Over many decades, South Africa’s electronic payment system has
evolved in tandem with those in developed economies and in many
areas is equal to the best. The payments industry’s challenge is to
now bring millions of cash-orientated South Africans into the
electronic payments mainstream.
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Despite South Africa being classified as a developing country, its
payments industry has, in many respects, long been at the forefront
of the adoption of technology.
In 1964, for example, the forerunner of one of the country’s
big-four banks, Nedbank, became the first local bank to embark on
computerisation of its banking systems. This was five years after
Bank of America became the world’s first bank to begin
computerisation and the Bank of Scotland became the UK’s first bank
to adopt this route.
Credit cards began making their appearance in South Africa in the
late 1960s and the first ATMs in 1977, five years after IBM
introduced the forerunner of ATMs in use today. According to Absa,
another of the country’s big-four banks, by the mid-1980s, there
were approximately 700 ATMs in South Africa, the fifth largest
number in the world behind the US, Japan, the UK and France.
But despite this solid history of progress, certain aspects of the
payments system had been neglected. In particular the system
depended on an outdated, manually operated settlement system. This
was a major shortcoming that, in 1996, prompted the South African
Reserve Bank (SARB), in cooperation with the banking industry, to
begin development of a real-time gross settlement (RTGS)
system.
The system, the South African Multiple Option Settlement (SAMOS),
was launched in March 1998. Owned and managed by SARB, SAMOS is
used for all electronic payments of more than ZAR5 million
($500,000) and according to SARB is responsible for some 90 percent
of all transactions by value.
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By GlobalDataA further part of the payments system modernisation was recognition
of the need for a body to manage the conduct of payment system
participants. This led to the formation of the Payments Association
of South Africa (PASA) in 1996. SARB recognised PASA as a payment
system management body in June 1999 under the provisions of the
National Payments System Act.
Also of major significance in the modernisation of the payments
system in the 1990s was the decision to extend real time settlement
to retail payments as well. This saw the introduction of the Real
Time Clearing (RTC) service operated by Bancserv which is licensed
by PASA.
The RTC service operated by Bancserv provides banks with the
functionality to move single credit payments in real time to each
other and operates 24 hours a day, seven days a week throughout the
year.
Established in 1993, Bancserv provides interbank settlement
services and ATM and POS transaction switching to the South African
banking industry and to some banks in Africa. Prior to Bankserv’s
establishment South African banks jointly owned several companies
that provided shared services in a number of different payment
channels.
Absa, Nedbank and South Africa’s other two major banks, Standard
Bank and First National Bank (FNB), own 92,5 percent of Bancserv in
equal stakes of 23.125 percent each. The balance is held via an
investment entity representing seven smaller banks including
Citibank, Bank of Athens, Investec and Bidvest Bank.
According to Bancserv it switched, cleared and settled 358 million
transactions valued ZAR1.61 trillion in the second quarter of 2008,
the latest period for which data has been made available.
Bancserv dilemma
Though Bancserv was established as a utility, there is a move
within the organisation to transform it into a profit-making
venture competing with banks.
However, Brian La Sar, a Standard Bank director, told EPI:
“Standard Bank is strongly opposed to any move to turn Bancserv
into a money making operation.”
La Sar is responsible for card and payments operations at Standard
Bank, the country’s biggest bank in terms of assets which totalled
$161.6 billion at the end of 2008.
Areas Bancserv is considering entering, he continued, include
driving white-labeled ATM services for non-banks, POS networks and
even approaching large corporations with a view to them bypassing
banks and routing transactions directly to Bancserv.
Notably, in 2007 it was widely reported in the South African media
that six South African and two foreign companies had submitted bids
to acquire full control of Bancserv. US payments processor First
Data was confirmed as being amongst the bidders.
Since the debate over Bankserv’s status erupted some four years
ago, Standard Bank has been something of a lone voice in opposing
its commercialisation.
“I believe some other banks are now seeing the error of their ways
on the issue,” said La Sar.
Though the largest retail payments processor in South Africa,
Bancserv faces considerable competition from a non-bank retail
payments processor, EasyPay, a unit of payments technology
developer and services supplier Net 1 UEPS Technologies.
EasyPay’s infrastructure connects into all major South African
banks and switches debit and credit card payments. Among services
supplied by EasyPay are electronic funds transfer, bill payment,
prepaid electricity, prepaid airtime gift cards and third party
hosting services.
Users of EasyPay’s services include four of the five major oil
companies, the countries three mobile network operators, seven
national retailers and electricity utility Eskom.
According to Net 1, EasyPay processed 156 million transactions in
the fourth quarter of 2008, up 15.6 percent compared with the 135
million transactions in the fourth quarter of 2007. The value of
payments increased by19.5 percent to ZAR36.2 billion.
Bancserv reported it had processed a total of 118 million credit
and debit card transaction valued at R40.6 billion in the fourth
quarter of 2007.
