In order to promote uptake of digital financial services (DFS) and achieve a fully operational digital ecosystem, mobile money needs to be as easy to use and as flexible as cash.

This means ensuring as many merchants and retailers as possible accept customer’s payments in digital form. It is one of the key elements driving the cashless society.

However, merchant acceptance remains a challenge in many countries. In some regions it is non-existent. Technical and fiscal issues, consumer awareness, education and protection remain barriers. But the single biggest challenge is cost.

While a clear commercial model exists for larger merchants to use digital payments, it’s a bigger challenge for smaller traders who often predominate in developing countries. Until very recently there was an assumption by governments and payment service providers that they would follow suit. The reality is that it is highly unlikely that smaller merchants have the scale to cover any costs associated with digital transactions. Perceptions become harder to shift when they still see cash as a “free” alternative.

If merchant acceptance is to be universally realized, costs need to be reduced significantly and much more needs to be done to promote the broader benefits. Governments also remain key. They have a continuing role to play by shifting more of their operations onto digital platforms and promoting digital payments as the future of payments, moving away from cash altogether.

The International Telecommunication Union’s Focus Group on Digital Financial Services has been looking into what can be done to address this challenge, bringing together both private and public sector organizations from across the world. The group met in Geneva in December to pool its expertise, share its learnings and discuss three potential solutions.

The first is cross-subsidisation by payments service providers. By making a return on operations with the larger merchants, it is possible services could be offered for free to small merchants. While tricky in a competitive market place, the economies of scale could deliver a bigger and more profitable market place for all parties involved.

The second is adjacency. A provider delivering additional services such as loans or data marketing can cover the cost of simple payments. This model has been successfully rolled out on a smaller scale in several countries including Kenya.

The third may not require a commercial model at all – digital money could be promoted as a ‘public good.'  Just as governments are currently printing, distributing and managing cash today, they could take responsibility for a proportion of the costs of digital payments, making it more commercially appealing to both merchants and consumers.

Mobile money and DFS are widely recognized as a tangible means to bring financial services to populations previously excluded, currently almost a quarter of the world’s population. Merchant acceptance remains a major barrier and one that must be addressed.

Raising awareness of the challenges and identifying incentives and potential solutions is only the first step. There is no simple answer which will solve these problems immediately and more research and analysis needs to be done.

Over the next year the ITU Focus Group will explore additional factors that could contribute to lowering costs. One of these could be bulk payments, which include government pay-outs. In Kenya it has been observed that an increase in government distributions has led to increased trust in DFS, which in turn has led to an increased number of payments taking place. Higher volumes could reduce the cost of payments for merchants. To explore this further, the Focus Group will be running several surveys across different geographies to assess its feasibility and identify best practices.

Ultimately, to overcome these challenges policy makers, financial institutions, service providers as well as NGOs must work more closely together to develop the right tools and flexible solutions that work in individual markets. Only then will DFS be able to flourish to benefit the communities that need them most.

Sacha Polverini is Chairman of the International Telecommunication Union’s (ITU) Focus Group on Digital Financial Services and Carol Benson is a Managing Partner at Glenbrook Partners.