Regenesis of SA payments | What needs to change?

Regenesis of SA payments What needs to change?

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Contents

Executive summary...... 2

Introduction...... 5

Is South Africa behind? ...... 6

Chapter 1 – An instant South Africa...... 9

Chapter 2 – Digital identification...... 16

Chapter 3 – Opening up the national payment system...... 22

Chapter 4 – Mobile payments...... 28

Chapter 5 – Digitising the informal sector...... 35

Chapter 6 – Enabling change...... 41

Endnotes...... 46

Contacts...... 48

About the report...... 49

01 Regenesis of SA payments | What needs to change? Regenesis of SA payments | What needs to change?

Executive summary

Deloitte South Africa, in conjunction with iCombine, commenced writing this insights paper The research found the most prominent and on payments by conducting research across global territories where developments and trends South Africa-relevant trends to be instant appeared the most impactful. The countries payments, centralised national identification, focused on were Australia, Canada, China, India and the United Kingdom (UK). open application programming interface (API) The research found the most prominent and South and mobile payments. Africa-relevant trends to be instant payments, centralised national identification, open application programming interface (API) and mobile payments.

With the trends selected, the team interviewed 34 payments experts from 22 different institutions in South Africa (SA), ranging from the regulators and the Payment System Operator (PSO) through to the retail banks, neo-banks, payment service providers, financial technology providers, e-commerce payment service providers and large physical retailers.

Respondents were asked about the current state of the South African National Payment System (NPS), the selected global trends, and their relevance in a South African payments context. The objective was to identify areas of consensus and glean further insights into current and foreseen changes in payments and how the industry should respond.

Feedback showed that South Africa will face a period of unprecedented change in the payments market over the next six years, as the South African Reserve Bank (SARB) and industry players move towards the stated Vision 2025 goals and review the NPS Act 78 of 1998. The proposed changes indicate that the SARB intends to drive financial inclusion, open access to the NPS, increase efficiency and lower costs. In addition, the SARB intends to shift the focus from regulating banks, to more explicitly regulating the activities of participants.

Much like Deloitte has seen in other regions, there may be early challenges in establishing the criteria for participation, evaluation and ongoing review by the regulator. Also, similar difficulties may arise in the designation, licensing and monitoring requirements needed for new settlement participants and payment service providers, among others.

02 02 Regenesis of SA payments | What needs to change?

Interviewees were encouraged by the mobile payments. For example, achieving a government initiatives like National Health changes that the SARB is driving as well as reduction in data costs to support specific Insurance (NHI). the level and scope of industry engagement low cost payment transactions may be being conducted. made possible by having the Department Deloitte foresees that many factors may of Telecommunications & Postal Services, accelerate the adoption of open banking in Instant payments was identified as a key National Treasury and SARB collaborate on South Africa. These include the regulator’s area that could make significant impacts viable options. tendency to model the UK regulations, on the way South Africans make payments. the potential inclusion of overlay services Exactly how this development will be In addition, a recommendation arising in the South African payment system achieved received mixed views. Many from the review of the NPS Act, which infrastructure, the impact of the Protection suggested that the existing Real-Time addresses the provision of retail payment of Personal Information Act (POPIA) 4 of Clearing (RTC) system, coupled with overlay services/activities where money is not due 2013 and the fact that most institutions are services, could be a short-term solution, and eliminates the need for non-banks already working on APIs. All interviewees while a more future-proof solution is to partner with banks for sponsorship, indicated a willingness to participate in sought for longer run adoption. may encourage increased non-bank an industry-wide open API pilot to inform participation in future. Non-bank inclusion policy and yield beneficial results by In conjunction with this topic, the issue could be further driven by the SARB addressing areas where standards are of cash usage and cost of cash was often providing narrow activity-based licences required, between banks, fintechs and raised. It was suggested that to successfully to non-banks, similar in nature to Payment retailers. digitise payments in the informal sector (a Service Banks in Nigeria and India. Such crucial component of financial inclusion), a move could increase accessibility to low The use of incubation models to effect electronic payments need to afford cost payment systems and incentivise change was favoured by many interviewees similar attributes to cash. In other words, participation in cross-border activities. as a means of fast-tracking innovation and payments should be simple, low-cost, implementation, while simultaneously real-time, widely acceptable and offer the Interviewees expressed how regulation informing policy based on actual practice. added benefit of an irrevocable medium of often hampers and constrains their ability Learnings from DebiCheck1 and Project exchange for all participants. to offer payment solutions and innovate. Khokha2 have highlighted the need for The Financial Intelligence Centre Act (FICA) time-restricted, lean and narrow vertical A high incidence of fraud and lack of trust 38 of 2001 was often raised as an example, pilots that include stakeholders across the was raised as a key impediment to the despite recent amendments to the Act. payments sector. adoption of electronic payments, which Regulations of this nature introduce friction drives the call for more regulatory and to the NPS and impose burdensome Overall, interviewees, as participants of enforcement efforts. Achieving inclusion, processes on all participants, including the NPS, seem enthused and expectant. interoperability and economies of scale consumers. South Africa is poised for a new era in the requires the establishment of nationally NPS evolution that has potential to increase accepted industry standards that also Deloitte considers that the successful the flow of funds, boost financial inclusion, adhere to global standards. This is of implementation of a national central digital modernise core systems and their particular interest to those wishing to see identity (ID) database could contribute to accessibility, and impact payments for the growth in mobile payments and inter- creating a central trusted resource much long-term good of the country’s economy. regional cross-border payments. like India has achieved with Aadhaar. This central database would leverage existing Key challenges highlighted for mobile national databases such as the Home payments were the high cost of data, lack of Affairs National Identification System interoperability, unreliable connectivity, (HANIS), South Africa Social Security the absence of standards and overly Agency (SASSA), FICA and the Regulation complex apps. of Interception of Communications and Provision of Communication-Related Deloitte believes that broader stakeholder Information Act (RICA) 70 of 2002. It could involvement, inter-government be accessed by accredited participants, collaboration and regulatory alignment used to enable trusted payments more are needed to facilitate the growth of efficiently and assist with various other

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Regenesis of SA payments | What needs to change?

Introduction

The world is in a state with non-bank technology innovators. No Based on open and direct engagement region is the same, nor is any regulator, with stakeholders in the South African of change. demographic, economy, or payments payments industry, this paper addresses infrastructure. four major trends in payments that are Traditional business models and, in turn, effecting substantial change both globally supporting payment structures are being Across the world this change is taking and locally: instant payments, centralised transformed. Globalisation, through internet place for different reasons. In some national identification, open API and mobile adoption, has forced a relook at how markets, payments reform aims to address payments. businesses acquire and retain customers. competitiveness; in others, increased customer satisfaction through immediacy, This paper goes on to explore these trends Emerging markets are innovating to realise ease and accessibility of payments are and their relevance in a South African economic and financial inclusion in an drivers. In South Africa, one key reason for context and provides various viewpoints and increasingly competitive marketplace. payments reform is the need for deeper recommendations. Included in these innovations are the birth financial inclusion, something that the SARB of digital IDs, mobile replacing cash and the has placed high on the agenda. growth of peer-to-peer lending. Some of these innovations are taking place outside of the financial services sector, for example, Alipay and WeChat in China. Such innovations are forcing the incumbent financial sector Figure 1: Countries referenced as good use cases for South Africa to follow players to address and adopt innovative 34% Percentage of entities referencing each country practices. 35% 30% In addition, the rise of fintechs is changing 25% the dynamic of the payments landscape. 20% 19% Increasingly, established banking and 15% payments entities are partnering with 10% 9% 9% 9% fintechs to provide innovative services to 6% 6% their clients. 5% 3% 3% 0%

A new era in payments welcomes innovative India UK China Nigeria Ghana Australia Estonia Canada Singapore

solutions such as third-party wallets, Source: Interviews with 22 South African payments entities, October to December 2018, Deloitte analysis biometrics and authentication, tokenisation, cloud computing, the Internet of Things, distributed ledger technologies, artificial intelligence and robotics, all of which affect interaction with payments.

The advancements of technology and the accessibility to advanced platforms, such as Amazon and Google, have opened trading on a global scale. The mobile is the point of sale (POS) and anyone can make or receive a payment instantly, effortlessly and at little to no cost. Yet, crime, both physical and in cyberspace, is on the rise, with fraud and ID theft being a greater threat than ever before.

Around the globe, regulators are opening the payments system, clamping down on interchange fees and enabling collaboration

05 Regenesis of SA payments | What needs to change?

Is South Africa behind? A global industry view

In the 1980s, South Africa’s Saswitch was a world first, allowing customers at any bank to withdraw their money from any bank automated teller machine (ATM). In 1998, South Africa implemented its real-time “There is innovation out there, but it is gross settlement system (RTGS), called the taking place within the individual bank South African Multiple Option Settlement (SAMOS). SAMOS enabled banks to settle entities rather than in the core.” their obligations on a real-time or an arranged batch basis, in line with international best John Anderson, practice. Head: Industry Payments, Standard Bank South Africa (SBSA) Several interviewees stated that South Africa’s payment system was rated among the best in the world during the early 2000s. In 2006 South Africa has indeed been innovating, South Africa pioneered one of the first inter- but mainly in silos. Several financial bank RTC payment systems. Multiple debit institutions have shown and continue to push services followed in the same year, as show great innovation. However, there is little a response to a need for creditors to collect collaboration between entities, which limits repayments. (See page 7 for a timeline that the industry-wide adoption of innovative lays out the developments in South African practices because of a lack of interoperability. payments from the 1980s to the present.) Interoperability at an industry level is the key to driving electronic transaction volumes and greater customer benefits.

Figure 2: Views on whether the South African NPS has fallen behind in payment innovations when compared to global markets “The people that kicked off the NPS and Saswitch in the 1980s were very Share of entities who agreed or disagreed that the SA NPS has fallen behind in payment innovations forward thinking. We have one of the best electronic banking systems in the world. One of the things that has held

our country strong and steady has Yes been our NPS.” 22.7% No Rick Wheeler, 63.6% Group Retail Systems Manager, SPAR3 No Response 13.6%

However, even with the recognition of a great NPS, the majority (63.6%) of interviewees agreed that the NPS has fallen behind other global markets lately when it comes Source: Interviews with 22 South African payments entities, October to to payments innovation as shown in Figure December 2018, Deloitte analysis. Not adding to 100% due to rounding. 2. Regardless of the views, the global expectations of a NPS are propelling the South African payments industry towards change.

06 Regenesis of SA payments | What needs to change?

South Africa Payments Timeline

80s 90s 00s 10s •• 1981: First debit •• 1992: First electronic •• 2003: EMV compliant •• 2013: All ATMs and POS orders are cleared POS services POS terminals go live terminals become EMV through the compliant •• 1993: BankservAfrica •• 2004: The SA Automated Clearing is founded to provide Rand accepted as •• 2013: The NPSD commit Bureau (ACB) interoperability Continuous Linked to comply with Principles •• 1985: Saswitch system Settlement (CLS) for Financial Market •• 1995: SARB NPS Strategy goes live currency Infrastructures (PFMIs) “Blue Book” published •• 2006: RTC system •• 2014: Revised ATM •• 1995: PASA is launched interchange rates effective established •• 2006: Early debit order •• 2015: Effectiveness of PASA •• 1996: Internet banking payments go live reviewed by NPSD launched •• 2006: Banking Enquiry •• 2016: Revised card •• 1998: SAMOS goes live by Competition interchange rates effective •• 1998: NPS Act Commission on •• 2018: PASA launches Project promulgated conduct of retail Future banking in SA •• 2018: DebiCheck system goes •• 2008: Banking live Enquiry publish key recommendations •• 2018: NPSD publish Vision 2025

•• 2018: NPS Act Review commences 07

Regenesis of SA payments | What needs to change?

Chapter 1 An instant South Africa

A fast payment system is a domestic, inter- and WhatsApp Pay. The mainstream banking payment service providers did not have bank, purely electronic payment infrastructure infrastructure was being used to enable social payment clearing licences. NUCC created a into which irrevocable funds are transferred payments. In each social platform, consumers clear boundary between online payment and from one bank account to another and where needed to register their bank account so that clearing services of Third-Party Providers confirmation back to the originator and payments on the platform could be sourced (TPPs) and improved financial compliance in receiver of the payment is available in one from and processed to that same account. online payments with specific operational minute or less. guidelines. This approach pushed the adoption of digital Globally, economies in various stages of payments in a society that had experienced a The interventions by government improved development have either replaced or are busy sudden withdrawal of cash. While this highly the transparency and interoperability of replacing daily batch payment systems with debated big bang approach to withdrawing financial transactions, creating more real-time systems. These systems execute cash left many casualties in its wake, the visibility and aiding in preventing fraud and payments in seconds, carry richer data (to design of the UPI, including its rules and criminal activity. align with the global standard, ISO20022) and layered architecture, has lent itself to an are architected for flexibility to meet the needs uptake in instant digital payments. There has China has leapfrogged developed countries of the future digital economy. also been an increase in competition and into embracing mobile payments owing to service quality from the social platforms. public willingness to try out a new platform, a APIs provide for further enrichment of faster lack of red tape and having a less developed payments platforms through the enablement UPI crossed the Rs1 trillion (US$14 billion) financial system at the outset. of overlay interfaces, through linkage to social milestone for monthly value in December media and chat platforms, through fraud 2018, growing nearly eight times over the These examples show how fast payment detection and integration to recognised previous year. It also achieved a monthly systems, overlaid with mobile payment national identifiers, as well as remote volume of over 600 million, four times the services, are stimulating economies by authentication services. These enhancements volume of UPI transactions in December 2017, replacing bank notes, reducing card usage, provide for ease of use, reduce friction and according to data released by NPCI.4 enabling businesses of all sizes and sectors, assist faster payments. providing a service to consumers “as quick Social payments unleashed in China as cash” and matching the demands of the Instant payments propel India’s market China is another example of explosive instant digital world. In India the regulatory driven Universal payment transformation, with the market Payments Interface (UPI) pushed by the dictating the need and timing of instant National Payments Corporation of India payments. Two decades ago, the internet (NPCI) was ground-breaking. Propelled by a boom and the resulting proliferation of social Fast payment systems, demonetisation goal to curb corruption by media saw the birth of social payments overlaid with mobile addressing the volume of black money in enabled by Alipay and WeChat. The Chinese circulation, in 2016 the Reserve Bank of India government took an arm’s length approach to payment services, are removed Rs500 and Rs1 000 notes which regulation and allowed the market to develop. accounted for 86% (in value) of the total stimulating economies currency in circulation at that time. From 2013 to 2016, the number of transactions made through non-banking by replacing bank Having combined the accessible and prevalent mobile apps in China increased from 3.7 billion notes, reducing card national identity base (Aadhaar) and their real- to more than 97 billion. This resulted in an time payments service, IMPS (in place since annual growth rate of over 195% in mobile usage, enabling 2010), the NPCI released its UPI – a universal transactions, according to a study by Ipsos.5 API and single integration point with access to businesses, and these services and more. Due to the rapid development of the online providing a service to and mobile payments market, mostly initiated UPI was initially used to offer a government- by the non-bank sector, the Nets Union consumers “as quick sponsored mobile service, BHIM, but it Clearing Corporation (NUCC) for non-bank really took off once it was used to enable payment institutions was established in 2017 as cash”. payments within a range of third-party social by the People’s Bank of China (PBOC). NUCC apps: PayTM, Google Pay (previously Tez) was formed because many of the non-bank 09 Regenesis of SA payments | What needs to change?

