COVID-19 has placed e-commerce at forefront of retail. Online shopping was growing at a steady rate of 4.5 percent per year before the pandemic. The retail landscape has changed dramatically this year due to restrictions on movement and a growing preference by consumers to avoid physical stores. The majority of successful businesses were able to adapt to digital platforms, and many prominent retailers filed for bankruptcy.
E-commerce has led to an increase in digital financial services offered to consumers and small businesses. The trend known as embedded finance is the offering of services such as insurance, credit, and digital payments at the point-of-sale by non-financial businesses. This increase in embedded finance can dramatically improve access to financing for small and medium-sized businesses while reducing costs and improving efficiency in the digital economy.
Platforms like Alibaba, MercadoLibre, and Jumia have ventured into finance in recent years. They followed a similar path: they added payments facilitation to their platforms, then expanded these capabilities beyond them. These companies were able to use rich data about payments and transactions to create credit scoring models that allowed them to extend credit to consumers and merchants.
A recently published report shows that embedding finance is expanding beyond ecommerce. The trend of embedding finance is expanding beyond e-commerce. Digital firms in agricultural value chains and ride-hailing platforms as well as e-logistics have adopted a similar approach and either launched financial services or expressed an interest in piloting new offerings.
Sudden shifts with long-lasting consequences
While the COVID-19 pandemic has created uncertainty in many areas, one thing is clear: It has greatly accelerated digital adoption. With a few exceptions, where economic activity was restricted, digital shoppers increased in almost all countries. Data shows that there has been a significant shift in consumer behavior and business operations, from the United States and Africa to the Middle East.
Online sales are not an option anymore, but a necessity to brick-and-mortar business owners. The COVID-19 crisis caused a shift in consumer demand towards digital commerce, which is likely to continue for many years. MercadoLibre is Latin America saw a 100% increase in demand for essential goods in the first weeks following the crisis. Jumia in Africa saw a fourfold increase in grocery sales. Amazon’s third-quarter 2020 sales rose by 37% compared to the previous year.
Many new platforms have gained prominence in emerging markets like Africa, Asia, and Latin America. They adopt new business models and help the landscape become more competitive. The crisis could open up opportunities for second-generation niche platforms, which operate in market segments that are typically excluded from large ecommerce platforms. In Kenya, Twiga Foods, an agricultural value-chain platform, partnered with Jumia Kenya to offer baskets of various fruits and vegetables directly to customers. Compare Local, a Brazilian initiative that allows customers to find small businesses and purchase items using a simplified payment method is being implemented. It remains to be seen if the many initiatives that have emerged during this period will become long-term viable market solutions.
A few questions ahead will help you determine if there is an upward trend.
The road ahead isn’t easy. The infrastructure for digital payments, including mobile and bank agent networks, is crucial for expanding e-commerce to underserved areas. Many platforms saw an increase in digital payments. A digital wallet is a payment system that allows users to make instant, safe transactions using digital money. Jumia in Africa enforced digital payments as it temporarily stopped cash delivery. Mercado Pago in Argentina saw a strong rise in both digital payment penetration and transaction volume.
Digital payments have many advantages over traditional mobile money. In Nigeria, for example, mobile payments were stopped by some platforms due to disruptions in the agent network making it difficult for sellers to cash their payments.
Uncertainty about the regulatory frameworks for financial services providers can pose a major risk to e-commerce platforms. This is why regulators need to prioritize the issue. Platforms must address changing requirements related to credit licenses and payments, as well know-your-customer requirements from sellers and customers to grow.