South Africa’s digital payments plan takes a page from India’s UPI

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South Africa’s payments industry wants to displace cash by enhancing its B2B-focused digital payment system to add instant low-value mobile P2P transactions.

Inspired by India’s Unified Payments Interface, the South African payments industry has launched a modernization program including an overlay system enabling consumers and businesses to use proxies such as email addresses and cellphone numbers. Generally, South Africa’s small and micro-merchants don’t accept payment cards for cost reasons, so the new system will help extend digital payments into this segment.

Around 90% of payments in South Africa are cash-based, and consumers are deterred from using payment networks such as the RTC (real-time clearing) interbank system because of high fees.

The RTC was launched in 2006 — two years ahead of the U.K.’s Faster Payments scheme — to handle lower-value payments than those processed by the central bank’s RTGS (real-time gross settlement) system, SAMOS (South African Multiple Settlement System). However, the RTC captures only 1% of electronic payments, and is used for only B2B payments, not consumer transactions.

“The average RTC transaction is ZAR 12,800, which is a fairly high amount,” said Maurits Pretorius, head of executive strategy and communication at Payments Association of South Africa (PASA), which manages the country’s payment systems. “The RTC doesn’t offer low-value, easy to use instant payments, unlike the U.K.’s Faster Payments and its Paym low-value P2P payments overlay service.”

Although the majority of South Africans have low incomes, 77% of adults are banked, including South African Social Security cardholders. Yet usage of banking products is constrained by a lack of financial literacy and inclusion.

“Most people do just three banking transactions a month,” said Jan Pilbauer, chief payments and innovation officer at South African ACH operator BankservAfrica. “They check their balance and do two ATM withdrawals, so bank accounts are just postboxes. The average consumer performs around 1,500 cash transactions a year, the majority under ZAR 100.”

Credit and debit card usage is high in South Africa, although three domestic QR code-based mobile wallets — Pay@, SnapScan and Zapper — are gaining traction among micro-merchants. However, a lack of QR code standardization has hindered widespread adoption of mobile wallets.

To increase financial inclusion and reduce cash, the South African Reserve Bank (SARB) is working with PASA and BankservAfrica to modernize three core payments systems — SAMOS, bulk EFT credit and debit settlement, and the RTC system. They are also looking to improve interoperability, for example through ISO 20022 migration and QR code standardization for mobile payments.

The first step was the 2017 launch of DebiCheck, an ISO 20022-based system that lets people electronically confirm with their bank new recurring payment mandates (debit orders) set up with billers.

“SARB wants a payment architecture that is flexible, will help all stakeholders meet evolving demands from users, and fit into a platform model,” Chipo Mushwana, divisional executive of emerging payments at Nedbank Group, one of South Africa’s largest banks, said. “Most of the modernization discussion is around low-value payment infrastructure.”

In early 2019, PASA, BankservAfrica, and PwC organized a study tour of India, Thailand, China, and Singapore so South African payments industry executives could see how these countries have implemented real-time payments.

“We were very inspired by India’s UPI and India Stack platform,” said Pretorius. “India and South Africa face similar socio-economic challenges.”

The India Stack is based on Aadhaar, a database of biometric digital identities which are authenticated by fingerprints and retina scans. India Stack allow people to store and share data such as bank statements and tax returns, and open bank and other financial accounts, via biometric scans using Aadhaar.

A key element of India Stack, the UPI is a combined real-time interbank payments system, federated ID scheme, and a social transfer app similar to Venmo, using proxies. Currently, customers can’t link wallets to UPI, and can only add bank accounts.

Instead of building a new instant payment system, PASA and BankservAfrica will create an overlay on the RTC, to be launched in 2021. This overlay will be similar to the UPI, Sweden’s Swish, and the U.K.’s Paym.

“The overlay system will be used to eliminate cash and drive mobile payments acceptance at micro-merchants using proxies plus QR codes,” said Pretorius. “It will incorporate an ISO 20022-based Request to Pay feature, and will use the RTC as a pipe but with a completely different rule set and transaction limit.”

As in the U.K. and Australia, both of which have launched instant payment systems, South African banks will need to grant fintechs indirect access to the overlay service, without their needing to pay to get settlement accounts with SARB.

“We don’t think we’ll initially let fintechs have direct access to the RTC system, for KYC/AML reasons,” said Pretorius. “PASA and BankservAfrica’s vision is for real-time value transfers between any stored-value account and any account such as bank-operated and telco-operated mobile wallets, cards and checking accounts. But we don’t plan to enable mobile wallet users to access the system initially. Interoperability between different types of account will be achieved through the platform’s proxy system.”

Since cash is perceived as free by consumers, PASA and BankservAfrica think banks shouldn’t charge for using the instant payment system. “We estimate banks’ ROI for deploying the overlay platform is five to six years, as they will be saving on the cost of cash through cash displacement,” said Pilbauer.

PASA and BankservAfrica also plan to offer instant cross-border transfers to other Southern African countries participating in a joint payment system being developed by BankservAfrica for the Southern Africa Development Community, a grouping of 16 nations. “We’ve carried out a cross-border payment trial with four different countries involving banks and non-banks,” said Pilbauer.

South Africa is taking a gradual approach to migrating to ISO 20022. “We’ll have translator software so banks using the older ISO 8583 standard on the RTC can interface with banks using ISO 20022,” said Pretorius. “Full adoption of ISO 20022 is expected to occur by 2024.”

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Digital payments Faster payments P-to-P payments Mobile payments South Africa India