How does South Africa perform? Illustration 1: Faster Payments Innovation Index (FPII) Fidelity National Information Services Inc (FIS) developed the Faster Payments Innovation Overlay services - API or QR code Remittance information Index (FPII) in 2014 to create a comparative Optional features maximising 5 Alternative identifier (aliases) rating system where diverse payment schemes customer value Batch and individual payments around the globe could be compared. FPII Fast settlement measures not only the speed with which 4 Push and pull payment capability transferred funds become available, but also Universal access how the scheme in question is applied in its 3 Highly desirable features ISO standard local market (see Illustration 1). enchancing customer value (ISO 20022 or 8583) 24/7 availability The FPII rates South Africa’s instant payments 2 capability at 3. India leads the way and is the Interbank Account to account only country with a rating of 5.6 This shows 1 Requested features < 1 min end-to-end that South Africa’s RTC system has room for Irrevocable improvement. Source: Flavors of Fast 2018 Report, FIS Could instant payments replace cash? Studies have shown that in both India and South Africans have shown an appetite A study released by Mastercard estimates China the growth in real-time payments for instant payments. For example, in that physical cash usage cost consumers has coincided with a reduction in the use of September 2018 First National Bank (FNB) R23 billion or 0.52% of South Africa’s GDP cash. Cash offers many benefits – for most reported that R21 billion had been sent in 2015. Despite an increase in the number consumers, cash is immediate, simple to use, via its eWallet platform in the 12 months of banked adults from 63% in 2011 to 77% easy to count and budget, free to exchange to June 2018, generated from 6.1 million in 2015, cash transactions still accounted with no hidden fees and can generally be active wallets, of which nearly two million for more than 50% of the total value of all trusted. In addition, using cash requires were regular users. This demonstrates consumer transactions in the country.8 neither digital literacy nor access to the the important gap eWallet has bridged internet through cellular data or WiFi. for consumers who need low cost instant According to a Moody’s Analytics study payment solutions.7 electronic payments added US$296 billion However, there are also risks inherent in in real terms to GDP across 70 countries the use of cash. These include loss, theft or studied between 2011 and 2015. That is counterfeit fraud, and an inability to create a equivalent to the creation of about 2.6 track record for purposes of securing credit million jobs on average per year over applications. the five-year period, or about 0.4% of total employment in the 70 countries.9 Digital payments are evolving at a rapid pace to “The market has expressed scope This shows that increasing the use of align with the benefits of cash and address its electronic payments and reducing the cash for growth and the need to extend pitfalls, while keeping up with the consumers’ in circulation has a direct impact on the growing expectations of omni-commerce (the the instant payment capability to growth of a country’s GDP. ability to pay with the same method whether broader use cases and transaction in-store, online or via mobile). types, such as low value micro Deloitte’s view is that in the short to payments. Instant payment is medium term, instant payments could In the marketplace, the convenience of instant a top priority, as we enter the operate alongside cash, increasing financial payment reduces the need for customers shared and digital economy. The inclusion with greater adoption. and merchants to carry cash, resulting in a sending and receipt of payments in reduction of associated costs such as cash Could instant payments replace real time matters and should not handling, security, transport, leakage caused Electronic Funds Transfer (EFT)? by theft and opportunity costs. be constrained and reserved for One of the biggest frustrations in South business related transactions or African banking is the transfer time for local high value payments.” inter-bank EFT payments. It can take up to two business days to process a payment Arif Ismail, between banks. Head: Fintech, SARB

10 Regenesis of SA payments | What needs to change?

Furthermore, the potential for error exists. Low cost EFT batch payments were designed transactions are grouped with others for Consumers who use this service need to for high volume payments, while instant batch processing and settlement all at know the recipient’s correct bank details; if a transfers through the RTC system were one time. mistake is made, there is no way of knowing designed for low volume, single transactions. prior to making the payment. This can result Therefore, merchants may have shipped the in payments made to closed or incorrect Inter-bank instant payments could goods, but they only get their money later accounts, disputes, incorrect allocations and significantly accelerate the velocity and and there is also the risk of chargebacks and time-consuming reversals. reliability of payments in South Africa. credit card fraud.

Traditional EFTs are collected throughout Despite the benefits that instant payments In addition, card processing comes the day and processed in batches at certain present, it is Deloitte’s view that there is with associated costs such as acquiring times. If the customer’s instruction has still a role for batch EFT. EFT is a viable commissions and bank charges for the card- missed a cut-off time, the payment will follow payment mechanism for high volume, batch acquiring devices and related infrastructure. in the next batch run or fall into the two-day payments, as is seen in the UK market where payment period. faster payment is the ubiquitous payments In Europe, instant payments are threatening approach. card products because customers want Instant transfers are available between to get services and make payments different banks, but customers are charged Could instant payments replace card? immediately. Merchants benefit by being a premium fee to use this service. According Initially, cards operated by either “swipe” or assured of instant settlement and pre- to banks, this fee covers additional risk and “swipe plus sign”. Rampant fraud necessitated emptive fraud detection, while suppliers want costs associated with immediate settlement. the card schemes increasingly assessing certainty around payments. and evolving the levels of complexity and sophistication, resulting in “swipe plus PIN”;10 As in China, instant payments provide an then “swipe or inject plus PIN”; then “swipe or alternative to card payments, with additional inject or tap plus PIN”, depending on value. cost savings for participants. A mobile In the online space, there are various ways to app enabled with instant payment makes secure e-commerce payments, for instance, a electronic payment more accessible to those “Many factors have prevented RTC One Time PIN (OTP) or remote authentication, who either do not qualify for cards or cannot from reaching its full potential. One such as 3D Secure. In addition, other afford them. of these is the high fees charged technologies such as Payment Card Industry (PCI) and tokenisation have evolved to Instant payments represent a new set of by many of the banks for the encrypt card and related data in flight and at “rails” on which payments can be made, service, which is definitely having a rest. facilitating the development of innovative dampening effect – apart from the products that can compete with cards both fact that many customers are just Contactless payments have been gradually online and in-store. Provided that such not aware of this option. Fortunately, gaining traction and mass market adoption. services are cheaper to use and as widely at least two banks have in recent These frictionless payments at the POS are accepted as cards, card products may months introduced much lower as simple as “tapping – sometimes plus PIN”, find themselves cut out of the payments like performing a “one-click” checkout when value chain. charges for real-time payments, shopping online. and they have been rewarded by a massive take-up by their customers.” Similarly, contactless card payments and transactions use the smartphone wallet Walter Volker, solutions such as Apple Pay, Samsung Pay CEO, Payments Association of and Android Pay. South Africa (PASA) “The best days of the classic card Consumers perceive instant or near real- time payments at a POS in a shop, online product are already behind it. In the When customers choose to pay for or on their smartphone when making a future, it’s unlikely to be the winner immediate settlement, the funds are card payment. The reality is that the funds in the scramble for new volume as cleared in around 60 seconds and there are transferred several hours or even a mobile replaces cash.” are no windows for reversals in the case of day or two later. After the issuing bank attempted fraud or user error. authorises the card transaction by sending Chris Hamilton, an authorisation code to the merchant (in CEO, BankservAfrica real time), the settlement stage begins. These 11 Regenesis of SA payments | What needs to change?

Small service businesses, such as delivery parties have differing opinions on this. the need for cards, the consumer benefits services, plumbers and electricians, can Merchants are likely to support instant EFT, are likely to keep cards as a key part of the benefit from faster payments by eliminating given the costs of the interchange of card payments offering in the short term. the complexities of carrying card machines, that they typically carry. For banks, however, working with card-acquiring devices, or there is less incentive to move away from Illustration 2 demonstrates how cash, EFT, waiting and trusting as they do for payments cards, given the interchange value to be card and instant payments currently compare to clear timeously via EFT for services gained. Consumers benefit from the loyalty from a South African consumer perspective rendered. programmes that most card schemes offer. and why cash is still dominant.

Could instant payments threaten cards? Deloitte is of the view that despite the many Within the payments ecosystem different reasons why instant payments could remove

Illustration 2: Comparison of payment methods from a South African consumer perspective

Instant Category Description Cash EFT Card Payment

Low cost Inconsiderable to most consumers

Simplistic Easy to understand and budget

Real time Settled instantly

Interoperable Accepted everywhere

Availability Easy to obtain

Usability No electricity, phone, battery, data or connectivity required

Trusted Provides certainty of payment

Safety & Security Makes it more difficult to become a victim of crime & fraud

Anonymity & Tax Untraceable and allows for tax avoidance

Score 8 6 6 3

Source: Deloitte analysis, 2019

Why has RTC not gained traction in In South Africa, RTC volumes are relatively South Africa? low. Currently, RTC transaction volumes South Africa was one of the first countries to amount to a mere 3% of all EFT transactions implement instant payments back in 2006. (255 million RTC payments as against Built for the instant clearing of high value, 8 460 million EFT credits in 2016), which “Banks have different names for low volume transactions, the South African poses questions as to why this capability RTC in South Africa and it delivers RTC system processes transactions within 60 has not been utilised more. Is the current seconds using a two-pass message process, architecture sufficient? Do the RTC rails need differently depending on the bank. on an ISO8583 message protocol. An account updating? Does RTC meet the requirements As a product, it is all over the shop. verification is done on each transaction of the Fourth Industrial Revolution? Nobody knows what it is and what to safely deliver irrevocable payments. they get when they use it. Industry Implementation of the service is optional, needs to address the elements with banks participating as issuers, acquirers of the problem first and then the or as both. pricing. RTC should be a branded product akin to Visa – customers need to know exactly what they are getting.”

Chris Hamilton, CEO, BankservAfrica

12 Regenesis of SA payments | What needs to change?

Interviewees highlighted the following challenges that have hampered the uptake of RTC in South Africa:

•• Not all banks are using the system, which has resulted in a lack of ubiquity. “It is essential for us that the SARB •• Posting time is not mandated and therefore sets the rates for RTC interchange, not uniform across all banks. and all future payment innovations. Otherwise, like with EFT, we have to •• High pricing of the RTC service has led to limited use among businesses and conduct bilateral negotiations with consumers that view the service as a all the participating banks. Bilateral premium value-add, only to be used for negotiations are not easy for a small urgent transactions. bank as the big banks have a volume •• The current architecture does not lend incentive to maintain high prices itself readily to innovation. and can use the bilaterals as a way of keeping small banks ‘out’.” •• The use of ISO8583 messaging prevents the carrying of the additional data Gary Cook, necessary for rigorous treatment of Head of Transactional and Value Added transactions and value-adds. Services, TYME Bank •• There is no national brand name or standard customer service experience.

Designing a payments future In the interviews, all 22 entities recognised the importance of instant payments, and the associated global trend. There was enthusiasm about the SARB’s involvement “RTC is built on card rails, ISO8583, and vision for instant payments. Instant payments and a request to pay functionality which is a massive problem for us as were identified as the highest payment it contaminates the way we do card. improvement areas, as illustrated in Figure 3. As a starting point, the architecture needs to fundamentally change. Secondly, the overlay services such as request to pay and proxy services Figure 3: Highest payment improvement areas for stakeholders interviewed that enable the optimisation of RTC

have not been built and thirdly, we Percentage of entities highlighting each improvement area have not collectively dealt with 30% 27% the risk components of real time 24% payments.” 25%

20% John Anderson, 15% 15% Head: Industry Payments, SBSA 15%

10% 6% 6% 6% 5%

0% Instant Request to Open API Mobile DebiCheck Proxy Contactless Payments Pay Payments Payments

Source: Interviews with 22 South African payments entities, October to December 2018, Deloitte analysis 13 Regenesis of SA payments | What needs to change?

Some stakeholders believe that while the current RTC system provides a solid core, the system infrastructure, messaging standards and processing capacity have not been designed for instant person to person (P2P) and person to business (P2B) “RTC with a proxy service would unlock payments. There is also an absence of overlay a whole lot of markets via payments by services such as a universal API interface to allow enabling person to person and person to for simple integration across a spectrum of service small business payments. This is critical providers and device types. to making payments and electronic commerce more accessible to a wider group of South Africans. It is feasible, not expensive to achieve and has been on the agenda for a long time.” “The PASA and BankservAfrica are Walter Volker, finalising a proposal that addresses CEO, PASA the optimal solution as well as the key issues (brand, bank participation and Projects such as Project Future11 are underway as a pricing) and will put forward an action collective effort to design a layered architecture that plan on what will be undertaken in facilitates speed to market and provides a framework the short, medium and long term. The to pragmatically embrace change. It will be important future enabling NPS architecture may for the project team to engage fintechs and the only come to fruition in a few years’ broader industry in the design of the architecture, as time, but we need to address what we has been the case in Australia, Canada and the UK. do between now and then. Because, indeed, we need to recognise that the world is operating in real time as the digital world doesn’t sleep.”

Tim Masela, “Project Future gives a really good view of Head: National Payment System what a logical layered architecture could Department (NPSD), SARB look like. We need to distil it and see what the primary use cases are and where we are going to focus. Our view is to start with optimising the instant payment rails, and then build primary services (proxy and request to pay) on top, focusing on addressing person to person and person to small business payments. The goal is to create a new instant payment service, branded as such for low value payments akin to mCash in Nigeria.”

John Anderson, Head: Industry Payments, SBSA

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Regenesis of SA payments | What needs to change?

