1. Executive summary

South Africa’s informal economy is a significant, yet often overlooked, driver of the nation’s GDP, contributing an estimated R750 billion annually (according to Capitec’s CEO) and employing roughly 30% of the workforce. This economy spans beyond the townships to include urban centres, Central Business District (CBD) traders and sectors like the taxi industry, providing livelihoods for millions nationwide. Despite its informal nature, this sector is a crucial pillar of economic activity, mainly through small, unregistered businesses like spaza shops, street vendors and informal service providers.

The informal market: Key opportunities

• Consumer spending: Households in this sector spend over R15 billion monthly on fast-moving consumer goods (FMCGs), with most transactions conducted in cash.
• Cash dominance: The informal economy is still heavily cash-based due to irregular income, high banking fees and trust in tangible transactions. However, a gradual shift towards digital payments is occurring, driven by increased mobile penetration (now at 95%).

Flash is a fintech platform that has successfully penetrated the informal market by providing accessible, low-cost digital payment solutions tailored to the needs of informal traders. Flash offers services like mobile airtime, electricity purchases and bill payments, enabling businesses that rely on cash to expand their offerings without needing a formal bank account.

• Financial inclusion: Flash empowers unbanked and underbanked traders by bridging the gap between cash and digital transactions, providing secure and reliable digital tools that cater to their specific business needs.
• Scalability: With its widespread adoption in spaza shops, Flash has proven its scalability and is poised to expand into other sectors, such as the taxi industry. Its flexibility in handling cash and digital transactions makes it a key player in driving South Africa’s informal market towards digital transformation.

Shifts in transaction modes
While cash is still the preferred medium for informal traders and buyers, the growing adoption of mobile wallets and banking apps – supported by banks like Capitec and TymeBank – creates new opportunities for fintech solutions like Flash. This shift is projected to grow at a compound annual growth rate (CAGR) of 8% – 10% over the next five years, opening up immense potential for investors looking to capitalise on the informal economy’s transition to digital.

Alignment with Pepkor’s Sustainability Strategy
Flash’s role in promoting financial inclusion aligns seamlessly with Pepkor’s Building Better Business sustainability framework, which drives sustainable growth, innovation and responsible business practices. By providing digital solutions that reduce the need for physical infrastructure and promote economic participation, Flash strengthens Pepkor’s market presence in underserved communities while driving long-term value for the company and the broader economy.

2. Understanding the informal market: South Africa’s unique township economy

The informal market in South Africa is a key part of the economy, providing income and livelihoods for millions of people. Unlike formal economies governed by strict regulatory frameworks, the informal market operates outside the official system – unregistered, often untaxed and characterised by micro and small businesses that cater to local communities’ needs. A central part of this market is the spaza shop – small, informal grocery stores typically operated out of homes or makeshift structures within townships. These shops provide essential goods and services to township residents and are a cornerstone of local commerce.

What sets South Africa’s informal sector apart from those in other parts of the world is how deeply intertwined it is with its history, socio-political landscape and unique spatial development patterns, particularly within the townships.

Why is it called ‘informal’?
The term ‘informal’ refers to businesses and transactions not officially regulated or registered with the state. In South Africa, this means small-scale street vendors and spaza shops, hawkers, mechanics, tailors and informal service providers who may not adhere to formal financial, tax or legal structures. Many operate without licenses or permits, which makes them ‘invisible’ to the formal economy despite their significant contribution to the country’s GDP.

This informal nature can be traced back to apartheid policies, which deliberately restricted economic opportunities for non-white South Africans, pushing entire populations into townships with limited access to formal employment. Consequently, these communities developed self-sustaining economies based on necessity, innovation and resilience, creating a sprawling network of informal businesses that serve the everyday needs of township residents.

How the informal market operates: Township dynamics
Townships – urban areas established during apartheid to segregate non-white populations – are at the heart of South Africa’s informal market. They function as tight-knit communities with their economic systems, often based on trust and long-standing relationships. Unlike formal retail environments, informal businesses in the townships operate with a hyper-local focus.

