Sri Lanka’s population of just over 22 million is widely credited as being digitally savvy, boasting over 14 million internet, and 7 million active social media users. While it earns its acclaim as a digital success story, there is one notable exception — digital payments.

Sri Lankan businesses and consumers have not adopted digital payments with the same enthusiasm seen in their adoption of social media and other digital services. During COVID-19 lockdowns, there was a 600 percent spike in internet banking volumes and fintech app registrations increased by more than 200 percent, but there has not been too much of a corresponding increase when it comes to on-premise (at the shop) retail and distributor payments. Many retailers and distributors prefer traditional payment methods of cash and cheque payments.  

Why are Digital Payments Lagging in Sri Lanka?

Although the country enjoys a banking penetration rate of 74 percent through an island-wide branch and ATM network, coupled with an uptake in digital banking and internet-based payments that kicked off with the pandemic, digital payments across the country are still lagging. There is not much of an incentive for consumers and businesses – specifically at retail points and within the distribution chains – to move to digital payments since they are used to cash or cheque transactions. At the same time, merchants are also not fully aware of the potential savings that can be achieved by embracing digital payments.

Low levels of digital literacy, limited access to smartphones outside of the Western Province of the country – Sri Lanka’s most urbanized province and home to the country's capital and commercial center – a general lack of trust in new technology, and concerns about the legal and regulatory aspects of the relatively unchartered territory of retail digital payments are some of the possible reasons for the slow adoption. These are all challenges that regulators, telcos and financial institutions can help to overcome.

Another significant difficulty is posed by language. With two official languages – Tamil and Sinhala – reaching the entire population can be somewhat difficult. Although English is used in administration and as a bridging language, only around a quarter of the population uses English, and currently, most digital payment platforms are only available in English.

Digitalization presents significant opportunities – from spurring economic activities and creating new jobs to being able to reach the as yet unreached. Across the globe, IFC actively champions and supports responsible, innovative solutions to reach unserved and underserved populations at scale. In Sri Lanka too, the move to accelerate digital financial inclusion – bringing even the smallest of transactions into the formal banking system – has been one of the key areas of focus in IFC’s work in the country. 

A First-of-its-kind

Helping to kick-start a revolution, in 2021, IFC implemented an innovative digital payment initiative in the Fast-Moving Consumer Goods (FMCG) sector, which has an extensive reach encompassing manufacturers, distributors, retailers, and consumers. This innovative project aimed to scale digital payments across the country, with an initial focus on sector-based interventions, rather than across-the-board solutions. The project – a part of the Women in Work program, a partnership between IFC and the Australian government – collaborated with Ceylon Biscuits Limited (CBL), Sri Lanka’s largest locally owned food manufacturer, the National Development Bank (NDB Bank), and telecommunications provider, Dialog Axiata PLC. This initiative was part of a larger project that CBL conducted with IFC’s assistance to build the capacity of their distributors and retailers, including on improving digital financial literacy skills. 

In a distribution chain, the payment flow typically starts from the consumer, then moves to the retailer, followed by a distributor and finally reaches the manufacturer, in this case, CBL.

Many of CBL’s distributors are medium-sized enterprises and need access to credit to finance their growth. The distributor financing scheme – where for the first time in Sri Lanka a local FMCG partnered with a local bank under a digital payment structure – frees up spare capital to help business grow without additional security and at attractive interest rates. Through the collaboration with the NDB Bank, distributors get greater access to credit – depending on their financial standing – increasing their purchasing power for CBL products, while also guaranteeing payment to CBL at the end of the credit period.

The distributor financing scheme has onboarded 80 distributors from CBL. “Together, we revolutionized cash collections from distributors, replacing manual processes with seamless digital transactions, while also enjoying preferential banking facilities,” said Nalin Karunaratne, CEO of CBL. Encouraged by the success, CBL intends to roll out this digital payment system across their distributor chain.

On the other hand, Dialog stepped in to streamline payments from retailers to distributors using QR codes. The pilot project included 24 retailers.

For those who have been a part of this initiative, life has been easier.

Chathuranga Lakmal Perera, a retailer in Pugoda in the Western Province, says “using QR payments to pay the CBL distributor has made my life easy.” Most of the customers who visit his store “Chandana Super” pay him in cash, but Perera hopes to increasingly use digital payment technologies, starting with the distributors who supply his inventory. “This was just the start. I also intend to pay my other suppliers digitally too,” he said.

When receiving digital payments from consumers, the fees for accepting QR code payments are typically lower than those for credit cards, benefitting retailers. Digital payment methods also offer retailers the potential to expand their businesses, for instance through home deliveries. “Our QR payment solution is designed to bring efficiency, transparency, and security to the retailer-distributor payment flow. It empowers retailers to make instant, cashless payments directly from their mobile devices, eliminating the need for physical cash handling and reducing the risk of errors and delays,” said Renuka Fernando, Group Chief Digital Services Officer at Dialog Axiata PLC.

For Tissa Fernando, a distributor of CBL’s products in Ratnapura district in the Sabaragamuwa Province, this new digital scheme has enabled him to invest in other areas of his business given that he has the assurance of credit. “I don’t have to look for funding or keep a buffer overdraft when the payment is due to CBL. Now I know that the bank will settle it and inform me if there is a shortfall. That’s a relief for me,” Fernando said.

The system works both ways; receiving his payments from retailers digitally means Fernando can easily manage his credit risks and he feels the whole system is more secure. “I no longer need to rely on cash collectors to pick up payments from retailers. The whole process of receiving digital payments is much simpler. And it’s faster and safer than cash,” he said.

Moving Beyond FMCGs

Sri Lanka has the right infrastructure to scale up digital payments. However, overcoming behavioral challenges will be crucial to driving change. “Once retail consumers fully grasp the advantages and ease of using digital payments and are assured there are no additional costs to going digital, they will readily embrace new habits,” said Alejandro Alvarez de la Campa, Country Manager for IFC Sri Lanka and Maldives.

Lanka Pay, the country's national payment network operator, is actively encouraging businesses and consumers to use digital payments. Channa De Silva, CEO of LankaPay said, “We have seen a growth in online digital payments among both businesses and consumers over the past couple of years. We are fully aware that digital payment solutions can help improve financial inclusion through faster, more convenient and secure payments especially at retails outlets, we are putting a lot of effort to convert on-premise retail payments to go digital.”

Making digital payment technology available in Sinhala and Tamil will also go a long way in helping Sri Lankans feel more confident in the new systems. Providing paper receipts for payments until user’s gain confidence in digital payments, can help provide assurance that transactions are legitimate and traceable. FMCGs and banks can also consider providing businesses and consumers with digital financial literacy trainings to help them understand the benefits and provide incentives for adopting digital payment methods.

With the success of CBL, NDB Bank is now working with twenty other Sri Lankan companies promoting digital payments and transactions.

Although this innovative project kicked off with the FMCG sector – which has a broad reach across the distribution chains – there is potential to introduce it to other industries like agriculture, through plantations, and tourism as well.

Technology has always steered the way consumers behave, communicate and shop. Innovative schemes as this digital payment system in Sri Lanka, not only simplify business processes, but also have the potential to transform the future of finance, making it more accessible and equitable.