Chapter 2 Digital identification

At the inaugural workshop of the Even if someone already has a bank account, •• 98% of Estonian companies are established Intergovernmental Fintech Working Group they must enrol in the programme and link online. (IFWG) in April 2018, participants highlighted their account. •• 99% of banking transactions are online. that a South African digital ID may result in increased financial inclusion by making it •• 95% of tax declarations are filed online, easier for South Africans to access financial taking only three minutes on average.12 services. This provides just one opportunity for the respective authorities and the industry Singapore’s MyInfo system to pursue the development of a digital Singapore has adopted a Smart Nation policy, foundation and contribute towards the longer- “India has cracked momentum which means that they embrace technology term digital wellbeing of South Africans. towards a digital economy by in all their processes and encourage creating four digital stacks, technological innovation and adoption. Digital ID is increasingly the focus of policy authentication; authorisation; discussions across several countries, The Monetary Authority of Singapore (MAS) payment and consent layers.” with various governments proposing or has identified 10 enablers to shift towards the implementing national digital ID programmes. digital economy. One of these, as in Estonia Arif Ismail, India, Estonia and Singapore are examples of and India, is the ability of citizens to store Head: Fintech, SARB countries that have successfully implemented their basic ID electronically. In Singapore, this digital IDs. initiative is called MyInfo. Estonia’s e-Identity system India’s Aadhaar system Unlike in many other countries, every Estonian MyInfo is a one-stop online personal data Aadhaar provides Indian residents with proof has a state-issued digital ID. As a result, platform, which collects personal data such as of ID by validating and recording demographic Estonia is years ahead of countries still trying ID number, name, gender and age. It can also information. The system stores the following to work out how to authenticate people include education, employment and income information: name, date of birth, gender, without physical contact. information. address, a photograph, fingerprints and iris scans for anyone age 18 or older. Recently, Estonians can provide digital signatures Such access enables quicker completion of facial recognition capability was added. The using their ID-card, Mobile-ID or Smart-ID, digital online artefacts by using the APIs of programme is free and voluntary, and as of so they can safely identify themselves and MyInfo. August 2018, over 1.2 billion Aadhaar numbers use e-services. The mandatory national card had been created. Each person can only have also provides digital access to all of Estonia’s Does South Africa need a national one Aadhaar number associated with them, secure e-services. digital ID? which can be used in person and online. Payments participants in South Africa strongly Statistics marking the success of Estonia’s support the need for a South African national The original purpose of the programme was to efforts are: digital ID to be implemented. have a verified method of distributing welfare •• 98% of Estonians have a national ID card. benefits and subsidies. The Aadhaar number can now be used to provide proof of ID to •• Over 30 000 people have applied for open a bank account, for tax identification, e-Residency. to receive government benefits, to make •• Over 30% of Estonian voters from 116 electronic payments, to validate drivers’ countries use i-Voting in Estonian elections. licences, and to enable check-in services for “A national reference database flight and train travel. It is one of the key pillars •• At least 2% of GDP is saved due to the is required. We need the ability of the Digital India initiative, which aims to collective use of digital signatures. to latch on to a centralised move manual processes to electronic ones. digital platform which is owned •• Every year, 840 years of working time is saved thanks to data exchange. by government and secured by The broad use of the Aadhaar number means government to enable authorisation the number is now necessary in order to •• The time required to establish a on demand.” function within broader Indian society. For business has been reduced from five days example, individuals must connect their to 18 minutes. Arif Ismail, Aadhaar number to all their bank accounts. Head: Fintech, SARB 16 Regenesis of SA payments | What needs to change?

One reason for this strong support is that a With a central digital ID, companies would digital ID enables access to financial services benefit from faster and more accurate KYC as and thereby facilitates financial inclusion. The well as save time and money when verifying existence of a national digital ID allows all to the identities of their customers. Customer participate in the future as new technologies identification could be confirmed with less become available. information, by relying on the already verified “The biometric standard has been digital ID. approved and is the international standard set by Visa and Mastercard. 2. Biometric authentication In 2016 PASA, in partnership with Visa That would be a perfect starting and Mastercard, published a biometric point for the national biometric authentication standard for use with Europay, data base.” “To unlock the digital economy for Mastercard, and VISA (EMV) chip cards. a broader community a verifiable The intention of the standard was to create Rick Wheeler, Group Retail Systems Manager, SPAR digital identity is critical.” interoperability in the payment space. The standards met those set by ISO and EMV. Walter Volker, CEO, PASA The standard is intended to ensure that In addition, South Africa is currently moving to cardholders have access to the same a Smart ID system that captures biometrics. biometric services across South Africa’s However, there has not been enough Digital identification use cases for financial sector. cooperation between the Department of South Africa Home Affairs (DHA) and the private sector Global trends have highlighted various Absa was the first to pilot this new to optimally use this database for digital benefits of a central identification, but what specification, combining biometrics with chip authentication. are the potential benefits for South Africa? card transactions. The biometric technology detects human characteristics to provide An obstacle to the adoption of biometric 1. KYC requirements identity authentication. The specification can authentication is that the current acquiring A central digital ID could benefit the market enable palm, voice, iris or facial biometrics. infrastructure does not cater for biometrics. in addressing Know Your Customer (KYC) The SARB, as catalyst, will engage stakeholders requirements that are placed on financial Visa and Mastercard have both tested to facilitate future acquiring infrastructure to institutions. While the recent amendment biometric payment cards in Europe and it is accept biometric authentication. This could to FICA allows financial institutions to take possible that multiple institutions will soon mean that although current infrastructure a risk-based approach to conducting KYC, adopt the standard. In South Africa the may not need to be upgraded, new KYC requirements still act as a barrier to standard could help biometric authentication infrastructure rolled out will need to facilitate account ownership among the financially extend beyond national banks, with PASA biometric authentication. Care will be taken to underserviced. CEO Walter Volker asserting that SASSA ensure this does not add significant costs to was regarded as one of the major potential the payments system and specifically to some users of the technology for its social grant big retailers who provide their own acquiring disbursements.13 infrastructure. The SARB sees biometric authentication as a further way to address Market research by Mastercard shows that convenience, enhance financial inclusion, and 65% of South Africans have an interest in benefit the lower end of the market. “One of the biggest challenges to using biometrics as opposed to traditional solve for financial inclusion is the authentication methods, with seven out of 10 current KYC requirements.” people preferring to use biometrics to access their account.14 Ravi Shunmugam, CEO EFT Credit House, FNB

17 Regenesis of SA payments | What needs to change?

3. A more seamless user experience efficiency through a more seamless user Protecting data sovereignty by investing In this digital age, consumers expect to experience. in South Africa’s own infrastructure and connect with services and products every providing local digital services addresses day, online and instantly. Traditional physical South African citizens would no longer have the privacy and security of the nation as it ID processes are no longer adequate in this to remember different usernames and increasingly goes online. new era, causing friction and mistrust. passwords for services or carry multiple security tokens to transact online. The central Every year, South Africans need to prove or database could provide the convenience Deloitte believes verify their ID hundreds of times to carry out of a single digital ID, saving time and effort everyday transactions. This is frustrating and for citizens when using their digital profile that adopting a time-consuming for consumers, also failing that contains government-verified data for to resolve the growing incidence of fraud for transactions with any digital service. national digital ID and businesses and government. remote authentication This could also form the basis for various Since 2012, a range of powerful solutions other payment innovations, including but not standard for South have been deployed in the banking industry. limited to instant payments, proxy payments Most of the major banks have established (e.g. payment by phone number), push Africa will improve mobile solutions that require users to payments, debit order authorisation, social customer experience, remotely “approve” transactions via apps or grant payments and account verification Unstructured Supplementary Service Data services. reduce friction and (USSD). In addition, these solutions have even proven effective in trapping and eradicating 4. Protecting local sovereignty help to address fraud instances of fraud and binding consumers The protection of a nation’s digital risks. to payment transactions conveniently sovereignty is pertinent to this discussion. conducted using Quick Response (QR) codes. In early 2019 the French government took steps to reduce the influence of Google and South African payments industry views One of the fintechs that has made such its personalised services by replacing the In the interviews, participants were asked technology possible for most of the South Google search engine. French bodies will be whether a national, reliable and accessible African banks is Entersekt, based in the using an alternative French-based search database has a use case in South Africa. fintech hub of Stellenbosch. Entersekt was engine called Qwant that protects its users the first company in the world to launch from being tracked or being targeted by Regulator view interactive transaction authentication by advertising. •• There is definitely a need for this in South leveraging the mobile phone. Africa. For example, why should citizens In August 2018, Sim Tshabalala, CEO of be required to complete the FICA process Deloitte, along with stakeholders from the Standard Bank Group, was quoted by multiple times? the payments ecosystem, believes that Business Live as saying: “These are enormous adopting a national digital ID and remote platforms that serve billions of clients. We are •• With the roll out of the DebiCheck system, authentication standard for South Africa will keeping a keen eye on them because they the need for a central digital ID was improve customer experience, reduce friction are very well resourced, collect enormous reconfirmed, recognising that citizens and help to address fraud risks. In addition, it amounts of data from customers and have that change their mobile numbers are not would greatly reduce the administrative load the ability to disrupt our industry.”15 contactable to verify their debit orders as on financial institutions by removing the need required by the system. for them to deploy their own KYC processes, Tshabalala believes that true disruption to and store their own secure KYC data. the core activity of banks — the execution of transactions, deposit-taking and lending India is probably the best example of how — will come from what he terms “the big a single, standard, central, interoperable, platforms”; the likes of Amazon, Tencent, nationally accessible digital ID database can Alibaba, Facebook and Google. be used as a trusted central resource for the nation and generate sizeable uptake and

18 Regenesis of SA payments | What needs to change?

•• Fintech view

•• The cost of managing risk in the payments space is massive and if a central database could assist with centralising some of the risk management, then there is a great “The banks are working on solutions “Moving forward on the benefit for the entire industry. to establish proxy services. The modernisation road map and •• A central database should be possible with SARB along with other government looking at Project Future, whether the South African ID number and biometric departments and stakeholders it is a global PSO or a domestic data already available. The central database needs to take a stance on the best PSO, the two should co-exist for would need to integrate with various other way forward to address digital interoperability and default into systems to be of value, add benefit and identification for South Africa.” a universal database to enable ensure customer consent. innovation such as request to pay •• If the data is applied correctly, the velocity of Tim Masela, and instant payments.” money could be increased significantly. Head: NPSD, SARB

Tshego Lesole, Next steps Head: Alternative Payments, Absa Implementing a central digital ID is not a PSO view simple task and poses challenges, such •• Strong digital ID is critical to facilitate as working with infrastructure that is not Retail view the emerging digital economy, not only optimal, dealing with unreliable connectivity, for payments but also other areas. It is, •• A central database should reduce capital managing hardware malfunctions and however, not a precondition for substantial outlay for hardware and software. It would addressing ID duplications. There are also key payments innovation. also reduce risk and queueing time and aspects that need to be addressed, such as create true interoperability. access to and the exposure and protection •• There are concerns with a central biometric of personal information, the management of ID in the event that it gets compromised. It data breaches, compulsory versus voluntary is not possible to reset biometric data like a participation and the inclusion of foreigners normal password reset. residing in South Africa.

Bank view The SARB has shown an appetite to work with •• Banks are already working with the DHA “This will only be useful if it results in other regulators, overseers, policymakers to optimise a digital ID solution for the faster, more cost effective and more and government to focus on unlocking any market. Government departments need to convenient payments.” inefficiencies within South Africa’s current coordinate to achieve policy alignment. processes and platforms to stimulate Jacque du Toit, economic growth. The plan it to provide •• There is a definite benefit for local and Chief Accountant, Pick n Pay parties an opportunity to gain deeper insights cross-border money transfers. into the various innovations available and •• There is a big opportunity for integration discuss critical government requirements with various other available data sources, (including a possible digital ID). The outcome including the National Credit Regulator of these discussions should form the basis of (NCR), DHA, FICA, etc. a national strategy that will take South Africa into the digital future.

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Case Study: Mobile authentication – a springboard for payment innovation

In 2008, Entersekt – a Stellenbosch-based technology company and an innovator of mobile-first fintech solutions – developed a push-based mobile authentication solution to combat internet banking fraud. Phishing attacks were a special focus, being rampant in South Africa at the time, and accounting for 5% of the US$1.3 billion losses incurred globally. Most South African banks followed suit, A common solution adopted by banks implementing the Entersekt mobile replaces OTPs for selected transactions with a authentication solution for multiple simple “yes” or “no” request presented to the applications across various product transaction initiator (user) via mobile phone. sets to solve customer ID, security and The solution binds the user to the mobile to trust for both banks and customers. the transaction. The result is a transaction that Currently, Entersekt protects 150 million is both authenticated and irrevocable, complex transactions per month in 46 countries in design yet simple for the user to register worldwide. and respond. With the foundation set, non-repudiation In 2012, Nedbank implemented the Entersekt in place, and security and trust solution and phishing attacks were reduced by neatly packaged, the path for further more than 99% overnight. Within 11 months of innovation was laid. In 2018, Entersekt, implementation, 23 million transactions with in collaboration with Mastercard, a value exceeding R15 billion were processed implemented its first payments via the Nedbank App Suite with almost zero enablement solution, Scan to Pay, with fraud. This breakthrough was achieved by a Nedbank. Scan to Pay enables Nedbank fintech partnering with a bank, resulting in a customers to make QR payments to successful market-first solution that solved a Masterpass, Pay@, SnapScan and seemingly impossible problem in a new and Zapper merchants and billers through innovative way. the Nedbank Money app, whether online or at a physical POS. This means that Nedbank Money users need just a smartphone app for all major domestic scan-to-pay services, representing a combined footprint of more than 100 000 retail points of presence Strength: Out of band, two-factor and 800 billers. The achievement of “People think banks should be authentication rendered on a interoperability is another big success disrupted. But banks do a hard job. single device which includes feature for the fintech. Banks have the data, the clients and phones and smartphones; secure payments with a QR code proxy. operate in a regulatory framework. The Entersekt case study illustrates The success lies when combining improved accessibility to the local Weakness: Dependency on banks fintechs and banks.” payments system and how payment to implement in a manner that innovation can be fast-tracked, rolled enables true interoperability. Gerhard Oosthuizen, out to multiple banks and accessed by CTO, Entersekt multiple users. This was achieved by Note: The views, opinions and leveraging a foundation layer comprising information expressed in this case of authentication, frictionless user are sourced from case interviewees registration, non-repudiation, trust and and printed with their permission. security.

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Regenesis of SA payments | What needs to change?