• Community relationships and trust: Trust is a key currency in the informal market, particularly in townships. Businesses thrive on relationships rather than formal contracts. Spaza shops, for example, are often run by people living in the same community and rely on regular, loyal customers. The ability to extend credit to customers based on personal relationships, for instance, is common practice – a system that would be almost impossible in more formal retail environments.
• Adaptability and flexibility: Informal businesses are highly adaptable. A spaza shop owner might sell products in single units or small quantities that meet customers’ daily needs, like selling a single egg or a spoonful of cooking oil. This granular approach allows businesses to cater to lower-income households for whom buying in bulk isn’t feasible. Additionally, many operate out of makeshift structures or homes, reducing overhead costs and allowing for nimble adjustments based on community demands.
• Cash-based economy with growing digital influence: South Africa’s informal market has historically been dominated by cash transactions. Cash offers simplicity, reduces financial risks such as debt, and aligns with the spending habits of many low-income households who prefer not to rely on credit or digital payments. However, increased mobile phone penetration and the expansion of fintech platforms like Flash drive a gradual shift towards digital financial services. Digital payments are gaining traction, but cash remains king in most township economies due to trust issues, limited digital literacy and unreliable infrastructure in some areas.
• Survivalist entrepreneurship: For many informal business owners, starting a business isn’t driven by a grand entrepreneurial vision, but by necessity. Township unemployment rates are high, so residents often create opportunities with minimal resources. From car washes to street food vendors, these entrepreneurs are motivated by survival rather than scale but form the backbone of township economies. This drive leads to incredible innovation, where small amounts of capital become sustaining businesses. For example, a roadside fruit vendor needs little more than a box of fruit, a spot at a busy intersection and a good relationship with local suppliers to run a successful operation.

Unique challenges and pitfalls
While the informal market is a source of resilience and economic activity, it also faces significant challenges.

• Vulnerability to shocks: Informal businesses are highly vulnerable to economic shocks without the safety nets of formal companies, such as access to credit lines, insurance or even business banking. For example, the COVID-19 pandemic devastated many small informal businesses that couldn’t access government relief funds due to their unregistered status. Similarly, inflation and rising costs of goods disproportionately affect these businesses, which rely on razor-thin margins.
• Lack of access to finance: Most informal businesses need more access to formal financing options like loans or investments. Banks typically consider them high-risk due to a lack of credit history or collateral. This leaves informal businesses reliant on personal savings or borrowing from family and friends, which can severely restrict growth and scalability.
• Regulatory and infrastructural gaps: Operating outside formal systems means informal businesses often face challenges related to infrastructure. Many townships face infrastructure challenges, such as poor road networks, unreliable electricity and limited access to water. These factors not only make day-to-day operations difficult but also hinder the ability of these businesses to scale up. Additionally, while there is potential for formalisation, many business owners fear that becoming formal might bring costs they can’t afford, such as taxation and compliance requirements.
• Fragmented markets: The informal economy is highly fragmented. Each township or local market might operate independently, with different consumer behaviour and preferences. This makes it difficult to create uniform growth and expansion strategies. However, it also opens up opportunities for tailored, hyper-local solutions, such as those offered by fintech platforms like Flash, which have successfully penetrated specific sectors like spaza shops.

What makes it work
Despite these challenges, the South African informal economy works because it meets millions of people’s immediate, day-to-day needs in a way that formal markets often cannot. The informal sector’s resilience lies in its ability to adapt quickly, maintain low costs and operate within community-driven trust systems.

• Proximity to consumers: Informal businesses are embedded in the communities they serve. They are not just commercial entities but are integral to the social fabric, often providing goods and services within walking distance of people’s homes.
• Low operational costs: Many informal businesses operate out of homes or temporary structures, so their overheads are minimal. This allows them to survive on low margins while still providing essential services.
• Meeting essential needs: Whether selling airtime, groceries, or running a hair salon, informal businesses often cater to basic, non-negotiable needs. These businesses continue to operate even in challenging economic conditions because they are the backbone of the daily lives of many South Africans.

3. The economics of South Africa’s informal market: A broader perspective

South Africa’s informal market is a complex and widespread economic force that extends far beyond the townships, encompassing various sectors that operate on the periphery of the formal economy. The informal sector touches all corners of the economy, from CBDs to taxi rank traders and the sprawling taxi industry. This diverse market includes a mix of urban street vendors, market traders, artisans and transport providers, and it contributes significantly to the country’s economic activity.

