South Africa’s hidden R750 billion economy has one reigning king
Although there has been a great push for and development towards a cashless society, cash is still king for the majority of the population across numerous sectors – but especially in the multi-billion rand informal sector.
Although the South African Reserve Bank (SARB) recently published a roadmap for the digitalisation of the economy, the country still has a long way to go in reducing its dependency on cash.
An estimated eight out of ten South African adults have a bank account, but cash continues to reign supreme. According to Statista, around 73% of point-of-sale transactions are conducted in cash, down only 6% from 2018.
According to research from the University of Stellenbosch Business School, lower-income earners, who comprise the majority of the population, exhibit the highest prevalence of cash usage.
This is particularly evident in the country’s booming township economy, which, according to informal economy expert GG Alcock, is estimated to be worth a whopping R600 billion to R750 billion.
This has been attributed to various factors.
Research from the FinMark Trust, in partnership with the World Bank, the Bill & Melinda Gates Foundation, and G2Px ,showed that a majority of businesses in South Africa’s townships operate without formal registration or bank accounts, choosing to deal exclusively in cash.
StatsSA reports approximately 1.8 million South Africans are informal traders. Among them, eight out of ten operate without a bank account, and 60% of those with an account use it solely for processing payments.
According to FinMark, this choice is often driven by concerns about the costs and bureaucratic hurdles associated with formalising a business.
Its studies have also found that lower-income consumers prefer cash transactions due to their immediacy and ease of use.
Cash is widely accepted, transparent in terms of fees, and facilitates meticulous budget management, allowing households to track every expended cent.
Despite the increased risks of theft or loss associated with carrying cash or using ATMs, it remains a more trusted payment method for many.
“Since cash is still a mainstay of payment tender in South Africa it indicates that both consumers and informal merchants are cautious to adopt cashless forms of payment,” wrote Diana Bresendale, researcher at the University of Stellenbosch Business School.
“The challenge with the uptake of cashless payment methods will be addressing perceptions, especially around cost, to induce a natural gravitation towards cashless payment methods,” she added.
The dominance of cash is far from limited to informal economies. South African retailers like Pepkor (the country’s largest) and Mr. Price, record around 90% of their sales conducted in cash.
The FinMark Trust research outlined that South Africa’s financial system is well-developed, with an interoperable national switch supporting most electronic payments, but real-time, low-value payment options are still costly for consumers.
“The primary goal of digital inclusion is to ensure that all South Africans can connect to and participate in the digital economy through affordable access and reliable digital infrastructure [but] for all citizens to participate in the digital economy, digital connectivity must be accessible, affordable, and impactful,” said FinMark Trust.
The SARB is looking to lead the country towards a future without cash by introducing a strategy for enhancing digital transactions.
Nineteen of the G20 countries, including South Africa, are currently advancing in the development of Central Bank Digital Currencies (CBDCs)
This strategy, outlined in a document published in April, includes a detailed 17-point action plan aimed at bolstering the use of digital payment systems across the nation, which builds on the objectives set in the National Payment System Framework and Strategy Vision 2025.
“South Africa has an advanced banking and financial services industry, with widely accessible digital payment offerings and high levels of financial inclusion,” said the SARB.
The transition to digital payments is expected to bring numerous advantages, such as improved safety and convenience, cost savings, new business opportunities, and increased financial transparency.
However, “the pace of adoption of new digital payment channels and the utilisation of existing digital payment options in South Africa has been sluggish due to a number of barriers,” added the Reserve Bank.
According to the SARB, these include:
- Excessive reliance on cash coupled with high costs for consumers and small businesses;
- Fragmented systems contributing to financial exclusion of underserved communities;
- Financial and digital illiteracy challenges;
- Slow modernization of outdated systems;
- Limited access to necessary infrastructure, including Internet/Wi-Fi;
- Lack of trust in digital payment systems
Bresendale said physical cash would likely be replaced by digital money, but monetary policy would continue to determine its function and value.
She said that digital money is more cost-effective than physical cash, and these savings can be passed on to individuals and businesses.
“The challenge with the uptake of cashless payment methods will be addressing perceptions, especially around cost, to induce a natural gravitation towards cashless payment methods,” said Bresendale.
The researcher said that “rationality is required when evaluating the merits of moving to a cashless society—reducing the payments menu by excluding cash limits the choice for citizens who rely on it as their preferred form of payment.”
“As an example, the informal sector, which forms such an important part of South Africa’s economy, stands to be left out in the cold,” she added.
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