Chapter 3 Opening up the NPS

Historically, the financial sector has been a As a result of this opening up, a wave of potential benefits to the public seem clear. protected arena with core payment service innovation has hit Europe. Open banking Open banking is safe, improves money providers operating in silos and competing has provided space for fintechs to enter the management, facilitates ease of payments, for market share by keeping customers and payments arena, thereby broadening the and provides access to fit-for-purpose their data close. This paradigm is shifting, payments ecosystem. Overlay services are finance. This revolutionary approach also with change being pioneered out of Europe. being provided, enabling banks and third offers a selection of relevant banking A 2016 Competition Markets Authority (CMA) parties (e.g. fintechs) that connect to the products based on actual behaviour, report highlighted the failures of the status instant payment clearing and settlement affordability and spend so that customers quo and described the anti-competitive and infrastructure and its participants to offer a can move, borrow, manage and grow their anti-inclusive nature of the finance space and host of payment services. money. Successful solutions are frictionless, its bias towards the banking sector. European add tangible value and have a quick and easy governments responded with regulations to The inclusion of fintech and the secure sign-up process. open the banking sector, a process known as accessibility of customer permissioned data open banking. has birthed many new financial services innovations. Examples abound. Starling Bank The need to embrace innovation, stimulate is a tech start-up with a banking licence, Open banking has competition and service, and protect which offers banking products through a consumers has been the driving force behind branchless, digital-only offering. Yolt enables provided space for regulatory changes in the European Union customers to make better financial decisions (EU) and Australia. In both areas, directives by providing them with a single view of fintechs to enter the have been effected instructing banks to where they spend, their accounts and credit provide third parties with access to personal cards across multiple account providers. payments arena, customer information at the request of the Openwork creates products to facilitate loan customer. Led by the market, countries such applications. ClearScore taps into multiple thereby broadening as India, Japan, Singapore and South Korea data sources to provide customers with a are developing data-sharing frameworks credit score. Yoyo is a platform that enables the payments electing to adopt an open banking approach. consumers to make mobile payments in- ecosystem. Open banking is happening at pace. store, collect loyalty points and receive fully itemised receipts. Europe setting the benchmark The EU’s open banking journey began in Certain requirements must be met to Around the world 2009 with the promulgation of the Payment participate in open banking. Only third Market-driven approaches Services Directive (PSD), enabling the parties that are registered with the Financial Some countries are opting for an open inclusion of non-banks and encouraging Conduct Authority (FCA) as authorised banking approach without a firm hand from pan-European competition. The intent was to providers can access the data and only with the regulator. In Singapore, the MAS and level the playing field and improve consumer the permission of the customer who provides the Association of Banks have published protection by focusing on the rights and consent, either through the internet, mobile an API Playbook to support data exchange obligations of payment service providers. banking or the authorised service provider’s and communication between banks and The legislation and its framework evolved to app or website. fintechs. In Japan, the Financial Services encompass a wider group of participants, Agency has established an authorisation with PSD2 taking effect in January 2018. The Customers choose which data will be process for TPPs, introduced an obligation General Data Protection Regulation (GDPR) accessible, to whom and for how long, and for banks to publish their open API policies, followed in May 2018 and addresses data bank login details remain completely private. and encouraged banks to contract with management and its handling across every Customers are redirected from the app or at least one TPP by 2020. The majority of sector. The launch of the Regulatory Technical website to their bank’s app website when this Japanese banks are taking this regulatory Standards (RTS), which will see banks input is required. Customers interact with encouragement very seriously and are on providing third-party access to customer these apps as they would any digital app, track to fulfil the 2020 deadline. The United transactional data and customer bank installing, using and deleting at will. States (US) has also opted for a market-led account data, is scheduled for September approach without any material government 2019. It is premature to measure the macro initiatives to support the development of success of open banking in the EU, but the open banking.16

22 Regenesis of SA payments | What needs to change?

Regulatory-driven approaches the cooperation of entities within the broader Outside the EU, two major jurisdictions have payments ecosystem, including fintechs and opted for a regulatory-driven approach: Hong banks. Kong and Australia. In South Africa, the current lack of industry- The Hong Kong Monetary Authority issued “All banks are ready technically. wide open API standards and the absence of an Open API Framework in July 2018, There are many use cases. It’s about an NPS fintech-inclusive operating framework setting out a four-phase approach for have encouraged fintechs such as SiD, iPay who will take the jump.” banks to implement open APIs, starting and Instant EFT to innovate. with information sharing on products Quintin Marneweck, and services, and ending with sharing of At present, these fintechs cannot connect Head: Product Wholesale Payments, transactional information and payments to banks directly for access to permissioned Nedbank initiation services. Contrary to the EU customer data. As a result, screen scraping approach, banks will be required to develop or HTML parsing has emerged as a way for APIs while restricting access to collaborating The EU innovation examples referred to Payment Service Providers (PSPs) to provide TPPs. above demonstrate the possibilities that the innovative services that satisfy customer open banking offers and how accessing needs. But it is Australia that stands out for its payments data and behavioural data inform innovative approach and scale of ambition. the development of meaningful products These services provide a seamless payment Like other open banking initiatives, the for consumers. alternative for the many people who either do Consumer Data Right (CDR) Act will allow not have credit cards or who are afraid to use consumers to share their data with whichever The real value is when products and services their credit cards for online store purchases. authorised third parties they choose. The key are presented to the customer at an To use these services, banked customers difference, however, is that the CDR is a data opportune time to satisfy a specific need. need to provide their online banking login policy initiative and not a financial services details within the PSPs apps, an inefficient one. While it will apply to banks first, the Nedbank Head of Product and Wholesale and costly process for the PSPs. CDR will subsequently apply to the energy Payments, Quintin Marneweck, provides the and telecommunication sectors as well and, example of the informal trader who uses This is also worrying for banks, which remain eventually, to any sector. The CDR is also the cash. If the trader’s payments were electronic responsible for their customers’ banking first open banking legislation to introduce the and various financial services providers had security. In fact, this solution counteracts concept of “reciprocity”, where an accredited access to his transactional and account data, the common theme of customer education data recipient in a designated sector is he could, amongst other value-adds, be made and campaigns to counteract cybercrime, obliged to provide equivalent data, in an aware of business trends that inform his especially phishing: customers must protect equivalent format, in response to direction stock purchasing requirements. The trader their bank login details. from a consumer. could be offered beneficial loans to help manage his cash flow and grow the quantum Open API would regulate the sharing of Open banking use cases for South Africa of his purchasing capability. He could have customer data between fintechs and banks The global trend is prolific, but what are the access to a host of options providing the by providing the standards, framework and implications for the South African NPS and opportunity to select the right products at architecture required to formalise these domestic use cases? the best price. Given such benefits, the trader services. would be in a better position to sustain and 1. Digital access stimulates the economy grow his business. In a cash-dependent South Africa, secure online payments delivered within social 2. Response to workarounds media and chat applications would In countries where open banking is encourage digital transactions and stimulate established, it operates within a framework the economy. and a set of standards that cohesively work together to meet the requirements of compliance and security while addressing customer demand. This framework guides

23 Regenesis of SA payments | What needs to change?

3. Agile implementation of industry An open banking framework wide projects In his book Digital Human, Chris Skinner It is clear that a centralised FICA database, speaks of the architectural shifts from which is linked to real-time and trusted proprietary to open, from controlled to data sources, is necessary. This would marketplace, and from internal to external provide reliable information for verification focus. He describes the idea as micro-service purposes and, later, enable smooth customer architecture where all components are on-boarding, accurate credit scoring and independent, separated and distributed so relational data insights. Various initiatives that services are isolated to enable real-time have failed to gain traction, resulting in change with no impact to the core.17 entities investing in their own solutions that are devoid of the benefits that are Illustrations 3a and 3b show the move from derived from collective input. FICA is not proprietary to open, from controlled to just about compliance. In many instances it marketplace, from internal to external focus, is a deterrent to customers who fail to take and from mainframe to APIs, apps and cloud. up new products from financial services providers. Illustration 3a: Legacy system – Multichannel integration Deloitte believes that in the open banking environment, through the provision of CHANNELS standards and integration points, the vision of these projects may be achieved with the input and execution of multiple authorised services providers, on a national scale, at Branch ATM/Kiosk Internet Call Centre Mobile Direct Sales Future speed and for a fraction of the cost.

4. Supporting innovation There is no shortage of innovation in South Presentation Layer Africa. Banks are using APIs within their own environments and building bouquets Multichannel Layer of products that include geo payments, QR codes and mobile money send services, among others. Discovery Bank has linked the Discovery insurance data and medical aid Legacy Layer data and will be combining it with banking data, creating a version of open banking within its own ecosystem. Illustration 3b: Future open system with collaborative structures

“Open banking is a future reality. Back Office Middle Office Front Office Banks are already building their own Manufacturing Processing Retailing

solutions and platforms. There is a Retail banking need for industry-wide standards Commercial banking • Analytics and regulations which allow an Payments • Cloud • Apps element of flexibility, and different • APIs Wealth management • Big Data • Smart devices layers which inform who can have • Blockchain access to what.” Investment banking Insurance Dirk Ehlers, Source: Digital Human, Chris Skinner, 2018 Head of Interbank, Capitec

24 Regenesis of SA payments | What needs to change?

Open banking appears to be the trend in Illustration 4: Open banking ecosystem South Africa as well. “We don’t know what 2. Engagement we don’t know. All we can do is architect a Framework 4. Payment payments environment that is more flexible Goals, Objectives, system capability and responsive rather than hard coded and Stakeholders Instant payment rigid,” says Walter Volker, CEO, PASA.18 In addition to investing in their own APIs, banks’ investment in DebiCheck has had them convert to the ISO20022 message standard, a key component of open banking.

Regulation alone cannot achieve the 1. Regulation imperatives of open banking. The outcome GDPR, POPI, 5. Overlay is dependent on the participants, their PSD2, RTS services engagement model, coordination, effective Mobile API, data mining, technology innovation and 3. Approach & Design Proxy services Architectural Design, the implementation of overlay services as Source: Deloitte analysis, 2019 Technology displayed by Illustration 4.

Open banking in South Africa according A pilot project may be the way to take open to the payments industry banking forward in South Africa. All 22 entities The payments industry acknowledges that who were interviewed expressed interest in open banking goes hand in hand with a participating in such an endeavour. This would regulatory framework that addresses data enable many of the issues and concerns to privacy, rights, accessibility, protection and “Availing APIs is critical and will be tested in a safe environment and assist in control. The SARB, as part of Vision 2025, is facilitate partnerships and innovation. establishing the principles and frameworks considering open banking and how it could Creating an open payments that will ultimately make for successful succeed in South Africa. environment through payments implementation. APIs and broadening access to the payments system is where we will go.”

John Anderson, “We are looking at establishing an Head: Industry Payments, SBSA open banking standard akin to PSD2 Some industry stakeholders worry that banks “We need to look to the Singapore regulation. The regulator believes will attempt to hold onto their customer central bank model for guidance; that the bank data that is with a data and feel threatened at the prospect of where there is an incubator customer’s bank is the customer’s including fintechs in the payments fold. The for participants to land ideas data, it should not be used as a fintechs made it clear during the interview that can be practically seen and process that they do not plan to compete customer retention tool and thus tested, in a space that actively directly with the banks, but rather compete should not be protected by the with cash. offers mentorship from the older bank to prevent the customer from generation.” receiving value-added services from outside of the bank. This data Hennie Ferreira, CEO, Microfinance South Africa (MFSA) should be accessible by relevant third parties with the customer’s consent for the customer’s benefit.” “Open banking should improve process efficiency and could significantly Tim Masela, lower the cost of transactions for bill Head: NPSD, SARB payments. Banks though are cautiously

From a technology perspective, the industry entering the open banking space by views open banking as a key imperative, holding on to their piece of the pie with the potential to effect quick changes and protecting themselves as the in the payments system. Open banking is threat of other market players, such as a mechanism that can utilise the strengths retailers, MNOs and fintechs, eroding of both the banks (regulation and risk) and their revenues and relevance is a real the fintechs (skill and agility to meet specific concern to them.” market requirements) for the benefit of the customer. Open banking can open up Andrew Hardie, the payments environment and provide a COO & Business Development, mechanism to regulate workarounds like Pay@ Services screen scraping.

25 Regenesis of SA payments | What needs to change?

Case Study: Innovating against the odds

iPay is an innovative payments company, offering online transactions and instant EFTs. They handle 11% of all online payment transactions processed in South Africa and saw remarkable growth in transaction value of 700% between Black “Banks are right to Friday 2017 and the same day a year later. want to protect their This proves they can deliver securely on customers.” scale and illustrates that the true metric for payment innovation is the impact it has on Thomas Pays, businesses and consumers. CEO and Co-founder, iPay

iPay was founded in 2014 by a digital payments team with e-commerce insight The fintech has not allowed the lack of However, while iPay is achieving in an and a clear vision to solve online payments, regulation nor the naysayers to hinder its undefined space, the fintech is looking for merchants and the consumer who performance, but rather seen this as an forward to a future enabling framework. either does not have or does not want opportunity to drive innovation and shape to use a credit card. Through clever the way forward. engineering and collaboration with the Mobile Network Operators (MNOs), iPay Among the top 20 candidates selected has assisted with the inclusion of the from 20 000 entrants in the TechStars underserviced in the online marketplace, Barclays Initiative 2016, iPay has continued who utilise the iPay service without to impress and to date has secured seed “The future of payments will be incurring data costs. funding and angel investment of around open API, that’s when R20 million. iPay plans to expand, starting the magic can really happen.” with a branch in Amsterdam. Thomas Pays, With security at the forefront, the team is CEO and Co-founder, iPay currently working on PCI plus with PASA, extending the PCI decision support system “We knew what merchants wanted (DSS) to include EFT login details and Strength: Easy merchant sign-up account information. and the payment gateways weren’t process; customers only require an active thinking of the merchant or the bank account to do online transactions. customer, they were just focused on moving money.” Weakness: No policy framework to cater for the utilisation of customers’ bank Mitchan Adams, recognised username and password. Head: R&D and Co-founder, iPay “We know it is sensitive Note: The views, opinions and information information and have asked Galix, expressed in this case are sourced from While the fintech has achieved smooth case interviewees and printed with their processing for its customers who can make our Qualified Security Assessor, permission. a registration-free, instant EFT within 20 to specifically look at EFT data seconds, the journey has been anything when conducting our PCI audit, but smooth. Despite its zero-fraud rate, treating account information the instant EFT is an emotional topic in the same way they would treat credit banking world, with banks firmly of the card numbers. We have gotten a view that there is a need for a regulated second check from MWR to make framework for this “stream”. iPay’s view is sure we are doing things right and no different: without a standard in place, iPay works closely with the SARB, PASA and give suggestions on how we can the South African Banking Risk Information do things better.” Centre (SABRIC) to create a standard, while continuously proving its ability to self- Mitchan Adams, regulate. Head: R&D and Co-founder, iPay

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Regenesis of SA payments | What needs to change?