Originally established in South Africa, Net 1 is now a US-domiciled
company. Net 1’s major focus is on development of smart card
technology which is used extensively in services it provides to the
South African government for the disbursement of welfare
payments.
In the fourth quarter of 2008 Net 1 was responsible for the payment
of 12.1 million grants in five of the country’s nine provinces.
Average revenue per grant paid was ZAR22 on an un-weighted
basis.
In addition to services in South Africa Net 1’s smart card payments
solution has been deployed in Ghana, Botswana, Iraq, Namibia,
Nigeria and Malawi.
EMV arrives at last
The next major advance in South Africa’s payments system, the
introduction of EMV chip and pin smartcards, is now well underway
with the four major banks having already issued some 1 million
smart cards each. However, this represents a small portion of total
cards in issue.
Surprisingly, total cards in issue is a difficult number to come
by, Werner Liebenberg, Southern and East African manager of US
payments technology vendor ACI Worldwide, told EPI.
Liebenberg added that ACI estimates the big four banks have 8.2
million credit cards and 23 million debit cards in issue. This
excludes considerable numbers of cards issued by smaller banks and
other players such as the UK’s Virgin Money and most major
retailers.
Precise numbers of ATMs and POS devices in South Africa are also
unknown, said Liebenberg. ACI estimates the four big banks have a
network of 16,900 ATMs and 160,000 POS devices, again totals that
exclude many other banks and non-bank operators. ATM Solutions, the
largest non-bank operator, operates some 3,000 ATMs.
Rollout of EMV itself has been subjected to protracted delays that
have denied South Africa the right to claim having been in the
forefront of the new technology. Indeed, if all had gone according
to plan, South Africa’s rollout of EMV chip and pin cards would
have been close on the heels of the UK’s rollout which commenced in
October 2003.
Notably, as early as June 2003, Standard Bank announced that it has
commenced giving EMV chip and pin credit cards to staff as part of
a pilot project. The deadline for national EMV compliance was at
that stage set for 1 January 2005.
South Africa would have been EMV compliant in 2004, commented La
Sar, had it not been for two unnamed banks that held up the process
of establishing a common national infrastructure.
But despite delays, EMV brings with it considerably reduced fraud
risk at a time when fraud is rising at an alarming pace. In 2008
credit card fraud soared by 146 percent compared with 2007 to
ZAR420 million according to the South African Banking Risk
Information Centre.
Another EMV benefit is the potential for a host of new
applications, one of which is contactless payments.
“Contactless payments for low-value transactions using applications
[such as MasterCard PayPass] are coming,” said La Sar. “Banks are
already looking at an interoperable system,” he added.
The first major use of contactless payments will be on the Gautrain
rapid rail link being built between Pretoria and Johannesburg in
the densely populated province of Gauteng.
“Gautrain will be the flagship for contactless payments in South
Africa,” said Liebenberg.
The rail service is to be commissioned in two phases, one in 2010
and the other in 2011.
Banking the unbanked
A challenge in developing economy’s such as South Africa is to
bring banking to the unbanked. This challenge was formalised for
the South African banking industry in 2004 with the signing of the
Financial Sector Charter, an agreement with the government to make
financial services more readily available to the poor.
Quick of the mark, the four major banks and the Post Office’s
Postbank joined forces and in October 2004 launched the Mzansi, an
account offering basic banking services such as debit card,
standing debits, ATM withdrawals and deposits and mobile phone
airtime top-up.
No monthly fees are charged while minimum balances required range
from zero to ZAR20, depending on the bank.
According to non-profit body Finmark Trusts, prior to the
introduction of the Mzansi account initiative almost half of South
Africa’s adult population were unbanked.
As an exercise in bringing banking services to the poor Mzansi
accounts have been a success with a review of the financial
services industry by Finmark revealing that by the end of 2008 more
than 6 million Mzansi accounts had been opened. Postbank was by far
the largest issuer, opening 2.2 million accounts with the remaining
3.8 million opened by the four banks.
In the review, Finmark noted that between 2004 and 2007 the total
of all new bank accounts opened was 7 million. Of these 3 million
were opened in 2007 and 1.1 million in 2008, taking the banked
adult population to 63 percent at the end of 2008.
Among those in the lower living standard measure (LSM) 1 to 5
groups, 49 percent were banked at the end of 2008, up from 31
percent in 2005. There are 10 LSM groupings in South Africa.
However, while Mzansi accounts have been a success in terms of
attracting first-time bank account holders, from the banks’
perspective they proved to be far from an attractive
proposition.
“Banks are all losing money on Mzansi accounts,” commented La
Sar.
Though precise figures are not available Finmark revealed in its
study that one bank reported losing an average of ZAR4.70 per
active Mzansi account per month.
Not all Mzansi accounts are active, with Finmark noting that of the
3.8 million opened by the four banks since 2004 42 percent are
inactive. This leaves some 2.2 million active Mzansi accounts with
the four banks indicating a total annual loss to the banks of about
ZAR125 million. Postbank has not revealed the number of its
inactive accounts.
