PwC warns Finance Bill 2026 could make digital payments costlier

Kenya's proposed Finance Bill 2026 contains a measure that could fundamentally reshape the economics of digital payments across East Africa's largest economy. PwC has issued a formal warning that subjecting merchant service fees and card interchange fees to withholding tax would create a cascading cost burden on businesses and consumers alike, threatening the cashless transaction momentum that Kenya has built over the past decade.

## What exactly is the withholding tax proposal on card payments?

The Finance Bill 2026 seeks to impose withholding tax on two critical payment infrastructure components: merchant service charges (MSC)—the fees retailers pay to accept card payments—and interchange fees, which are the charges that acquiring banks pass to issuing banks for facilitating transactions. Under the proposal, financial institutions would be required to withhold tax at source on these payments before they reach payment processors, merchants, and acquiring banks. This represents a fundamental shift in how Kenya taxes the digital payments ecosystem.

The Kenyan government's rationale centers on broadening the tax base and capturing revenue from the fintech and payments sector, which has grown exponentially. The Central Bank of Kenya reports that mobile money transactions alone exceed 40 million daily transfers, while card-based payments have tripled in volume since 2018. However, PwC's analysis suggests the government may be underestimating the secondary effects.

## How would this tax increase costs for consumers and businesses?

PwC's economic modeling indicates that withholding tax on these fees would compress merchant margins and reduce the incentive for retailers—especially small and medium enterprises (SMEs)—to offer digital payment options. When accepting card payments becomes more expensive, merchants typically pass costs to consumers through higher prices or transaction surcharges. This undermines Kenya's digital economy transition and could reverse years of financial inclusion gains, particularly in rural markets where digital payments still compete with cash.

For payment processors and fintech companies already operating on thin margins in Kenya's competitive market, the tax would reduce reinvestment capacity for innovation, security upgrades, and expansion into underbanked regions. Companies like Pesapal, Flutterwave, and traditional acquirers like Equity Bank's payment division would face margin compression at precisely the moment when competition from global players (Square, Stripe) is intensifying.

## Why is timing critical for Kenya's digital economy?

Kenya positioned itself as Sub-Saharan Africa's fintech hub, attracting regional payment flows and venture capital. A tax that increases the cost of digital transactions sends a contradictory policy signal—the Central Bank and Ministry of Finance have publicly committed to reducing cash dependency and expanding financial inclusion, yet this bill taxes the infrastructure enabling that shift. Regional payment flows may reroute through Uganda or Rwanda if Kenya becomes materially more expensive.

The Treasury argues revenue is essential given fiscal pressures and external debt obligations. However, PwC suggests the dynamic revenue loss—fewer transactions, lower merchant adoption—could exceed static projections. A 15-20% increase in payment costs could reduce transaction volumes by 5-8%, offsetting tax gains.

**Market implications:** Tech-focused equities on the Nairobi Securities Exchange (NSE), particularly Safaricom and equity banks, would face pressure. Diaspora payment flows—critical for remittance-dependent counties—may shift to competing corridors.

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