Chapter 4 Mobile payments

Since 2005, South Africa has seen accelerated Constraints to growth in mobile individual interpretation of the FIC Act. This growth in mobile subscribers, resulting in payments in South Africa results in repetitive disclosure of information unprecedented change which has shaped required across multiple financial service and continues to reshape consumers’ 1. Banking and payment regulation segments, generating onerous processes lifestyles and patterns of behaviour. e-Money and deposit-taking regulation and unnecessary red tape in financial service constrain the services which may be offered interactions for all concerned. There is no There are 88.8 million mobile connections in through mobile money in South Africa, single FICA register, national digital standard South Africa (the number of active subscriber including remittances and mobile payments. for reporting, nor national API for banks, AIs, identification modules [SIMs] attached This is mainly due to the stipulations that fintechs and third parties for referencing FICA either to multiple devices or machines). The force partnership with a bank. The business status for individuals or businesses. total reflects the approximation of South case in such a partnership becomes Africa’s mobile market as reported by GSMA encumbered and costly, leading to failure 3. Lack of mobile industry standards Intelligence’s 2018 update. According to the of initiatives with great potential, such as The industry has multiple deployments of group, South Africa has about 89.4 million Vodacom MPesa and MTN Mobile Money. The varied technologies in the mobile payments mobile connections, giving it a penetration forced partnership models limit the ability to space. Multiple QR code standards and rate of 157%. Of these connections, over innovate and challenge existing models. The integrations are required at POS, such as 86% are prepaid, while 58% are broadband difference between a sponsored and licensed Zapper, SnapScan, Masterpass and Wicode, connections.19 scenario is displayed in Illustration 5. with multiple Near Field Communication (NFC) standards, Samsung Pay, Garmin No longer a luxury item, the mobile phone The structure of the NPS creates barriers to Pay and others to come. Each deviation has become a necessity serving every non-bank participation in clearing services, from standards or new integration causes demographic. including the costs of “multi-layering”. immense roll-out delays in implementations These barriers limit the launch of payment and leads to costly integration and Coupled with increasing access to high-speed mechanisms that could compete with deployment. In countries where there has data connectivity, search engines and apps well-established ones in scale, cost and been mass uptake in mobile payments, there to serve every purpose, the “digital multitool” acceptance. is evidence of clear adherence to a single, has made our world smaller, resulting in ever- national QR code standard and treatment increasing consumer expectations. at POS (WeChat and Alipay in China), or a clear, single, national integration point with With smartphones becoming ubiquitous and standard interfaces (UPI in India). providing access to an ever-growing array of “instant services”, it has become difficult to imagine life without mobile devices. Mobiles “Some regulations such as KYC and have moved beyond being the key form of AML are hindering us from including communication to serving a host of needs, excluded segments. We need to including extending traditional payment address how to bank foreigners. “The lack of interoperability between mechanisms. This is an industry conversation.” store of value mobile operators According to the GSMA 2017 State of the and varied standards is preventing Industry Report on Mobile Money, since 2012, Tshego Lesole, the growth in mobile payments as the mobile money industry has seen a high Head: Alternative Payments, Absa tender. As Shoprite, we keep on level of digitisation. This means that a larger needing to build over and over again. proportion of money entering and leaving the Each little project takes six months, ecosystem is already in digital form, rather 2. Anti-Money Laundering (AML) and than being through a cash conversion.20 FICA regulation costs millions and the return is not AML and FICA regulation has complicated justifiable.” However, a large portion of the South African user registration and distribution efforts, banked population does not benefit from which in turn has hindered the uptake of Tremaine Hechter, digitisation and mobile money. Cash is still mobile payments. However, regulations General Manager of Financial Services, the primary transacting mechanism. do not establish a national standard with Shoprite clear guidelines, nor a unified approach among the AIs (Accountable Institutions). There is a need for standards, considering This means that consumers need to deal compatibility with POS, which allow for easy with each AI on its own merits. Each AI and reliable checkout processes in physical sets derivatives of the standards based on retail and online. 28 Regenesis of SA payments | What needs to change?

Illustration 5: Mobile money channel example of sponsored and licensed scenarios

Less agile; more costly; slower time to market; onerous reporting; higher compliance costs; many layers

Sponsored SAMOS scenario

Payer Payer’s MNO’s Payee’s Payee’s Payee MNO Bank Bank MNO

PCH SO

Licensed scenario SAMOS

Payer Payer’s Payee’s Payee MNO MNO

PCH SO

More agile; less costly; quicker time to market; simpler reporting; lower compliance costs; fewer layers Source: Deloitte analysis, 2019

Regulation on barcode payments to solve 4. Require fair market competition: Banks payment mechanisms is not in place. For e-payment scams and facilitate fair and payment providers should price their example, it took over seven years for all market competition in China fees by referring to bank card payment card-acquiring devices in South Africa to In China, bar code payments (including QR charges and should not subsidise or process chip and PIN for EMV acceptance. codes) dominate the mobile payment market. provide below-cost prices to eliminate Deployment of new devices that are NFC Using a bar code to pay is easy, but comes competitors or distort the market. enabled or allowing for multiple versions with risks. In 2017, about RMB90 million 5. Rank risk levels and limits according to of the QR code to be scanned at POS could (US$14 million) was stolen via fraud. On 25 verification mode: The regulation states take just as long to deploy, which hinders any December 2017, the PBOC released new that banks and payment processors scope for broad-based national uptake of regulation to standardise bar code payments. need to follow the new payment risk mobile payment services, keeping the need The regulation came into effect in April 2018. prevention standards and apply different for cash in the system. Allowing interoperable payment limits according to verification services in payments has the potential to The new regulation focuses on five aspects of methods. challenge the reliance on cash. payment security: 1. Business licences: Non-bank payment 4. Lack of interoperability According to Brett White, Chief Product processors should get a specific Internet Mobile offerings in South Africa are divided, Officer at Zapper, countries like China and Payment Business Licence to provide a which means that no scale can be achieved India have almost entirely eradicated cash bar code payment service. because the customer value proposition and cards. Consumers pay for just about 2. Clearing requirement: Banks and is limited to the ecosystem within which anything, anywhere, using their phones payment processors should clear their the customer operates. To see the use of through apps such as Alipay and WeChat. inter-bank bar code payment business mobiles mimic cash, individual ecosystems He added that a cashless, cardless system through the PBOC clearing system or need to create new methods of interchange could be a reality right here in South Africa, a legally registered clearing entity and and interaction across these established right now – all we need is for the retailers and cannot use direct connections to clear ecosystems. For example, FNB account banks to get on board.21 payments. holders can currently send money to non- 3. Regulate business scope: Payment account holders who are able to withdraw processors cannot conduct security, cash at FNB ATMs. Interoperability could insurance, loan, financing, wealth mean an expansion of such a service to work management, guarantee, currency on all bank systems, at all bank ATMs, at all exchange or cash deposit/withdrawal bank POS devices and at national retailers. services based on their payment business. Many consumers rely on cash because the infrastructure that would support alternative

29 Regenesis of SA payments | What needs to change?

Interoperability needs to happen at various Further constraints that need a of activity-based regulations such as levels, including interconnection with: new approach restricting mobile money to future In creating an environment for ubiquitous payments due and excluding lending. •• banks digital payment acceptance, several non- •• Mobile payment offerings which use the •• clearing and settlement payment-specific factors impact the use of device to access an account are not seen as mobile devices. •• other payment, service and utility networks true mobile payments.

•• relevant national databases for validation, Data costs must come down •• There is a need to embrace mobile authentication, reporting and compliance Data connectivity costs, data coverage, payments in an interoperable form, with (e.g. South Africa ID and fingerprint and handset capabilities (such as onboard access to multiple service providers and database; FICA database; MNO cell number memory) can negatively impact growth in multiples stores of value to address the verification database, allied to RICA) usage. high usage of cash. Social payments could be the catalyst for this. •• loyalty systems, distributed ledgers for The GSMA states that in sub-Saharan Africa, crypto currency, enhanced biometric data •• An inability to achieve interoperability will mobile internet penetration has more than (such as SASSA, iris and facial recognition result in the continued proliferation of doubled in the last five years to 21% in 2017 data) closed loop schemes and will not achieve (from 9.1% in 2012) with 280 million new the “big network effect” of being able to use •• internationals (such as SADC – Mowali with mobile internet subscribers estimated to mobile payments anywhere. MTN & Orange; M-Pesa; Ecocash; etc.). come online in the region between now and 2025 (40%).23 •• A broader conversation with the Most markets in the Southern African Independent Communications Authority of Development Community (SADC) do not Smartphone adoption is helping to drive South Africa (ICASA) needs to address the mandate interoperability. However, there strong growth in data traffic. For example, capping of data costs on mobile-originated are new provisions which encourage Mobile Vodacom in Q1 of 2018 reported 65% year- payment transactions. Money Service Providers (MMSPs) to create on-year growth in data traffic across its interoperable solutions in future. It has international operations in the region. MTN been recommended that SADC central reported a 56% increase in data traffic for the banks include provisions that encourage same period.24 interoperability amongst MMSPs irrespective of the MNO, channel and bank. Despite mobile operators’ growth, there has not been a matching reduction in the “I believe that we will see traction charges. Data prices remain relatively high in mobile payments when they In 2013/14 a review was commissioned by the which causes a barrier to entry for lower are integrated with social media. legal and payments sub committees of the income customers. This impacts access to If what is under consideration by all financial services via mobile, increases Committee of Central Bank Governors (CCBG) PASA and BankservAfrica could in SADC to assess the laws, regulations, friction, reduces the uptake of digitisation have the support of the broader directives, circulars, guidelines and guidance and sustains cash usage. payment system stakeholders, the notes directly applicable to the NPS in each of the 15 SADC countries. Agreed national standards and reciprocal industry could put a valid solution benefits established for MNOs to carry together and the take-up would The review highlighted that regulations for payments-related data at a marginal cost be natural, especially among the mobile money in the various SADC countries would enable payment integration into chat younger generation. We are living were significantly different. An in-depth study platforms, charged at little or no cost to in a world that expects payments incentivise uptake. on mobile money in SADC was undertaken, to be integrated into the service resulting in the drafting of the Mobile Money experience.” Guideline for the SADC region. Known as South African payments industry views the MMSP Guidelines, a framework for key Regulator view regulatory aspects and performance criteria Tim Masela, was drawn up. •• The regulatory framework that forces Head: NPSD, SARB MNOs to partner with banks due to At this stage, it is unclear how many countries deposit taking law is a hindrance. The PSO view in the SADC region have implemented these SARB is engaging with the regulator of guidelines..22 banks to address deposit taking and is •• More and more, the expectation will be considering regulation aligned with India’s to offer “payments in the app” without Payments Banks for participants who only expecting users to pay as a separate wish to provide payment services. The process (e.g. Uber). conversation includes the consideration

30 Regenesis of SA payments | What needs to change?

•• The biggest issue in achieving growth is a lack of coordination and a unified brand. A branded industry-wide USSD and app-based mobile solution that everyone understands would address the need to deliver critical mass. “The underlying clearing and “The biggest area of innovation has

•• There is a need to reconsider the cost of settlement mechanisms, namely got to be mobile. Mobile payments routing electronic payments. our card rails and instant payment must not slow down the operations rails, are where we’ve got to create at the till otherwise it simply won’t that national capability, so that our work in retail.” Bank view enabling environment becomes • There is uncertainty about the SARB stance • device agnostic, lending itself to Rick Wheeler, on issuing e-money and having a large store the mobile and other channels to Group Retail Systems Manager, SPAR of value being anonymous. More clarity is execute payments. If we get this required on what is allowed and what is not allowed in the e-money area. right, the device is immaterial.” Fintech view •• USSD is still prominent in the mobile John Anderson, market. There has been massive growth •• All fintechs interviewed agreed that while Head: Industry Payments, SBSA in banking app usage for various digital the underlying infrastructure is the enabler, channels, including USSD. Current banking attractive mobile payment offerings that apps are probably too complicated and address social aspects and consumer need to be simplified. In future, banks may Retail view behaviour are paramount to success. have different versions of apps for differing •• All retailers indicate that contactless •• Data costs are a factor in preventing the purposes. payments are growing at a much faster rate growth of mobile payments, referencing various other African countries as examples •• For mobile payments in South Africa to than mobile payments. where data costs are not as onerous. achieve critical mass, adequate rails need •• Retailers assert that while even in the to be in place and the solutions need to be deepest rural communities consumers •• The low entry level “smart” phones have affordable, real-time and “as good as” cash. have entry level smartphones, the most insufficient memory and NFC, affecting the ability to download and make use of •• Certain banks asserted that the lack of commonly used channel for communication willingness among players to make solutions is still USSD. Retailers thus recommend that payment apps. mobile apps should be developed on USSD interoperable is preventing growth and •• The need for standards is required for first, then Android and then iOS. that mobile wallet solutions should be mobile wallet cash-in and cash-out in South interoperable in the future. Other banks •• Retailers have collectively discussed Africa. asserted that forcing interoperability would and agreed to support the principle of •• Regulation that allows non-banks to process add clearing, settlement and complexity interoperable money transfers at PASA e-money is necessary. costs (given the current structure of the NPS since 2016. and interchange arrangements). •• In addition, retailers want interoperability •• Most banks felt that to address between store of value mobile payment interoperability in its entirety requires providers, as currently the integration costs discussion in the SARB, PASA, PSO and MNO of mobile payment solutions render the environments to come up with a solution. return unjustifiable. “We need to understand the social •• Retailers assert that interoperability at a factors. Regardless of the rail bank level will only be achieved if mandated (e-money, card, mobile), the offering by the SARB. needs to be inviting enough for consumers to want to pay via an “Mobile will be the channel that will electronic method.” drive innovation going forward and will include card and EFT.” Pieter Swanepoel, Managing Director, Real Pay

Charl Smedley, Head: Retail Payment Innovation, Absa

31 Regenesis of SA payments | What needs to change?

Regional Learnings - Mobile Payments

Solutions Kenya – M-Pesa China – WeChat India – BHIM RSA – Flash

Subscribers 30 million 902 million 32.4 million 16 million

P2P/P2B/POS/B2B/Messaging/ Services offered P2P/P2B/B2B/Prepaid/Bills P2P/P2B/B2B P2P/P2B/B2B Voice/Video

Store of value Wallet Wallet Wallet Wallet

Ecosystem Closed loop Closed loop Hybrid Closed loop

Mobile access USSD/SIM Toolkit (STK)/ USSD/App/QR Code App/QR Code USSD/App/QR Code method App

Transaction fees 2% to 0.2% 0.1% Free Free

WeChat has built an ecosystem Agent regional awards of services — carefully curated Traders earn profit schemes for operational list of service providers; starting from sale of prepaid excellence. Weekend from the core (messaging/ airtime, data and prepaid financing to support social) with different layers on Offering cash backs; electricity, bill payments and complement top — expansion, related, and promoting and and other services. Send working capital. Entering societal layers. Everything is incentivising cashless money. One voucher Incentives partnerships with banks right there in the app. A user payments by waiving the for any network. Quick for long-term business doesn’t have to exit WeChat merchant discount rates prints, pre-print and bulk loans; encourages formal interface to do different things. (MDR) on debit-card print. Sell even when contracts between the Payment processing through usage. offline. Convenience and principal and sub-agents merely QR codes has made lives reliability is key. No credit ensuring fair treatment of simpler. It is completely free for cards and no fees. all classes of agents. users. Merchants get paid for advertising opportunities in app.

