Cashless transactions have the potential to boost business profits by enabling more efficient and cost-effective financial transactions.
Digital payment systems may link businesses with banks, workers, suppliers, and new markets for their goods and services in a quick and cost-effective manner. By decreasing transport costs and expenditures, these solutions help expedite the registration process and payments for business permits and licenses. Access to savings accounts and loans can also be improved through the use of digital financial services. Electronic salary payments to employees can improve security while also reducing the time and expense of paying employees. However, there remain obstacles, such as a lack of bank accounts, digital gadgets, and dependable technology infrastructure for many entrepreneurs and employees.
What are the Advantages and Disadvantages?
Digital payments accelerate and drive down the cost of transactions between businesses and their suppliers, workers, consumers, and governments. Digital financial systems make it simpler for business owners to obtain credit products to establish and develop their enterprises while also encouraging formal entrepreneurship by making regulatory and tax compliance easier. Governments in poor countries may encourage digital financial services by investing in required infrastructure, cooperating with private companies to provide training for potential users, and assuring the existence of adequate security and regulatory procedures. Yet as it sounds sophisticated and revolutionary, it's inevitable to have pros and cons along the way. What are these?
Advantages
Digital payments may boost an entrepreneur's profits by making financial activities with consumers, suppliers, and the government easier, safer, faster and less expensive.
Wage payments via digital means helps employees while also being safer and more cost-effective for companies.
By combining a digital payment method with a cloud-based invoicing solution like Blinksale, it may help businesses offer smooth invoicing transactions. Invoice processing durations typically begin with receipt of the invoice. Payments are paid early and on schedule because an electronically transmitted invoice is instantaneously available to the recipient.
Digital payments instantly generate a credit record for consumers, which can increase an entrepreneur's access to financial services.
Disadvantages
To enable digital payment systems, a robust financial ecosystem, including access points such as computers and mobile devices, is required.
Many business owners are hesitant to use digital payment systems due to their complexity and difficult technological features and usage. Though tech savvy individuals would like to participate in digital world advances.
Businesses and workers lack sufficient financial literacy and the capacity to think quantitatively, making it difficult for them to make effective use of digital financial solutions.
In-depth Advantages and Disadvantages
Digital payments may boost an entrepreneur's profits by making financial activities with consumers, suppliers, and the government easier, safer, faster and less expensive.
Shifting from cash to digital payments helps increase an entrepreneur's profitability by significantly reducing operational expenses and making contractual arrangements, delivery records, and accounts receivable easier to manage. Creating and receiving digital payments will strengthen an entrepreneur's e-commerce engagement and enhance connections with customers, merchants, and financial firms. For example, digital records may assist entrepreneurs in better managing their inventory supplies and making more cost-effective purchase selections. Small business owners, for example, can measure sales by product type and day of the week and utilize this data to improve inventory management.
Entrepreneurs can execute more frequent digital payments to suppliers, decreasing the number of extended trade credit days and working capital charges (by reducing accumulated interest on supplier loans). Digital financial settlements also increase transparency and record-keeping by generating a readily traceable electronic trail, which helps prevent document-related fraud. Entrepreneurs who accept digital payments have much less cash on hand, and so have a decreased risk of theft. Digital payments may be especially vital for female businesses' success. Women are frequently prevented from going to distant suppliers or bank offices due to long travel distances, societal standards, and family duties. By making it simpler to access funds and the marketplace, digital payments can help people overcome such mobility constraints.
Digital applications such as e-filing and e-payment of licensing fees, registration fees, income taxes, and property taxes can cut the cost of tax compliance and reduce travel time and face-to-face encounters with tax officials for larger-scale enterprises. This can also boost corporate formalization and help governments generate a broader revenue base. Greater formalization of labor contracts provides workers with social benefits and protections, while digital technology can make it easier for businesses to pay employment taxes and social security online. By immediately depositing funds into the accounts of the targeted beneficiaries, digital financial transfers can increase the effectiveness of government initiatives to assist small enterprises. This increases the openness of financial transactions and decreases "leakages," or the possibility for middlemen to steal tiny quantities of money.
Wage payments via digital means helps employees while also being safer and more cost-effective for companies.