Economic contribution and employment
The informal sector contributes an estimated R300 billion annually to the national GDP. It is a cornerstone of the South African economy, employing roughly 30% of the workforce. This is not just a ‘township economy’ but a broader informal economy permeating urban centres, peri-urban areas and rural zones.

For example, the taxi industry – one of the largest informal sectors – generates billions in revenue annually. Taxi ranks, often found in major cities like Johannesburg and Cape Town, serve as economic hubs where informal traders sell goods to commuters. These sectors function without formal structures yet remain deeply embedded in South Africa’s daily financial life.

Consumer spending and cash dominance

Households within these informal markets, including townships and urban centres, spend over R15 billion monthly on fast-moving consumer goods. Most of these transactions are still conducted in cash. Cash remains the lifeblood of the informal market, mainly due to several key factors:

• Irregular income: Many individuals working in the informal sector have irregular income streams, making it challenging to budget for long-term expenses. Cash allows for immediate, flexible spending, as people tend to buy what they can afford.

• Cash for now, save for later: The informal market operates on a ‘spend for now’ basis, with consumers purchasing only what they need and saving what little they can. This is often because it’s unclear when the next source of income will come.

• Preference for cash over digital: Even though digital transaction options are increasing, cash remains the preferred medium of exchange. Several factors drive this preference:

• • Unbanked and underbanked: A significant portion of the population remains unbanked or underbanked. For many, banking fees in South Africa are prohibitively expensive.

• • Security concerns: Cash is seen as more secure and tangible, especially when card fraud or scams are prevalent.

• • Familiarity and simplicity: Cash is straightforward to use, and for those with limited financial literacy, it makes budgeting and managing day-to-day expenses easy. While digital solutions are growing, some, especially older generations, still view them with suspicion.

4. Shifts in transaction modes

While cash remains the dominant medium of exchange in South Africa’s informal economy, there has been a gradual shift towards digital transactions. The increasing penetration of mobile technology and innovations from fintech companies and banks drives this shift. Fintech platforms like Flash and banks like Capitec and TymeBank are leading the charge in transforming how informal traders and consumers manage their finances.

• Mobile penetration and digital tools: South Africa’s mobile penetration rate, now over 95%, provides the foundation for adopting mobile financial services​. Many informal traders and consumers are beginning to use mobile wallets and banking apps to facilitate transactions, though cash still plays a significant role.

• Banks innovating in the informal sector:
  • Capitec and TymeBank have been instrumental in offering accessible, low-cost banking services tailored to the needs of the informal sector. These banks provide easy-to-use digital banking platforms that allow individuals with minimal income to open accounts, manage funds and make payments with reduced fees compared to traditional banks.

• • Capitec, in particular, has built a reputation for offering low-cost, simplified banking services that appeal to the unbanked and underbanked segments of the population. These services make it easier for consumers to move away from cash.

• • TymeBank is a digital-only bank that requires no physical branches, which makes banking services more accessible and convenient for people in remote areas or those who are uncomfortable with traditional banking environments. Their emphasis on affordability and ease of access makes digital banking more attractive to the informal sector.

• Cash-digital transition: The transition from cash to digital transactions could have been faster despite these innovations. Cash still appeals to consumers and traders in the informal market due to its simplicity, tangible nature, and the avoidance of banking fees. However, platforms like Flash are making it easier for traders to accept digital payments while continuing to handle cash transactions. This dual capability helps ease the transition to digital without disrupting the cash-based systems that traders are accustomed to.

• Buyer behaviour: The shift towards digital payments is also influenced by changing buyer behaviour. Consumers in the informal economy tend to make small, daily purchases based on what they can afford at the moment, often preferring the certainty of cash for immediate needs. However, as digital payment solutions become more widespread and trusted, consumers are slowly adopting mobile payment systems, especially for recurring services like airtime and electricity purchases.

5. Financial inclusion: Bridging the gap

One key challenge in South Africa’s informal economy is financial exclusion. Many people remain unbanked or underbanked, unable to access formal financial services due to the high cost of banking, lack of required documentation or mistrust in financial institutions. This financial exclusion prevents many from participating fully in the economy, limiting their ability to save, invest or scale their businesses.