Flash network; Pep M-Pesa network across 10 Interoperable across Interoperability WeChat network Stores; PnP stores; Eco- Countries approximately 37 banks cash; Absa; FNB (Limited)

Internet and social media NPCI; Consortium of Entrepreneur and private Launched by MNO company major banks sector

Duration in 7 years 12 years 2 years 10 years existence

Lack of banking products Lack of low-cost digital Lack of banking products Lack of banking products for for poor, social media banking and trading for poor, enabling poor, social media and internet and internet boom, high products for poor; high Enablers regulation and high mobile boom, high mobile penetration mobile penetration and mobile penetration, penetration and access to immense funding enabling platform for STK Apps and sense of interoperability (UPI) ownership

Empowers, uplifts informal Empowers, uplifts informal Empowers, uplifts Empowers, uplifts sector, facilitates trade, sector, facilitates trade, enables informal sector, facilitates Benefits informal sector, facilitates multinational, reduces cash instant communication, trade, multi-bank, reduces trade dependence multimedia cash dependence

Kenya's GDP growth at 135 000 traders in Represented 30.3% of the GDP Economic 5% per annum; mobile Close to 15% growth informal sector; and contributed to 69.9% of the growth money transaction growth contribution to GDP R1.2 billion per month GDP growth at 20% per annum turnover

32 Regenesis of SA payments | What needs to change?

Flavours of mobile Enablers for mobile payments payments

Mobile payments (also referred to as mobile 1. Mobile apps using “card proxy” – money, mobile money transfer, mobile wallet The mobile device is used in place of the and mobile banking) generally refers to physical card issued by the bank. Once payments services operated under financial users load their cards into recognised regulation and performed from or via a apps, the smartphone camera can be mobile device. used to scan QR codes for making retail purchases (e.g. Zapper, SnapScan, mVisa). 1. Mobile banking – Customers access a bank account via a mobile phone. 2. Mobile with NFC – The mobile device is used in place of the physical credit, 2. Mobile money – Customers access cheque or debit card issued by the bank. financial services via a mobile phone. Certain banks allow users to load and 3. Mobile money transfer – Customers use “associate” their cards with recognised a mobile phone to move value from one apps for making retail purchases. To pay, mobile wallet to another mobile wallet and any card-acquiring device is tapped with a the value accrues in the receiving wallet. contactless symbol using the mobile (e.g. Samsung Pay, Apple Pay, Google Pay). 4. Mobile wallet – An account that is primarily accessed using a mobile phone, typically 3. Mobile POS – Devices connect via faced with constraining rules surrounding Bluetooth to mobile phones to enable its usage. For instance, it can only be used card acquiring of magstripe cards and to purchase goods and services, may not chip cards to meet EMV standards, earn interest, and its residual may not be depending on the market (e.g. Square, withdrawn as cash (e.g. Venmo, Alipay, iZettle, SumUp, Yoco, iKhokha). Paytm, Masterpass, Virgin Money 4. USSD App – This was typically used Spot Wallet). during the early evolution of mobile, for 5. Mobile payment – Customers use a mobile entry level devices and feature phones. phone to move value to or from a mobile Especially developed in Africa, USSD wallet, or from a card, shadow account or exploits the signalling channel of the bank account to make transfers, or pay for GSM standard to temporarily invoke goods or services, either at POS (purchases) an “overlay menu” which runs on top or remotely (bill payments). of the mobile embedded phone menu. It is typically navigated using number selection to walk the user through a “dialogue”. It has proven very popular for airtime purchases and loads.

5. STK App – This functions much like USSD apps in the user experience and application. However, the menu of services and options is invoked by opening an app which is embedded in the SIM card of the mobile, either during SIM manufacture or via download later (e.g. Flash, SharedPhone, early versions of MTN Mobile Money).

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Regenesis of SA payments | What needs to change?

Chapter 5 Digitising the informal sector

In December 2017 Mastercard released the In 2018 the IFWG successfully brought Payments at SBSA, explains, “Financial Insights into the Informal Economy Report.25 together policy makers, regulators and the inclusion is not about having a bank account, The intent was to understand trends in financial services industry for a focused it’s about financial deepening, it’s about a payments – from cash to card – to estimate discussion on the challenges impeding transition away from cash.”28 the opportunity for cash displacement in the financial inclusion in South Africa. There informal sector. was a call for more in-depth research on the Interviewees shared various ideas why cash dynamic between the declining usage of bank continues to be the dominant tender type for Findings indicated that more than 51% of accounts and the increased utilisation of cash low income individuals and factors that hinder South Africa’s informal enterprises had in the informal financial relationships. financial inclusion: encountered strong customer interest in •• data costs and connectivity required for paying by card, yet around 90% of them electronic payments continued to run as cash-only businesses. •• a lack of trust in the banking sector, The report also found that rural and township worsened by the ongoing debit order abuse residents used cards for 60% of their •• the need for electronic payments that are transactions at formal retailers, compared “South Africa’s Gini coefficient is with only 4% of transactions being card based designed and implemented to replicate the one of the highest in the world. at informal retailers. cash value proposition with a focus on low Ironically, if you are wealthy it is a cost, immediacy and ease of use Apparently, this was due to these small great system. On the other side of •• channels that deliver electronic payments traders not offering card or mobile payments the railway line, you are a price taker not being designed for the social dynamics as tender. According to Gabriël Swanepoel, and a product taker, and the banks of the end user Vice-President of Product Development and set the price and the terms.” •• regulation that is too stringent, for example, Innovation at Mastercard SA the lack of access KYC to formal banking tools and understanding •• education regarding the real cost of cash of available payment options limits their Hennie Ferreira, (the misconception that cash is free) opportunity for growth. CEO, MFSA •• the fear of becoming known in relation to During interviews formal retailers reported A Cenfri survey conducted on social grant the enforcement of tax payments. that cash purchases constituted roughly 80% recipients receiving funds digitally found that of the total volume and 55% of the value of 90% withdrew all funds from the bank account payments taken in-store. While accepting cash as soon as funds became available.27 To this is the cheapest payment method for retailers, point, John Anderson, Head of Industry the cost of importing cash to support SASSA payouts, as well as cash withdrawals at POS, Figure 4: Factors that hinder financial inclusion the most causes immense operational challenges, costs and risks for the retail stores. “Cash is a Percentage of entities highlighting each factor 25% 24% huge risk. Shoprite had 400 armed robberies and SPAR 150 during 2018. Retailers need 20% additional security and have become the front 17% 17% 15% line of the banks,” adds Rick Wheeler, Group 15% Retail Systems Manager, SPAR.26 11% 11% 10% Based on interviews retailers anticipate 4% new regulations being imposed on cash-in- 5% transit companies, which will push up the costs of cash handling significantly. Without 0% Data Costs & Trust Regulation (e.g. Bank Smartphone Financial Anonymity a reduction in the costs of card acquiring, Connectivity KYC/e-money) Fees Memory Literacy & Tax retailers anticipate an overall increase in Source: Interviews with 22 South African payments entities, October to December 2018, Deloitte analysis banking costs to affect their operations.

35 Regenesis of SA payments | What needs to change?

Cash rules According to Richardson, technology solves are of the view that this business segment of According to the 2017 Mastercard study, all these issues and dramatically reduces the the South African economy has been ignored South Africa had around 1.5 million informal client acquisition cost, processing costs and for far too long,” he adds.33 enterprises generating turnover of around ensures 24/7 availability for the customer. He R75 billion a year. Absorbing 12% of the adds that financial inclusion means having a FNB believes that these businesses are country’s labour force, they provide a safe place to keep my money; being able to underserviced from a banking perspective, valuable source of employment and income access my money when I need it; being able mainly due to cash being the predominant for some of the country’s most financially to make payments and send money; having form of payment for them. According to Vacy- vulnerable.29 access to credit should I need it. It clearly Lyle, “There is a clear need to provide cost goes way beyond simply having a convenient effective and safe financial solutions into the Information presented by Pick n Pay and way to buy airtime. Trust is critical. Fast Moving Consumer Goods (FMCG) space – calculations by Moneyweb in May 2018 spaza shops and other retailers.” indicate that the informal food sector was Richardson predicts that we are going to valued at about R404 billion, holding 40% of see a big move in the use of mobile for FNB has partnered with a South African the total food market in South Africa.30 retail transactions and a dramatic rise fintech start-up, Selpal, in the hope of in e-commerce. Customer needs and unlocking the country’s township economy. The above-mentioned Mastercard study requirements will need to drive strategy. The partnership between Selpal and FNB identified six major reasons why cash still will seek to provide cost effective financial rules the informal economy: Strategic insights expert and author of solutions to the spaza shops. Selpal has KasiNomic Revolution, GG Alcock says of the developed a system that connects spaza •• the perceived costs of accepting mobile and so-called township economy, “[Kasi] is a shops with FMCG suppliers, wholesalers and digital payments vibrant, eclectic mix of mansions, shacks, brands. •• a lack of knowledge and awareness about spaza shops, premium taverns, hawkers, taxis the solutions available for card acceptance and hot wheels. To say I am a kasi boy or girl Can digital acceptance reduce cash in the and the benefits of going cashless now has a sense of urban cool. It is said with informal sector? swagger; you’re a survivor, a trendsetter, The Mastercard study found the use of •• lack of formal banking facilities one of the mass majority of South Africa, smartphones among informal enterprises •• a belief that cash makes it simpler to budget with its majority of urban and peri-urban and their customers to be relatively accurately when handling small amounts of populations.”32 high, driven by the decline in the cost of money smartphones and the strong demand for Alcock asserts that those brands that still digital messaging services and social media •• tax evasion believe townships are slums are making a platforms. •• a relatively high percentage (45%) of huge mistake: “In this kasi market, there are consumers receiving salary payments in vibrant businesses, energetic people, a tight, The study found that merchants who cash. networked social community, abundant hope introduced card acceptance reported an and a glimpse of what our future is really like.” average increase in turnover of 50%, while Opportunity knocks those that introduced mobile payment In 2004 Brian Richardson, CEO and founder Flash founder, Peter Berry, agrees. His modus acceptance via QR codes saw their revenues of WIZZIT, launched mobile banking solutions operandi is to engage intimately with informal climb by 10%. to service the informal sector.31 He asserts traders and learn about their customers, that for years traditional banks have been business models and needs. Inspired by their Spaza owners who can digitise their claiming that there is no money to be made at entrepreneurship and drive, Berry proceeded commercial activities are able to build a the bottom of the pyramid. Bricks and mortar to deploy meaningful solutions to address track record of their trading activities and banking is expensive to run. The critical the constraints of cash in the informal use this to raise loans and gain access to elements of success required for financial marketplace, giving informal merchants and financial services that help them grow their inclusion are embodied in what he calls the communities support. businesses. “3 As”: A bank that is taking an interest in this “The informal economy is key,” adds Hendrik 1. Affordability: account and transaction market is FNB. Michael Vacy-Lyle, CEO of FNB Pelser, Head: Payments Regulatory and 34 costs Business, explains that, “With 50% of South Interbank, Absa. Enabling card transactions 2. Accessibility: branch location, design and Africa’s urban population living in townships, in the spaza environment, for example, would staff availability/skills the ecosystem supporting these communities enable informal traders to compete more warrants significantly greater focus from the 3. Availability: operating hours, queue time, effectively with the large retailers, enabling banking sector.” He refers to this opportunity growth in smaller economic centres. At this ability to resolve matters in one visit, as the “Unseen Economy” – the opportunity stage the preferred tender is cash, driving information to address intimidating and space that most call the informal sector or consumers to larger economic centres to onerous requirements. the township economy. “At FNB Business we withdraw cash, as ATMs are not economically

36 Regenesis of SA payments | What needs to change?

viable in small commercial centres. Such funds are normally then spent in the larger centres with the larger retailers. Deloitte’s view is that

Like South Africa, India and China were the cost of data and cash-heavy economies. They also had a lack of interoperability well-banked top demographic and large numbers of financially underserviced people between store of who typically had a mobile phone. In 2009, over two-thirds of all e-commerce payments value mobile payment in China were cash on delivery, while today mobile payments account for over 70% of providers, coupled with all e-commerce transactions in China. India is also winning with mobile payments. Cash varied standards, is reduction is happening more gradually. The Economic Times reports that in just preventing true retail four months of Google launching its own penetration and the mobile payments service, Google Pay has been processing the same number of digital acceptance of mobile transactions as one of India’s top private banks, Axis.35 payments in-store.

There are signs that South Africa’s transition to a cashless environment could happen quickly. Locally, QR code app-based payment services such as Zapper and SnapScan already have over 50 000 merchants across South Africa. In addition, Samsung Pay launched in August 2018.

However, these solutions make use of existing card rails and some merchants believe that they come with the existing complexities, costs and accessibility issues associated with card products.

In addition, Deloitte’s view is that the cost of data and lack of interoperability between store of value mobile payment providers, coupled with varied standards, is preventing true retail penetration and the acceptance of mobile payments in-store.

Could the regulator and banks consider adopting bold moves that shift the South African payments landscape into rapid adoption of mobile and social payments? Is there a clear policy and plan on how to reduce the reliance on cash and drive digital payments in the informal market? Is the industry in South Africa doing enough to drive industry standards and true interoperability?