Of those banking customers who have closed or lapsed Mzansi
accounts, Finmark noted that 28 percent have opened a more
comprehensive bank account.
Losses on Mzansi accounts are unsurprising given that Finmark
reports that average balances are only ZAR280 and three quarters of
accounts have balances of less than ZAR100. In addition the fees
charged on services used by Mzansi account holders average ZAR12.50
per month while the same transactions would cost the user of a
nearest equivalent account about ZAR32.
Liebenberg noted that the four major banks are faced with another
costly problem, dormant debit cards. ACI estimates about 30 percent
of debit cards in issue by the four banks are inactive. This
amounts to almost 7 million cards.
Mobile solution
Even with availability of low-cost bank accounts access to banking
facilities remains a major problem for millions of South Africans.
Access to mobile phones is, however, at a high level with mobile
network operator MTN reporting that of the country’s 48.9 million
people 43.9 million have a mobile phone.
This has resulted in a considerable focus on mobile banking since
the launch in 2000 of the country’s first mobile banking service by
Absa. Uptake of the service particularly in recent times has been
brisk and in February 2009 Absa became the first South African bank
to exceed 1 million mobile banking customers.
This represents some 10 percent of all Absa customers with the
number of new mobile banking customers growing by up to 5,000 per
day, according to Absa.
Absa’s mobile banking service uses three delivery models: short
message service, unstructured supplementary service data and
wireless application protocol mobile internet.
Absa has been joined in the mobile banking market by its three
major competitors as well as a host of smaller players, which has
brought the total number of mobile banking services available to
12.
Though the exact number of mobile banking users is unknown, Hannes
van Rensburg, CEO of South African mobile banking technology
developer Fundamo, estimates the figure at about 6 million.
Adoption of mobile banking and other initiatives to increase the
use of electronic payments will hopefully erode the use of cash in
what La Sar stressed remains a cash-based society.
The cost of cash in South Africa is extremely high, noted La Sar.
In no small way this is a result of substantial criminal activity.
For example, the deputy minister for justice, Johnny de Lange,
revealed in a recent speech that there were 297 cash-in-transit
robberies in the fiscal year to 31 March 2008. While this was down
from 467 in the 2006-2007 fiscal year, de Lange noted: “The focus
[of criminals] seems to have shifted to bombing ATMs.”
Indeed that appears to be so. According to the SABRIC there were
439 ATM bombings in South Africa in 2008, up from 386 in 2007 and
54 in 2006.
The banking industry has had no choice but to “throw money and
technology” at the ATM bombing problem, commented La Sar.
Progress appears to be being made in the erosion of cash’s
dominance though at a slow pace. Data from the SARB which show that
between 2003 and 2008 notes and coins in circulation increased at a
CAGR of 11.2 percent, a somewhat slower pace than the 12.6 percent
CAGR registered by South Africa’s GDP at market prices.
Cheques still prevalent
In addition to cash, cheques remain a popular payment instrument in
South Africa. While individual’s now seldom use cheques they remain
widely used by many companies, noted Liebenberg.
But the cheque is in retreat, with SARB data showing the number of
cheques used fell by 74 percent between 2000 and 2008 to 69.4
million while the value of cheques written fell by 72 percent to
ZAR1.4 trillion. However, the value in 2008 was still equivalent to
almost a third of electronic funds transfers.
Regrettably, online banking and payments have not yet played the
role they should have in encouraging the migration to electronic
payments. Though all banks offer online banking none of them are
making money out of it, noted La Sar.
Low internet penetration has played a role. According to research
by internetworldstats.com, internet penetration of South Africa’s
population at the end of 2008 was 9.4 percent, lower than many
other countries in Africa, including Zimbabwe where penetration was
11.9 percent.
Aggravating the situation is a very low penetration of broadband
internet, with research firm World Wide Worx (WWW) estimating that
the number of unique broadband users is about 1.1 million or some 2
percent of the population.
Major reasons for low internet uptake – of broadband in particular
– include extremely limited international bandwidth availability
and the high cost of services to end users.
Part of the result is that e-commerce is of minor significance,
with WWW estimating South Africans spent a mere ZAR514 million
shopping online in 2007. Unsurprisingly major alternate payments
names such as PayPal are absent from the market.
But change is coming, with WWW noting that international bandwidth
capacity will increase 30-fold thanks to two new undersea cables,
one due for completion in 2009 and the other in 2011. WWW
anticipates this will drive down costs and increase competition and
predicts that within five years the country’s internet user
population will rise to 9 million.
Pending change has attracted one new payments player into the
market, UK-based Ukash which launched a prepaid online shopping
voucher service in conjunction with one of South Africa’s largest
retailers, Pick ‘n Pay in November 2008.
“We saw a great opportunity in South Africa,” said Ukash CEO Mark
Chirnside at the time of the launch.
Hopefully his optimism will be vindicated in a country that despite
a history of often being ahead of the curve in the adoption of new
payments technologies has lagged in the online space.
