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  The most urgent issue to address is not the "unbanked" people, it is security - no payment system should allow someone with my bank account just to draw a debit order against my account, same for a cr...  

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BankservAfrica gears up to modernise the country’s payments system

The move to a real-time environment is underway.

The organisation that describes itself as the so-called “plumbing” of the South African economy is gearing up to play a lead role in modernising the country’s National Payments System (NPS).

This is according to BankservAfrica’s CEO, Chris Hamilton, who, as an Australian citizen, had undertaken a similar process in his land of birth before being hired by BankservAfrica to undertake a very similar assignment.

“Let’s be clear, South Africa’s NPS is still world class. But it’s probably not evolving as fast as it should be, especially since there is major structural change taking place in the payment systems of developed countries around the world,” Hamilton says during the interview with Moneyweb at BankservAfrica’s offices in Selby.

Hamilton describes the work that needs to happen as a process of “modernising” not “overhauling”. He explains that one of the strengths of the country’s system is that it has a massive network effect; many institutions and consumers are already linked and its utility (usefulness) is strong. (Like with cell phone coverage, the system becomes more useful as more people join and interact with it.) All that is required to transact on the NPS is a bank account and access to basic telecommunications infrastructure, like 3G.

So what needs to change? The NPS is in fact a combination of systems. In one format – bank card (debit or credit) – consumers engage in transactions with retailers in order to pay for goods and services. In Electronic Funds Transfer (EFT) format, consumers and businesses need to pay counterparties for goods and services, and the technology behind this is based on low data, overnight batch systems that carry just enough information to execute payment.

“While many countries have sped this process up depending on who is being paid and to which bank money is being sent, it’s a process that can be dramatically improved,” says Hamilton.

Despite South Africa’s payment system being world class, financial exclusion is still a large challenge – 84% of the country is “banked” – defined as those individuals possessing a bank account. A key focus in modernising the system will be to bring more people into it.

“The big change we are seeing overseas is that systems are becoming real-time, which is consistent with modern living, and this applies specifically to the EFT-type payments,” Hamilton says. “So what we are looking to do is drastically speed up the system which in turn will support the digitisation of the economy.”

The CEO has designated 4 design principles as fundamental to the project:

  1. Reach: the system must be able to touch everyone who needs financial services.
  2. Payment needs to be in real-time, and that means effecting transfers immediately. Hamilton says the biggest issue with enabling real-time payment is not systems, it’s security. “Do you know who you are paying, does the person being paid know from whom the transfer has come, and how easily can it be intercepted? That makes design important.”
  3. Transactions must allow for “data richness”. Hamilton uses the example of Uber. Before payment occurs, information flows back and forth between the customer, the company, and the driver. “There is a lot of other associated information in the transaction – the route, driver, time, and status of the journey (i.e. has it been completed) accompanying the economic transaction. So the new payment system has to allow for the free flow of much larger amounts of data. “The richness needs to be native to the system people are using and this is not the case with the current batch system,” says Hamilton.
  4. Flexibility. In the modern “gig” economy – where people like Uber drivers get paid per job, payment systems need to evolve to adapt to a wide range of requirements that could include being integrated into sophisticated corporate supply chains. To do this, they are going to need to be open, adaptable systems, and where money is involved, that brings a range of unique challenges.

But don’t expect any sudden changes, as the process is still very much at conceptual stage. “There is a strong acceptance we need to upgrade the payments system, but we are at an early stage in terms of the system we should design. So we and the Payments Association of South Africa (Pasa) are currently conducting research on what systems have been used overseas, and on what South Africa will need in the future. Then we are going to present our findings, and get approval and consensus from the regulator (South African Reserve Bank) and the commercial banks to ensure the system is compliant and relevant,” says Hamilton.

Other stakeholders that will be consulted include large retail companies, pension funds and medical insurance companies, and entities involved in administering social grants. Hamilton expects the research to be completed in August and thereafter will most likely publish a high level proposed design paper for public consultation. After that, “there will be a lot of arguing to do”.

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The most urgent issue to address is not the “unbanked” people, it is security – no payment system should allow someone with my bank account just to draw a debit order against my account, same for a credit cards. The NPS needs to add a layer of security to force the participants in the payment process, the banks, to do so.

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