another fundamental problem is fragmentation. The Caribbean is not one market, but a collection of relatively small markets, each with its own currencies, banks, payment providers, regulatory arrangements and financial infrastructures. That fragmentation becomes especially painful in the digital commerce space.

For example, a customer may have money in one digital wallet while a merchant uses another. The customer wants to buy, the merchant wants to sell, but the two systems cannot communicate. This is not a simple technology problem. It is a regional trade problem.

The Caribbean Community (CARICOM) has long recognised that interoperability must be addressed if the region is to achieve the CARICOM Single Market and Economy (CSME). Hence, a crucial thrust of the CARICOM Single ICT Space is the need for harmonised legal and regulatory frameworks, including interoperable payment systems, to support seamless cross-border transactions.

 

What Caribbean policymakers should be doing

Without a doubt, there is a litany of challenges the region must address, but we do not need another digital strategy that sits on a shelf. To a considerable degree, we already know what the problems are and the solutions that are needed. What we need are policymakers who will do what needs to be done to improve the enabling environment for e-commerce and digital payments in the region, and to lower the barriers to entry for MSMEs. Some of the areas that must be addressed include the following, which again are not new, but are worth highlighting.

1. Make interoperable payments a regional priority

The Caribbean region should accelerate work towards a genuinely interoperable regional payment ecosystem. The objective should be simple: a customer should be able to pay a legitimate Caribbean business easily, regardless of which participating bank, wallet or payment service provider they use. To do so seamlessly and efficiently will require common technical standards, regulatory cooperation, settlement mechanisms, and incentives for private-sector participation.

Work on developing regional payment rails has been underway for several years, but so far none have been launched in the market. This is an area that policymakers could address directly and seek to remove roadblocks that have been hindering progress.

2. Lower the cost of accepting digital payments

Digital payment acceptance must be economically viable for small businesses. Hence, policymakers and regulators ought to carefully examine the current merchant fees, interchange arrangements, payment gateway charges, foreign-exchange costs and other fees that make the adoption of digital payment systems unattractive and unduly onerous to MSMEs, especially when the majority of them are likely to engage in small-value transactions. The goal of reviewing the various fees and charges is not to impose arbitrary price controls, but to create conditions under which efficient and interoperable alternatives can enter the market and compete.

3. Open the market to innovation

Although regional policymakers often speak about fostering innovation, especially in the fintech space, it could be argued that the manner in which fintech is regulated in many countries can make it unnecessarily difficult for legitimate fintech companies to enter the market. Further, although some Caribbean countries are welcoming of fintech ventures to their regulatory sandboxes, for example, these ventures are often not allowed to serve the local market, which inherently undermines the innovation posture countries have been promoting.

The importance of regional harmonisation must also be emphasised. Currently, considerable regulatory fragmentation exists, where a fintech business can develop an excellent product but faces substantially different requirements in every Caribbean jurisdiction. In our small individual markets, a regional approach is likely to lead to more viable ventures. Greater policy and regulatory harmonisation would lower the barriers businesses experience to regional expansion.

4. Treat digital identity and trust as payment infrastructure

It almost goes without saying, people will not embrace digital commerce if they do not trust it. A modern digital economy needs reliable ways to establish identity, authenticate transactions, protect personal information and resolve disputes.

Although across the region efforts are being made to advance digital-ID frameworks, data-protection laws, cybersecurity capabilities, electronic-transactions legislation and consumer-protection mechanisms, in many instances, progress has stalled. For example, comprehensive and modern digital-ID frameworks and data-protection laws have been established, but fully operationalising those systems has been lagging—sometimes for several years—thus rendering them ineffective, though in principle the overarching structures are in place.

5. Use government as an anchor customer

Finally, if policymakers are serious about digital payments and the development of our digital economies, Caribbean governments can accelerate digital payment adoption simply by using the systems themselves. As the largest employer and procurer of goods and services, and the entity that every citizen must interact with from birth to death, there is an invaluable opportunity to shape business and citizen behaviour through the systems and processes a government implements.

Further, the relative volume of transactions generated by and paid to government, such as fees, licences, taxes, social transfers, procurement payments, is substantial and could be a key factor in the overall viability of a digital payment platform offering service in some of our very small markets.

 

Final thoughts

The Caribbean region’s reliance on traditional cash transactions and legacy payment infrastructure is becoming an economic bottleneck limiting regional trade, business resilience, and global competitiveness. However, policymakers have to do more than just talk about it and help to position Caribbean businesses to compete globally and thrive locally by modernising the way money moves within our countries and across the region.

 

 

Image credit:  rawpixel.com (Magnific)