Flash’s role in addressing financial inclusion
Flash has emerged as a crucial enabler of financial inclusion within the informal economy by providing low-cost, accessible fintech solutions that address the specific needs of informal traders.

• Access to digital payment solutions: Flash provides spaza shops and other informal businesses with a platform to process digital payments, offering mobile airtime, electricity purchases and bill payments. This allows those traditionally relying on cash to expand their service offerings without access to a formal bank account. This diversifies their income streams and enables them to attract more customers who prefer or are beginning to use digital payment methods.
• Bridging the cash-digital divide: By enabling merchants to handle cash and digital transactions, Flash plays a pivotal role in easing the transition for businesses and consumers still primarily reliant on cash. Traders can continue operating in a cash-dominant environment while adopting digital solutions incrementally, reducing friction and building trust in the system over time.
• Empowering unbanked traders: Flash’s tools offer informal businesses, many of which are run by unbanked individuals, the opportunity to participate in a more formalised financial system. Traders who might have been wary of traditional banking systems now have access to secure, low-cost digital services that cater to their business needs without requiring them to change their cash-based habits immediately.

6. The cash-to-digital transition and growth projections

While cash continues to dominate South Africa’s informal market, the Lesaka SA Informal Economy Digitalisation Index projects a steady growth in digital transactions over the next few years.

• Increased mobile penetration: With mobile phone penetration at 95%, consumers and traders are gaining greater access to mobile-based financial services. As the informal market becomes increasingly digitised, the reliance on cash will gradually decrease, opening up new opportunities for businesses to operate more efficiently and securely.
• Projected digital payment growth: Digital transactions in the informal sector are expected to grow at a CAGR of approximately 8% – 10% over the next five years as fintech platforms like Flash expand their reach. This shift is supported by consumer demand for more secure, convenient and accessible financial tools.
• Innovative fintech offerings: Flash is at the forefront of this transition, continuously developing fintech solutions that cater specifically to the needs of informal traders. These innovations include features allowing traders to track real-time sales, manage inventory and settle payments instantly. As more businesses adopt these digital tools, the informal economy will benefit from increased transparency, efficiency and scalability.

7. Flash’s adoption in spaza shops and scalability for other sectors

Flash’s penetration in spaza shops, which serve as essential retail hubs in townships and informal settlements, demonstrates its ability to scale across various sectors of the informal market. These shops are more than just local grocery stores; they are multifunctional community centres where residents can purchase essential goods and services like electricity and airtime.

• Spaza shop penetration: Flash has successfully integrated its digital payment platform into spaza shops, allowing them to offer various financial services beyond traditional retail transactions. Shop owners can now process payments for mobile airtime, electricity and other services, making these outlets one-stop shops for their communities.
• Scalability for other sectors: Flash’s success in spaza shops signals its potential scalability to other sectors within the informal market. The taxi industry, for example, represents a significant opportunity for digital payment solutions, especially as operators look for more efficient ways to manage fare collections. Flash’s ability to provide customised digital tools for diverse market segments positions it as a key player in the broader informal economy.

8. Alignment with Pepkor’s sustainability and retail strategy

Flash’s digital solutions enhance financial inclusion and align with Pepkor’s Building Better Business sustainability strategy, highlighting sustainable growth through innovation and responsible business practices.

• Supporting sustainable economic participation: By empowering informal traders with digital tools, Flash drives sustainable economic activity that benefits small businesses and the wider community. This aligns with Pepkor’s commitment to creating long-term value in underserved markets by supporting the financial inclusion of historically marginalised communities.
• Environmental benefits: Flash’s digital solutions reduce the need for physical infrastructure, such as banks or formal retail spaces, by enabling businesses to operate digitally from their homes or existing informal structures. This reduces the environmental impact of building and maintaining physical locations, a key component of Pepkor’s sustainability goals.
• Strengthening market presence: Flash also helps Pepkor reinforce its market presence within the informal economy, particularly in areas already served by its retail brands. By offering affordable, accessible financial services, Flash drives customer loyalty and fosters stronger connections between Pepkor’s formal retail operations and the informal market.