New Digital Payment Regulations are Vital to Entrepreneurs in the U.S and Globally

For entrepreneurs, cash is king. I regularly share this mantra in my entrepreneurship courses at the University of Maryland, and with entrepreneurs that I advise. Cash is the lifeblood of the startup company, and without cash, the company will inevitably die. “Cash” is, however, quickly evolving to the point that digital cash is the new king. Physical cash is increasingly an inconvenience at best, and a hardship at worst. There is an opportunity, if not an obligation, for governments, banks, and businesses to embrace a digital payment system to support the launch and growth of new companies, and elevate the participation of entrepreneurial men and women in the local and global economies.

To contrast the role of physical cash versus digital payments for entrepreneurs, imagine taking your next Uber or Lyft ride as a cash-only experience. Throughout the day, your driver is collecting cash, and if it’s a busy day, there is a bulge of bills in his pocket. He may even feel uneasy about the growing amount of cash in his wallet, or under his floor mat. As the rider, you also need to have sufficient cash in hand to pay for your trip, along with extra cash to cover any traffic delays that may increase the fare. From the company founder’s perspective, how would the resulting security and safety concerns of cash-only impact the ability for the company to enlist and support drivers, and serve riders? Would the inconveniences and inefficiencies of this cash-only model stifle the ability of the company’s founders to launch and manage the company?

While this cash-only scenario is trending downward in the U.S., the U.K., and other developed countries, cash-only is the reality of street food vendors in Vietnam, minibus drivers in Indonesia, and millions of entrepreneurs across the globe. A need for the speed, reliability, efficiency, and security of digital payments by entrepreneurs is at often odds with the political and regulatory environments in many parts of the world.

Digital payments present significant, and increasingly vital, benefits for entrepreneurs. While the improved efficiencies and effectiveness of digital payments are numerous for many consumers, businesses, and governments, aspiring and active entrepreneurs are uniquely positioned to benefit from digital payments. Select benefits of digital payments that can be realized by entrepreneurs are addressed here in turn.

1. Improving the Speed, Timely Delivery, and Reliability of Payments

The speed of digital payments is unmatched by cash payments, which depend on the carrier. Digital payments transcend distance, across town and across countries. This means that entrepreneurs can receive immediate payments for their goods and services without hoping that “the check is the mail”, or that the purchaser has cash on hand at the time of their meeting. Entrepreneurs can pay their employees on time, which may reduce the demand by employees for payday loans or informal loans to meet monthly expense obligations. In a business emergency, such as a natural disaster or unexpected business expense, the speed and timely delivery of payments is of the essence. In digital form, payments can be made without delay and when the need is most urgent.

2. Lowering the Cost of Receiving and Disbursing Payments

The ability of digital payments to reduce the cost and increase the convenience of financial transactions may expand the pool of eligible account users, including the customers of entrepreneurs. Digital payments can encourage existing account holders, the customers, to use their accounts with greater frequency, which is a positive outcome for entrepreneurs. Furthermore, entrepreneurs that receive cash payments in rural and remote areas often have to travel a considerable distance to designated locations such as a bank branch, in order to make a deposit. This results in significant travel time and travel expenses for the entrepreneur, particularly once the time is tallied for an entire year or multiple years. This time is costly in terms of income forgone while traveling simply to deposit cash payments.

3. Increasing the Security of Payments and Reducing the Incidence of Crimes Associated with Payments

Entrepreneurs that collect cash payments not only often have to travel to deposit these payments, but are vulnerable to street crime as they carry cash. While security is a concern when traveling with a large quantity of cash, this concern is especially high for entrepreneurs that rely on the safe deposit of these cash funds for the survival of their business, and well-being of themselves and their families. Digital payments can be held more securely than cash payments, and the risk presented due to cash deposits can be avoided.

4. Supporting the Economic Empowerment of New Entrepreneurial Men and Women

Digital payments promote economic empowerment by facilitating greater account ownership and increasing economic participation. Digital payments by customers improve the convenience and confidentiality of payments for entrepreneurs, which can be valuable in countries or circumstances where women’s earnings may be subject to the control of their husbands. Payments provided via a digital account can provide the entryway to financial inclusion, and in select countries, the first account that a woman has in her own name and under her control. For all entrepreneurs, opening a business banking account with comprehensive digital payment capabilities can be an important first step to formalizing their businesses.

5. Fostering Economic Development through New Companies and Improved Efficiencies

In a 2016 study by Moody’s Analytics, “The Impact of Electronic Payments on Economic Growth”, digital payments were estimated to have added nearly $300 billion to global GDP across 70 countries in the prior five years, along with over 2.5 million new jobs per year. Digital payments help modernize economies, drive productivity, and increase tax revenues to enable better public services. Digitizing payments also improves the traceability of payments and can reduce financial fraud and money laundering. In 2015, the Indian government’s digitization of subsidies for liquefied petroleum gas enabled savings of $2 billion through reduction in financial leakages.

The Roles of Governments in Empowering Entrepreneurs via Digital Payments

While the opportunities and benefits for digital payments abound, so do the challenges. There are complex systems for governments to address through vision and leadership. Governments can best address these legislative and regulatory concerns by working with the private sector to develop infrastructure that can securely reach urban and rural areas, and ensure interoperability and competition among providers to entrepreneurs and their customers. There is momentum on the part of governments, banks, and organizations in this direction, but with billions of people still outside the formal financial system, and millions of aspiring and active entrepreneurs not realizing their economic potential, there is an urgent need for digital payments to be more prominent in the agenda of governments.

Governments should play a leading role in establishing and overseeing a regulatory framework that is effective and proportional in order to promote innovation and adequately protect customers, while promoting the usage of digital payments with minimal compliance burdens for entrepreneurs. As evidenced by Sri Lanka’s digital payments experiences, regulation evolves most effectively when regulators and policymakers collaborate with stakeholders to understand the gaps and barriers of existing and prospective regulations. Sri Lanka’s 2005 regulations relating to digital payments did achieve its intended goal of widespread adoption of eZ Pay, a digital payments service. After a 2012 revision that addressed earlier shortcomings, the re-launched service experienced considerable success, with several million subscribers.

Governments can engage in a broad-based digital payments ecosystem as a path to developing and supporting entrepreneurs. The legal and regulatory framework for digital payments plays a critical role in creating an enabling environment for entrepreneurs. A failure to establish and support such a framework can stifle competition and innovation, threaten the safety, soundness, and efficiency of payment services, lead to inadequate protection of customers and entrepreneurial businesses alike, and deter the usage of digital payments. It is therefore imperative that governments and regulators balance innovation and risk to achieve digital payment progress and the financial inclusion of entrepreneurs.

Next Steps

For entrepreneurs and consumers to experience the benefits of digital payments, concerted efforts are required of leaders in government, business, and organizations. The rewards for entrepreneurs, their customers, and society at large are substantial. Instead of waiting decades for incremental improvements to trickle into the market, and for traditional banks to extend their digital payment offerings, there is an immediate opportunity to use existing technologies to provide digital payments for all, rapidly unlocking economic opportunity and accelerating the creation and growth of new businesses.

Author: Dr. James V. Green


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