37 Regenesis of SA payments | What needs to change?

Case Study: Digitising cash in a Flash

Founded in 2008, Flash connected a R190 The market need for a cash out solution, mobile phone, which operated on a zero- savings and loans products propelled Flash rated USSD1 signalling layer of the network, to apply for a co-operative banking licence to a printer. The device took any prepaid in 2010. Despite multiple attempts, the SIM, vended airtime and electricity, and application was declined on the basis that processed bill payment. It cost R600 and shop owners as a collective did not qualify “There are problems with was advertised for R799 in the Daily Sun. as a common bond. connectivity. Data is expensive, The solution challenged competitors who the deals offered by the networks were selling devices for between are difficult to understand and the R5 000 and R10 000 and skated around the regulatory blockages which prevented low-end devices provided pose small shop owners from vending electricity. as smartphones but don’t have sufficient memory.” Uptake flourished with a sign-up in the “I don’t think there is region of 1 500 customers per day and fundamentally an unbanked Peter Berry, over 5 000 vendors in the City of Cape problem. There is a trust problem, Founder of Flash Town. The company set up a call centre in a debit order problem, a loan Delft, in a refurbished school, which they problem. Until this is addressed audaciously secured for a rental fee of In executing its philosophy that focused on by the banks, an individual who R1 per annum from the Cape Town City enabling customers on a basis of mutual th Council. gets paid on the 25 will continue trust rather than being driven by the to withdraw their salary and their bottom line, Flash had a significant impact. Flash took a huge leap of faith and loan money in full. They need the delivered devices to customers based reassurance that they have all on their word, not their deposit. This was their money up front so that they Strength: Provides a merchant enabling solution and a cash replacement solution further extended to the advancement can survive the month.” of working capital on a next day at near to zero cost. repayment basis. Flash knew and trusted Peter Berry, Weakness: Constrained by e-money their customers and expedited the Founder of Flash implementation of its service to get shop regulation and limited access to owners up and running. connectivity, customers are required to go Focused on its quest to make micro in-store to recharge their accounts. Locals could now purchase airtime and entrepreneurs self-sufficient, the company electricity and pay their bills simply and partnered with Pepkor Group in 2014 Note: The opinions and strategy expressed without transport costs. Increased foot to extend its footprint significantly and in this case represent the views of Peter traffic in-store and access to trade had continued to innovate. Berry as the founder of Flash. Peter sold shop owners generating an average Flash to Pepkor and left the group in 2017 monthly turnover of R20 000 to R30 000. Flash launched a remote account load to start Shop2shop, a business that helps Flash had created a cashless ecosystem voucher which took shop owners out of the small shop owners access more products that kept money in the community with queues. For the first time, Flash customers at the right price. access points on a national scale. no longer had to leave their businesses to recharge their accounts at the bank branch or in-store, provided they had access to connectivity.

“If you can get a shop owner to be successful, then it’s good for everybody.”

Peter Berry, Founder of Flash

38 Regenesis of SA payments | What needs to change?

Illustration 6: Digital payment use case This illustration demonstrates how the daily life of a South African could be enhanced if the NPS offered interoperable mobile payments, real-time payments at low or no cost, open APIs and a unique national central digital ID.

05:00 – Taxi payment: The example will use a street The street vendor gets up early to catch a taxi from his home vendor who sells cooldrinks at a to the intersection where he sells cooldrinks. Upon getting into the taxi, the driver, using the “taxi app” installed on his traffic intersection. He has a mobile 1 mobile, enters the fare. The app generates a QR code. The phone with a banking app and street vendor, using the same taxi app on his mobile, scans the QR code. The amount is displayed, and he selects a preferred mobile wallet app linked to various wallet for payment and confirms the payment. The amount is stores of value. The following deducted from his chosen wallet account. The mobile wallet sequence illustrates a day in his life shows his available balance. The taxi driver immediately receives confirmation of the payment on his mobile phone. and how he conveniently fulfils his payment requirements digitally.

Loan amount Approved 3 2

Thank you for paying your 05:30 – Bill payment: DSTV account On his way to the intersection, the street vendor receives a notification that his monthly 06:30 – Short-term finance: DStv subscription fee is due. As an authorised The bill payment caused his bank account to go into the red so he participant of open banking and with the required lacks sufficient funds to purchase his daily cooldrink stock. Luckily permission, his service provider has linked the for the street vendor, with the availability of open APIs, various payment order directly to his bank account. microfinance companies have access to his transaction history and He securely logs into his banking app, selects cash flow data. Using his “lend money” app he quickly applies for a the beneficiary DStv, verifies the amount (by short-term loan selecting the most competitive offer. He accepts confirming it against the invoice) and authorises the short-term loan and the money is transferred into his bank the payment. DStv receives a notification that the account in real time. He also receives a notification that the funds payment has been made. are now available.

4 Payment 08:00 – Buying cooldrinks: Received Arriving at his intersection, the vendor goes to a nearby 6 merchant to purchase his stock for the day. The merchant creates a request to pay at POS and he receives the request message on his mobile. He reviews the amount and selects “yes”, authorising the request to proceed with a real-time credit transfer at POS. Both the merchant and the street vendor receive notifications that the payment cleared and settled in real time.

14:00 – Sending money home: In the afternoon, he receives a message from his wife requesting money to buy groceries for the family. He opens his mobile wallet and enters 09:00 – Selling cooldrinks: the amount and his wife’s unique identifier His customers know his unique identifier (created on the back (e.g. mobile phone number enabled by digital of the new national digital ID – using his mobile number, ID national ID). He authorises the payment and 5 number, name, surname, email address and personal biometric both receive notifications that the money was data). They pay him using their own mobile phones in real time transferred. The money is immediately available at the traffic light by sending real-time payments to his unique for his wife to buy groceries using her mobile. identifier number. Both the street vendor and his customers receive notifications and the money is instantly available in his account. New customers simply need to load the street vendor’s unique identifier onto their mobile phone the first time as a registered beneficiary. 39

Regenesis of SA payments | What needs to change?

Chapter 6 Enabling change

The global trends in payments show that an challenged by the inherent prospect of the and enhancements to the NPS architecture to evolution from traditional to digital payment Fourth Industrial Revolution. The SARB is support stability and fast-track innovation. “We solutions is being achieved and accelerated, keeping its principles intact as is evidenced need to balance the risk with inclusiveness. via the adoption of modernised messaging through the SARB NPS Vision 2025, the NPS Our NPS can’t be so secure that no one can standards, and featuring rich overlay services Act review and the establishment of the use it and it can’t open up so much that the and renewed regulation. This trend relies National Payment System Strategy Body, put in entire system collapses,” says Walter Volker, on the implementation of a regulatory place by the Payments Council and chaired by CEO, PASA.36 The approach is to focus on the environment that informs and enables the the Deputy Governor of the SARB to actively design and the technology will follow. successful collaboration between banks and monitor progress of Vision 2025. non-banks, innovation and new technologies Banks, retailers and fintechs shared their and the need for protection, fairness and Through these initiatives, the SARB is views on collaboration, regulation, pain points rigour to all. showing the industry that it recognises the and expectations of the NPS. need for change. There is a dependence on Banks such as the PBOC are succeeding by open collaboration and the responsible and Bank view remaining focused on the activities, related active incorporation of fintech providers and Collaboration policies, stability and integrity of the core payment service providers in the form of Certain banks expressed the need for a financial services. At the same time, fintechs in non-banks. regulatory environment and a collaboration the private sector, like WeChat and Alipay, can model whereby the regulator mandates what innovate swiftly, delivering massive uptake and With the South African NPS requiring a needs to be done and the collective deliver achieving a win-win solution. delicate policy balance between regulation on mandates for the national good. Global and market forces, the continuing role of examples included Nigeria and India. Referring the SARB as expressed in Vision 2025 is to to Nigeria, Brad Gillis, Head of Payments, Rest balance the interests of all participants in the of Africa, SBSA commented, “The environment market, inform the market of what is needed is non-competitive, but on a platform level, to adhere to public policy, and provide a the banks are able to compete. Finding that 37 “Fintechs add huge value when framework for participants to innovate, design, balance is key.” India was also mentioned, develop and implement for the benefit of the with the UPI being used to illustrate a it comes to the development of South African public. more aggressive regulatory approach, overlay services, channels and with the regulator enforcing mandates front-end products. We have and deliverables, setting the standard and a number of fintechs that we dictating the price at the core. Other banks work with and it’s all about argued that the NPS participants should lead complementing each other.” the strategy for the industry, with the SARB “We need to be open to change, providing the rules of engagement. John Anderson, collaborate on emerging complex Some banks asserted that the current format Head: Industry Payments, SBSA issues and develop policy for collaboration is not effective, highlighting transparently and iteratively (with the Banking Enquiry by the Competition In Africa and South Africa in particular, fintechs adequate feedback loops) to ensure Commission from 2006 to 2008 as a turning have proven that they are motivated to go robust and appropriate policy point that inhibited them from brainstorming door-to-door and sign up merchants for low development.” openly as a collective. fees. They are also geared to process high volume, low value transactions, showcasing a Arif Ismail, willingness and capability to close gaps in the Head: Fintech, SARB payment system.

No two countries are the same, and central Concurrently, Project Future, a PASA initiative, banks are finding themselves increasingly is underway to review and propose changes

41 Regenesis of SA payments | What needs to change?

Banks also recognised the need for closer changed more than once in a generation. This engagement: “Absa can’t do anything on its highlights the importance of getting the design own. There is a need to drive the industry right from the start. conversations, the NPS conversation, the There is also a view that the modernisation of SARB Vision 2025,” says Hendrik Pelser, “We need to improve the regulatory Head: Payments Regulatory and Interbank, the core SAMOS system currently underway environment. In 1994 the NPS Absa.38 To achieve a responsibly inclusive at the SARB will assist the industry with payments system and economies of scale in formalised with banks adopting modernisation efforts and provide for the interoperable space, banks proposed the a self-regulating model on the rich data messaging requirements. The introduction of a mechanism to enable them back of a commercial competitive implementation of ISO20022 messaging to collaborate freely without being deemed to principle. This has proven to be less standards during DebiCheck will also fast-track be anti-competitive. than ideal and needs to be firmed the modernisation build. up with a regulatory model that Another issue that hampers collective Projects applies equally to participants in innovation is that banks are operating in DebiCheck and Project Khokha were the payments ecosystem. When it individual ecosystems and are on different highlighted as projects that have yielded evolution paths, with some more ready than comes to fintechs, there is currently important learnings. Regarding DebiCheck, others to entertain the adoption of new no licensing or withdrawal of many of the banks asserted that a standards and industry solutions. According to licensing, something that is required staggered approach rather than a big bang Quintin Marneweck, Head: Product Wholesale for a standardised effective implementation would have been of greater Payments of Nedbank, “We need a mind shift framework.” value to the industry, saving large scale to say that we’re doing strategic long-term frustration, time and money. Project Khokha 20-year investments in an environment that was seen as a framework for project delivery, Hendrik Pelser, we want to create value in for the next 20 with banks commending its execution and Head: Payments Regulatory and years. The problem is the current five-year the delivery time frame. Banks stated that any Interbank, Absa bank business case view.” He adds that, “In future projects should be broken into stages, Vision 2025 we see greater efficiency, greater with long, medium and short-term goals, interoperability and lower costs. We all know Furthermore, concern was raised that putting in place sanity checks and testing that none of that can happen without an more regulation results in less innovation, performance regularly. increase in transaction volumes and that won’t emphasising the need to not overregulate. happen in individual ecosystems alone.”39 In addressing this concern, certain banks offered a more practical approach to the Regulation drafting of directives, suggesting that a pilot In the main, banks require legal certainty environment be used for participants to regarding the NPS stakeholder roles, their consult, collaborate, implement and test, the “Our learnings from Project Khokha participation and access and how Vision 2025 outcome of which could inform policy. Others have shown us that the best way will be applied structurally as tabled in the NPS suggested a review of the intent of policies to accelerate change and enable Act review. and that policies should be drafted using a risk-based approach. An example provided decision-making for new policies is While it was agreed that Vision 2025 provides was the review of the FIC Act which was to trial proof of concepts involving an ideological framework, clarity is still amended to allow non face-to-face FICA. This all stakeholders, that don’t take too needed on how it relates to the broader policy mitigates risk through the implementation of long or cost too much.” objectives with areas such as reducing the transaction limits, which opens the money reliance on cash still in question. transfer and remittance market, while keeping Arif Ismail, the risk factor in check. Head: Fintech, SARB In addition, with the imminent entrance of fintechs to the core payment systems, there is Architecture a need for equitable regulation and directional Banks asserted that the NPS architecture leadership which levels the playing field and needs to be modular and service-oriented addresses the proportionate shift of risk and to protect the core, meet regulatory costs to non-banks. The current sentiment is compliance requirements and enable industry that “banks pay all the costs and fintechs get participation, innovation and technological to play”. growth. Considering the industry effort and costs, the core architecture should not be

42 Regenesis of SA payments | What needs to change?

Retail view Collaboration Interviewees raised the importance of working closely with regulatory bodies. For example, rules that address messaging have been implemented without consultation, resulting “As brands we are trusted by in a negative impact at a store level. The issue consumers. The currently unbanked started with the move from dual messaging have more trust in the major retail to single messaging and the sending of brands than they do in banks. For us confirmation messages to customers before to provide banking services makes the transaction has been approved. This has a lot of sense but it is not so simple caused problems in-store, with tellers having and doesn’t form part of our core to convince customers that the payment has business.” not yet gone through.

Rick Wheeler Group Retail Systems Manager, SPAR

Standards “The reason why South African Retailers interviewed expressed the need for Retailers’ Payments Issues Forum the NPS to inform standards. For example, the (SARPIF) wants to work closely with current lack of standards for money transfers the regulators is we don’t want (domestic) and remittances (cross-border) banks making decisions on behalf of impedes integration in the retail environment. retailers and delivering something In addition, interviewees raised the need that causes problems for us.” for biometric standards in relation to social grant pay-outs to address the 2.5 million Rick Wheeler, grant recipients who do not have cards. The Group Retail Systems Manager, SPAR industry-approved biometric standard could be the starting point for the national biometric database. Regulation The retailers feel the need to become Furthermore, standards would enable designated acquirers and to share in interoperability between retailers, whereby interchange fees such as balance enquiries. a customer would be able to originate a Their reasoning is that retailing has evolved money transfer at one retailer and cash out at with retailers having their own POS terminals, another. switches and paying scheme costs, which comply with PCI DSS and effectively serve as physical ATMs. The difference between interchange rates determined by the SARB on ATM withdrawal fees (R4.07 plus 0.53% of the withdrawal amount) and cash-back at POS (R1.11 fixed) was also highlighted as another “Payments shouldn’t be a area of concern. competitive advantage. It should be an enabler for the customer to pay for what they’re buying.”

Jacque du Toit, Chief Accountant, Pick n Pay

43 Regenesis of SA payments | What needs to change?

Fintech view NPS through overlay services such as instant Collaboration payments would yield the greatest value in Fintechs were encouraged by the imminent delivering real-time payment solutions – with changes and their growing influence in the the caveat that the rules would also need to NPS. Confidence in the regulator was also change to allow for inclusivity and innovation. emphasised, with an example being the The request is for the regulator to solve establishment of the IFWG. However, the inefficiencies and provide mandates so that current process in addressing market needs fintechs can “play responsibly” rather than was described as long, cumbersome and forcing the market in a narrow direction. lacking in agility. Architecture The need for a low cost, low value, efficient instant payment capability was expressed, with fintechs referring to the current rails as “limited”. “I remain optimistic that the strengths of our NPS including the infrastructure and strong legal foundation, combined with the opportunities presented by local digital technology and innovation, “Payment needs to be convenient outweigh the risks of stagnation and immediate. When I want to pay and slow progress. For the South with an email I can, when I want to African NPS, collaboration and tap I can. It’s about enabling all the openness are key aspects to unlock journeys and using rails that are fit this potential and regain its global for purpose. The current challenge position in payments.” is the limited nature of the rails.”