Switching to digital salaries and wages can save time and resources for larger-scale enterprises employing workers. These electronic currencies also provide employees with access to conventional financial services like accounts and loans, providing them with greater financial autonomy. This also ensures the accuracy of workers' payments and has the potential to aid in audits and supply-chain accountability, given the date and amount of salaries and wages are already recorded in the monthly digital transaction data obtained from the financial institution or mobile payments service.
Employees may find digital payments to be more secure than traditional cash payments, which are more readily stolen or mishandled. While safety is always an issue when traveling with significant sums of cash, this is particularly true for regular cash transfers, such as salaries, that are collected at publicly recognized locations and times. Employees can also keep money in traditional banks or e-wallets with electronic salary payments. They may cash out their income whenever they choose or simply transfer funds to pay for utility bills or school fees for their children. Findings from the United States reported that when the government implemented the Electronic Benefit Transfer (EBT) program in the mid-1990s, switching from delivering social cash transfers via paper checks that had to be cashed to electronic debit cards, the overall crime rate fell by nearly 10% over the next decades.
Combining a digital payment method with a cloud-based invoicing solution
The COVID-19 outbreak causes panic and frustration, particularly in different business sectors that are mostly unprepared and caught in the middle of the turmoil. Still, a lot of businesses, particularly small and medium-sized enterprises, continue to rely largely on paper invoices. This poses a big issue for customers and the government. A non-issuance of an invoice can lead to legal difficulties and disputes, especially if the government begins its audits and a customer can sue you for any discrepancy.
The perfect combination for accelerating payment transactions in a safer and more comfortable manner is to switch to an E-invoicing system and integrate digital payment options. Because you don't require servers or other complicated devices to use this amazing technology, you only need your standard personal computers, laptops, smartphones, and the internet, and you can access it anywhere at any time. Learn more about How Digital Invoicing Can Boost Your Business's Experience
Digital payments instantly generate a credit record for consumers
Digital payments can also improve an entrepreneur's access to traditional financial services, such as credit. According to the World Bank Enterprise Reports, half of all businesses worldwide require a loan, but only 35% have a bank loan or line of credit. Small-scale enterprises, in particular, sometimes have restricted access to formal finance.
Numerous developing nations lack credit reporting bureaus, making it difficult, if not impossible, for banking firms to assess risk when making loan decisions. As a result, these financial institutions charge exorbitant interest rates, require substantial collateral (sometimes more than 100 percent of the loan's value), and need guarantors. As a result, new and small-scale enterprises that have not previously banked or do not have the requisite collateral and guarantors are frequently unable to acquire loans.
The widespread use of digital payments faces substantial hurdles too.
Countries with sophisticated and extensively implemented payment systems may already have the physical infrastructure to support processing digital payments. However, designing and developing suitable physical connectivity to deliver digital payments to all corners of the country is a significant challenge in low-income countries with more simple and basic banking systems and infrastructure concentrated in urban areas. Furthermore, there are considerable infrastructure issues for digital payments. The absence of electricity to power smart phones and telecommunication networks, as well as limits in mobile network coverage and inadequate transportation networks, all impede the spread of digital financial services in rural regions. Finally, while digital payments may be more cost-effective in the long run, developing a sufficient physical infrastructure for dependable payments would require considerable upfront expenditures. Poor network reliability and coverage can result in lost connections and transaction failures, eroding user confidence, particularly in rural locations.
Customers need to produce required documentation such as government-issued identification cards or birth certificates to create a bank or mobile money account or to conduct most digital financial activities. However, according to the World Bank, more than two billion people globally lack legal identity. This might make it difficult for enterprises to get legal registration, labor contracts, and banking services. Employees may also be prevented from creating an account to accept electronic salary payments. Entrepreneurs and workers with low levels of financial literacy and numeracy may find it difficult to use digital financial goods effectively. For example, just 33% of individuals in more than 140 nations could properly answer three of the following four questions: inflation, asset allocation, simple interest, and investment returns. Inadequate financial aptitude makes it difficult for entrepreneurs and their staff to make sound financial decisions.
