Appeared in Electronic Payments International, April 2009
Friday, April 02, 2010
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.
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 In particular the system depended on an outdated, manually operated settlement system.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.
A 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 Le Sar, a Standard Bank director, told EPI: “Standard Bank is strongly opposed to any move to turn Bancserv into a money making operation.”
Le 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 Le 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 Le 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 Le 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 off 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 Le Sar.