Gerhard Oosthuizen, Pieter Swanepoel, CTO, Entersekt MD, Real Pay

Regulation Like the rest of the industry, fintechs agree As it stands, fintechs feel that their lack of that the technology is secondary, with the legal standing means they are hampered design taking priority, to ensure stability, by regulation. They highlighted the need to scalability and security, while meeting the partner with a sponsoring bank, as one of customers’ ever-changing needs. their key constraints. “Vision 2025 shows a loosening up of the NPS, but the shape and Projects form won’t change much if we are forced to The Payment System Stakeholder Forum go through a bank,” says Ahmed Cassim, MD, (PSSF) proposed the implementation of Hello Paisa.40 incubator models such as those adopted in Singapore. These facilitate the reciprocal Most fintechs argued that value would be sharing of content and knowledge, with derived from connecting directly to the solutions tabled to the right forum and with NPS in order to avoid complexities such as the capability to escalate to the regulator. sending a file in a predefined format to meet the cut-off time as opposed to doing a file upload. Instead, connecting directly to the

44 Regenesis of SA payments | What needs to change?

Case Study: Collaborating to include

Started in 2005, the Hello Group focus on With Hello Paisa as the trusted market solving otherwise ignored problems for brand, the solution boasts a fully underserviced customers in innovative interoperable bank account coupled with a ways. debit card that runs on traditional banking “We are not a fintech we are rails and offers a sound cash alternative to In 2010 and in partnership with Cell C, Hello a receptive market waiting for payments to ‘solutionists’. We commit to Group launched Hello Mobile, a prepaid work for them. SIM card that removed the international understanding our customer and calling costs incurred by its customers. delivering products through a platform they trust, in a language Driven to financially empower they understand and ensuring we underserviced merchants and the public, execute in minute detail.” the company designed a low cost and “We offer our customers a SIM comprehensive banking solution in 2013. Ahmed Cassim, Faced with a sector which at the time MD, Hello Paisa card to phone their family, was hesitant and unwilling to collaborate, remittance solutions to send delivering the solution proved to be a money home, a bank account to challenge. In 2019, the Group employs 1 000 keep their money safe and a debit people and enjoys a customer base that Nonetheless, Hello Group turned to solving constitutes 600 000 prepaid SIM card card to transact – anywhere and the challenges faced by customers in users and 400 000 remittance customers. everywhere.” moving their money across borders. Hello Paisa has now launched its banking solution in collaboration with Sasfin Bank. Ahmed Cassim, In 2014, Hello Paisa became the first non- MD, Hello Paisa bank to receive SARB approval to operate as a Category 3 ADLA (Authorised Dealer in Foreign Exchange with Limited Authority). The high tech, high touch company has straddled the anonymity bar and overcome Empowered by the regulator, Hello Paisa what the market believes is unachievable, went to market with a secure, affordable “We service hundreds of thousands through sincere customer interaction and accessible app-based foreign of customers who traditional and education, pricing transparency, exchange product. Today, Hello Paisa players cannot reach. They make performance, speed and effective remits to 41 countries and delivers funds a huge difference, grow small collaboration. within seconds of settlement (where not businesses and create jobs.” restricted by the domestic clearing stream in-country). Strength: Offers comprehensive and Ahmed Cassim, transparent banking services for the MD, Hello Paisa Committed to inclusion, the company, underserviced. which describes itself as a “solutionist”, worked with the SARB to address FICA and The collaborative and unique relationship Weakness: The implementation of the AML regulation. In 2016, in another first addresses regulatory compliance solution is dependent on a bank’s banking for the industry, Hello Paisa successfully requirements and leverages the strengths licence, which introduces additional costs launched a fully compliant digital of both the bank and Hello Paisa to achieve and administrative complexity. registration process that replaced the a collective goal – financial inclusion. need for a face-to-face FICA. Note: The views, opinions and information expressed in this case are sourced from case interviewees and printed with their permission.

“What Hello Paisa is doing is what should be done. How we have collaborated is the way banks should engage, where there is a real need.”

Rodger Dunn, Head: Transactional Banking, Sasfin Bank

45 Regenesis of SA payments | What needs to change?

Endnotes

1. DebiCheck is a system designed to prevent debit order abuse in 13. News24Wire, “Fingerprint technology coming to SA bank cards”, South Africa. The SARB with the assistance of PASA and South African 26 July, 2016, Business Tech, https://businesstech.co.za/news/ banks implemented the system. Under the new system banks must banking/131500/fingerprint-technology-coming-to-sa-bank-cards/ confirm every debit order with a customer before deducting money 14. Agency Staff, “Fingerprint biometrics coming to SA bank cards”, 26 July, from an account. DebiCheck went live during 2018 and the deadline 2016, Tech Central, Press Release, https://techcentral.co.za/fingerprint- set for full compliance by the SARB is end of October 2019. DebiCheck biometrics-coming-to-sa-bank-cards/67275/ Corporation, “DebiCheck – Putting You in Control”, https://www.debicheck.co.za/ 15. Warren Thompson, “Why Adrian Gore has Standard Bank’s Sim Tshabalala worried”, 17 August, 2018, Business Day, https://www. 2. Project Khokha was a proof of concept designed to simulate a “real- businesslive.co.za/bd/companies/financial-services/2018-08-17-why- world” trial of a distributed ledger technology (DLT)-based wholesale standard-bank-ceo-sim-tshabalalas-wary-of-new-rivals/ payment system. The project focused on providing participants with practical experience on aspects of using DLT in a realistic test 16. EMEA Centre for Regulatory Strategy, “Open Banking around the environment where different deployment models were utilised. world”, Deloitte, 2018, p 1, https://www2.deloitte.com/global/en/pages/ Project Khokha, South African Reserve Bank, 2018, p1-79, https://www. financial-services/articles/open-banking-around-the-world.html resbank.co.za/Lists/News%20and%20Publications/Attachments/8491/ 17. Chris Skinner, Digital Human: The Fourth Revolution of Humanity SARB_ProjectKhokha%2020180605.pdf Includes Everyone (USA, Marshall Cavendish Business, 2018) 3. 22 South African Payment Entities, Face Interview with the 18. Walter Volker (CEO of PASA), stakeholder interview, 14 November, stakeholders, October-December, 2018 2018. 4. Alex Rolfe, “India’s UPI usage surges as digital payments continue to gain 19. Staff Writer, “SA mobile phone share in 2018: Vodacom vs MTN vs Cell C traction”, 20 January, 2019, https://www.techapeek.com/2019/01/20/ vs Telkom”, 19 March, 2018, Business Tech, https://businesstech.co.za/ indias-upi-usage-surges-as-digital-payments-continue-to-gain- news/mobile/232795/sa-mobile-share-in-2018-vodacom-vs-mtn-vs- traction/ cell-c-vs-telkom/ 5. Ipsos, “2017 Mobile payment usage in China report”, China Tech 20. “State of the Industry Report on Mobile Money 2017”, GSMA, 2018, Insights, August, 2017, p 1-29, https://www.ipsos.com/sites/default/ p1-32 https://www.gsma.com/mobilefordevelopment/wp-content/ files/ct/publication/documents/2017-08/Mobile_payments_in_ uploads/2018/05/GSMA_2017_State_of_the_Industry_Report_on_ China-2017.pdf Mobile_Money_Full_Report.pdf 6. Raja Gopalkrishnan, “Flavors of Fast Report 2018”, Fidelty National 21. Staff Writer, “We need to stop using credit cards in South Africa”, Information Services, 2018, p 1-end, https://www.fisglobal.com/flavors- 18 January, 2019, Mybroadband, https://mybroadband.co.za/news/ of-fast banking/292256-we-need-to-stop-using-credit-cards-in-south-africa. 7. African News Agency, “R21 billion exchanged through eWallet”, 12 html September, 2018, IOL, Press Release, https://www.iol.co.za/business- 22. “SADC Mobile Money Guidelines”, FinMark Trust, 31 March, 2016, report/companies/r21-billion-exchanged-via-ewallet-17029507. p1-32 https://www.finmark.org.za/wp-content/uploads/2017/04/sadc- 8. Gareth van Zyl, “Cash still king in SA as coins, notes make up 50% of mobile-money-guidelines.pdf consumer tractions”, 4 May 2017, BizNews, https://www.biznews.com/ 23. Belinda Baah, “Beyond the basics: How smartphones will drive future wef/wef-africa/2017/05/04/cash-king-sa-coins-notes. opportunities for the mobile money industry”, 19 September, 2018, GSMA 9. Mark Zandi, Sophia Koropeckyj, Virendra Singh and Paul Matsiras, Press Release, https://www.gsma.com/mobilefordevelopment/blog/ “The Impact of Electronic Payments in Economic Growth”, Moody’s beyond-the-basics-how-smartphones-will-drive-future-opportunities- Analytics, February 2016, p 1-27 https://usa.visa.com/dam/VCOM/ for-the-mobile-money-industry-2/ download/visa-everywhere/global-impact/impact-of-electronic- 24. Denis Upodo, ”How Smartphone Acquisition in Sub-Saharan Africa payments-on-economic-growth.pdf Plays a Major Role in Regional Development”, August, 2018, Tech in 10. A PIN is a Personal Identification Number. Africa, http://www.techinafrica.com/how-smartphone-acquisition-in- sub-saharan-africa-plays-a-major-role-in-regional-development/ 11. Project Future is a PASA initiative to establish a target state architecture for the future payments landscape. The concept aims to 25. Mastercard, “Low Card Acceptance at Informal Enterprises Despite achieve the goals set out by the SARB’s Vision 2025 policy document High Consumer Demand – Mastercard Research”, 12 December, 2017, as well as key industry goals. Payments Association of South Africa, Mastercard Press Release, https://newsroom.mastercard.com/mea/ “Project Future”, http://www.pasa.org.za/resources/project-future press-releases/low-card-acceptance-at-informal-enterprises-despite- high-consumer-demand-mastercard-research/ 12. e-Estonia corporation, “E-identity, ID card”, https://e-estonia.com/ solutions/e-identity/id-card/

46 Regenesis of SA payments | What needs to change?

26. Rick Wheeler (Group Retail System Manager at SPAR), stakeholder interview, 16 November, 2018.

27. Jeremy Gray and Antonia Esser, “Paid, but not paying off”, 24 November, 2016, Cenfri Interview Compilation, https://cenfri.org/ blog/paid-but-not-paying-off/

28. John Anderson (Head: Industry Payments and Brad Gillis Head of Payments: Rest of Africa at SBSA), stakeholder interview, 21 November, 2018.

29. Mastercard, “Low Card Acceptance at Informal Enterprises Despite High Consumer Demand – Mastercard Research”, 12 December, 2017, Mastercard Press Release, https://newsroom.mastercard.com/ mea/press-releases/low-card-acceptance-at-informal-enterprises- despitehigh-consumer-demand-mastercard-research/

30. Anon, “The Amazing Scope of SA’s Informal Food Sector”, 4 May, 2018, Moneyweb, https://www.foodstuffsa.co.za/amazing-scope-sas- informal-food-sector/

31. Tefo Mohapi, “Discussion financial inclusion with WIZZIT’s Brian Richardson”, 8 August, 2018, iAfrikan, https://www.iafrikan. com/2018/08/08/untitled-11/

32. Jeremy Maggs, “The informal market: It’s the township’s turn”, 17 January, 2019, Financial Mail, https://www.pressreader.com/south- africa/financial-mail/20190117/281964608893508

33. Anon, “FNB partners with FinTech distribution platform to help solve Financial Inclusion”, 26 November, 2018, South Africa The Good News Press Release, https://www.sagoodnews.co.za/fnb-partners-with- fintech-distribution-platform-to-help-solve-financial-inclusion/

34. Hendrik Pelser (Head: Payments Regulatory at Absa), stakeholder interview, 14 November, 2018.

35. Anon, “Digital payments in India to reach $1 trillion by 2023: Credit Suisse”, 15 February, 2018, Economic Times Press Release, https:// economictimes.indiatimes.com/small-biz/startups/newsbuzz/ digital-payments-in-india-to-reach-1-trillion-by-2023-credit-suisse/ articleshow/62935890.cms

36. Walter Volker (CEO of PASA), stakeholder interview, 14 November, 2018.

37. John Anderson (Head: Industry Payments and Brad Gillis Head of Payments: Rest of Africa at SBSA), stakeholder interview, 21 November, 2018.

38. Hendrik Pelser (Head: Payments Regulatory at Absa), stakeholder interview, 14 November, 2018.

39. Quintin Marneweck (Head: Product Wholesale Payments at Nedbank), stakeholder interview, 15 November, 2018.

40. Ahmed Cassim (MD at Hello Paisa), stakeholder interview, 9 November, 2018

47 Regenesis of SA payments | What needs to change?

Contacts

Stephen Ley Akiva Ehrlich Partner, Risk Advisory, Partner, Risk Advisory, Deloitte United Kingdom Deloitte South Africa [email protected] [email protected] Tel: +44 20 7303 7386 Tel: +27 82 443 2020

Paula Buchel Shahil Kanjee Associate Director, Partner, Risk Advisory, Strategy & Operations, Deloitte South Africa Deloitte South Africa [email protected] [email protected] Tel: +27 83 634 4445 Tel: +27 76 020 1009

Albertus Nel Kreeban Govender Senior Manager, Risk Advisory, Senior Manager, Risk Advisory, Deloitte South Africa Deloitte South Africa [email protected] [email protected] Tel: +27 82 359 2398 Tel: +27 83 253 9818

Robert Noel Danielle Shein Director, iCombine Director, iCombine [email protected] [email protected] Tel: +27 83 445 0066 Tel: +27 84 414 0077

48 Regenesis of SA payments | What needs to change?

About the report

About the Authors Stephen Ley is a partner and heads up the Deloitte EMEA payments practice out of the UK. Akiva Ehrlich is a partner in Risk Advisory South Africa and heads up the Deloitte Africa payments practice. Paula Buchel is an Associate Director and Albertus Nel a senior manager in Deloitte South Africa and subject matter experts in payments.

Rob Noel and Danielle Shein are partners in iCombine, a company that specialises in providing payment consulting services including the development of payment products and services.

About the payments research The Deloitte South Africa Payments team in conjunction with iCombine conducted extensive research in addition to interviewing 34 payments experts from 22 different institutions ranging from the regulators and the PSO, through to the retail banks, neo-banks, payment service providers, financial technology providers, e-commerce payment service providers and large physical retailers. As part of the interviews, respondents were asked about the current state of the South African NPS, global trends and their relevance in a South African payments context, the burning issues and common challenges experienced. The interviews were conducted between October and December 2018. The objective was to understand their perspective on what change is required and how the industry should respond.

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