Despite the numerous advantages of digital payments for workforce participation, most developing nations overestimate entrepreneurs', workers', and consumers' willingness to use such programs. When a new form of payment instrument, such as point-of-sale payments, is implemented, success necessitates the simultaneous growth of both the supply and demand sides of the product. Otherwise, payment providers will face a complication: without a large number of entrepreneurs accepting the product, customers will be hesitant to sign up; however, without a broad range of consumers willing to pay for it, entrepreneurs will be hesitant to accept it—especially if they must pay to use the digital service. Employees' reluctance to accept technology such as electronic salary payments might also be a significant challenge. Given that workers who are accustomed to cash may struggle with the transition to digital payrolls, investing in technology, staff training, and offering on-site support agents is necessary.
Impulsive Motivation
Entrepreneurial spirit, both formal and informal, is a major factor in workforce participation and revenue: 11% of adults in high-income nations self-report as businessmen and women, compared to 34% of adults in developing countries, where entrepreneurial activities may be the only source of income in countries with very few formal career opportunities. Entrepreneurship also introduces different pay jobs and helps to enhance the labor participation rate.
Digital payment solutions enable businesses to pay for goods or services electronically, rather than using cash or cheques, by utilizing a mobile phone and computers, the internet, retail point of sale, and other widely available access points. Usage of digital payment networks is more than simply a convenience for enterprises, particularly in developing countries. Digital payments can help accelerate business registration and minimize the time it takes to send payments for business licensing requirements. Access to digital platforms can boost e-commerce participation.
It can also help with logistics management and communication with customers and vendors. Employees who get electronic salary payments save time, decrease expenses, boost transparency, and empower themselves by providing them with an account and access to financial services such as loans. Businesses can establish a credit history, which can boost their access to working and investment money. Digital applications such as E-invoicing for firms and workers, for example, may accelerate the process of delivering estimates and invoices to a wide range of clients all over the world.
The Challenge and Gap
Despite growing demand, there is still a data deficit on digital payment flows available to individuals and organizations, particularly assessments of merchant payments. For example, the Global Findex database statistics for individuals to determine if they use a debit or credit card to make payments (yes/no). However, this is insufficient for doing a thorough study. It should be supplemented with useful merchant data, such as the number of merchants who paid electronically, the volume of payments, and the percentage of payments made electronically (as opposed to cash). The data might be disaggregated by profiling merchant characteristics such as size, sector, and urban/rural location. The impediments to usage, such as price, availability, and terrible customer service, as well as the economic exposure and other barriers to the supply of digital payment services, must be thoroughly investigated.
Conclusion
Entrepreneurial possibilities enabled by well-functioning digital payment systems can play an important role in increasing workforce participation in developing nations. Regulators and financial service providers must work together to provide safe and secure access and encourage the use of digital payments by entrepreneurs, as well as their consumers and staff. Governments must guarantee that digital payments are secure and dependable. A suitable financial consumer protection framework should be in place to enable an electronic payment system.
And without a framework, consumers may lose faith in the system, and financial inclusion objectives may not be met. Furthermore, it is critical to note that digital payment channels might have security flaws, such as card or account details being stolen. A reliable payment system should include precautions against fraud and cyberattacks, as well as an emergency response strategy in the event of a breach.
Governments should really establish a comprehensive regulatory framework that stimulates innovation and a level playing field, as well as collaborate with the private sector to build dependable infrastructure that can reach rural regions. They should also ensure robust and secure digital networks, as well as provider interoperability and competitiveness. Governments may assist digital financial services by reforming their banking and communications rules. Financial institutions and service providers should provide new and innovative products for small-scale enterprises, particularly those in rural regions. They should develop and implement new solutions to evaluate the creditworthiness of new enterprises and create user-friendly financial apps.
It would also be appropriate for them to raise awareness among entrepreneurs about the benefits of digital payments and to develop specific initiatives to strengthen the financial competence of potential users. Banking institutions and service providers should ensure that employees who receive electronic wage payments fully comprehend, for example, how the electronic payment system works, the significance of PIN numbers, and what to do if something goes wrong. Successful digital payment system improvements have demonstrated that entrepreneurs and workers swiftly adapt to their introduction, rapidly developing competence and satisfaction when utilizing suitably designed, easy, and efficient systems.
