Why Stablecoins? Part 3 - Enabling Merchant Payments
We have previously discussed two critical use-cases for stablecoins in emerging markets: protecting people’s money from inflation, and helping people avoid predatory fees when sending money home to their families in other countries. However, those use cases do not address the question of how we can provide people in these markets with an alternative for monetary exchange. In distressed economies, the utility of a stablecoin hinges largely on the willingness of local businesses to adopt distributed ledger technologies (DLT) as a form of payment. Put more simply, what good is stable, digital money if you can’t spend it anywhere?
Emerging Markets Driving Payment Disruption
The good news is that emerging markets are at the forefront of the payments technology revolution, according to consulting firm PricewatwerhouseCoopers (PwC). A 2016 PwC report titled “Emerging Markets: Driving the payments transformation” found that the adoption of mobile devices for point-of-sale (POS) transactions is “exploding worldwide, especially in emerging markets” as merchants and consumers increasingly transact through mobile channels in lieu of cash.
In fact, the World Payments Report 2018, authored by consulting firm Capgemini and French multinational bank BNP Paribas, found that emerging markets currently account for one-third of all cashless transactions. Furthermore, non-cash transactions are growing nearly three times faster in emerging markets than in mature economies, according to the report. Mobile-merchant transactions are skyrocketing in the developing world for one primary reason: falling hardware costs, which make it easier for merchants to adopt the necessary POS systems.
On the consumer-side, the price point for lower-end smart phones has fallen to $40 in most emerging economies, according to mobile trade body GSMA. With decreasing cost-barriers to cellphone ownership, GSMA data shows that mobile Internet penetration in Sub-Saharan Africa, South Asia and Latin America has grown by an average of 15 percent over the last six years, connecting over 33 percent of all people in these regions today. And by 2025, these geographies will see mobile Internet penetration reach an average 52 percent of their inhabitants.
Meanwhile, emerging-market merchants, most of which are small and medium-sized enterprises (SMEs), have found that mobile POS solutions require less up-front investment than traditional fixed payment terminals and cash registers. This trend bears particular significance for Africa, where SMEs comprise 90 percent of all companies and employ 80 percent of all workers. According to PwC, many emerging-market SMEs have also found that integrating a mobile POS device with an Android app is much easier than implementing and maintaining a traditional payment terminal with Windows-based software.
Dovetailing with PwC’s and GSMA’s findings, a 2018 study from market intelligence firm Juniper Research projects that annual mobile-merchant transactions by unbanked individuals will grow from 1.8 billion in 2018 to 3.8 billion by 2023. Juniper predicts that Africa and the Middle East will drive the vast majority of this growth. In Kenya alone, the mobile money-transfer service M-Pesa has already enrolled 100,000 merchants, according to Juniper.
Inflation on the Rise
At the same time, researchers at the World Bank have identified a disturbing trend of “further upward acceleration of global inflation” that disproportionately affects emerging and developing economies. Recent currency convulsions in emerging markets like Turkey, Argentina, South Africa, India, Russia and Brazil underpin the World Bank’s concerns.
In Africa, there are at least 10 countries facing severe currency crises, with Zimbabwe emerging as the most prolific example of failed monetary policy. According to the Financial Times, Zimbabwe’s economy is in slow-motion collapse, as inflation has risen to its highest levels in 11 years and violent protests have broken out throughout the country.
Lacking a functional domestic currency or foreign currency reserves to purchase imports, Zimbabwe’s “local industries are operating at a reduced capacity or have closed down altogether,” according to South African media. Meanwhile, an arguably more catastrophic scenario is playing out in Venezuela, where extreme hyperinflation and the collapse of the bolivar have forced most businesses to close down or flee.
After two decades of socialist rule, the number of private businesses in Venezuela has dwindled down to 140,000 from the 650,000 it counted when former President Hugo Chavez seized power – a 77 percent decline. Meanwhile, large multinational corporations like Pirelli, Kellog, Kimberly Clark, Clorox and dozens of others have fled the imploding nation en masse.
Crypto to the Rescue?
The confluence of increasing mobile-POS penetration and rising emerging-market currency jitters has made crypto an increasingly viable medium of exchange in the developing world. Developing countries are actually overtaking their developed-world peers in bitcoin usage, according to 2018 transaction data from LocalBitcoins, a peer-to-peer crypto exchange and escrow service.
In Argentina, record inflation has made local businesses weary of the peso. As such, merchant adoption of bitcoin payments has soared in the capital city of Buenos Aires, which ranks second in the world for bitcoin-accepting businesses. Crypto adoption is also transforming monetary exchange in Venezuela, which according to Alex Gladstein, the chief strategy officer for the Human Rights Foundation, drives eight percent of global bitcoin transactions.
This trend shows no signs of abating, as just two weeks ago, Venezuelan bitcoin transaction volumes reached $7 million on LocalBitcoins, an all-time record. However, Venezuelan merchants have shown a particular affinity for privacy coin Dash, with over 1,500 businesses accepting the token, according to the International Business Times. Multinational fast food chains like Church’s Chicken, Papa John’s and Subway have all accepted Dash in at least one of their Venezuelan locations.
Despite the relative advantage that bitcoin and other altcoins present to merchants operating in currency-distressed economies, these crypto assets can be just as volatile. For example, bitcoin can lose 30 percent of its value in a day, while Dash is down nearly 90 percent in the last year. It stands to reason that stablecoins offer a better value proposition for business operators in countries facing monetary crisis.
Generally pegged to reliable fiat assets like the U.S. dollar, stablecoins can help merchants in the developing world insulate their revenues from local currency malfunctions. For businesses that rely on international suppliers, a dollar-backed stablecoin could help them seamlessly convert and transfer sales proceeds back into their international bank accounts to purchase more goods.
This creates a virtuous cycle, where merchants are incentivized to accept payments in stablecoins that insulate their revenue from the volatile local currency, and the more merchants there are that accept stablecoins, the more beneficial stablecoins are to the citizens of these developing economies. As a result, it makes more sense for people to use stablecoins to send money home to their families (since they know they’ll be able to use the coins to buy essential goods), and they are saved from the high fees charged by remittance companies in the process.
Ultimately, merchant adoption is the lifeblood of a sustainable stablecoin ecosystem. Without commercial acceptance of stablecoin technology by local operators, financially marginalized populations will see no benefit from volatility-proof crypto assets. However, the rapid evolution of mobile-payment infrastructures in the developing world, along with fast-growing crypto-penetration in these markets, have created the optimal foundation for stablecoin adoption.
At Reserve, we recognize the vital role that local businesses and SMEs will play in the emerging stablecoin ecosystem and are actively building out our partner base to help scale prosperity through the developing world. To learn more about how stablecoins can help merchants in financially distressed markets, join the conversation on Telegram.