31 December 2020 marked the end of Cheques, one of the oldest recognized payment instruments in South Africa. For the Payments Association of South Africa (PASA), the legal and operational structures and constructs that governed Cheques were formally disbanded on 31 March 2021, bringing the end to a grand old payment system.
By contrast, several developed nations have considered abolishing Cheques as a means of payment but have not managed to successfully execute on this. Of note was the UK Payments Council’s announcement in 2008 to abolish Cheques by 2018 – a decision that was later reversed following uproar from consumer groups, charities and small businesses.
In this paper we look at the factors that enabled the South African payments industry to successfully transition away from Cheques in totality in an orderly and efficient manner.
Evolving consumer preferences and the economic crisis
Cheques were once a popular form of payment in South Africa, having reached its peak usage in the early 1990s where it accounted for approximately 80% of the total value of non-cash payments. Over the years, with the ever-increasing adoption of digital payment instruments such as cards and electronic fund transfers (EFTs), cheque usage had been rapidly declining with global economic crises such as the global financial crisis between 2008 and 2010 as well as the Coronavirus pandemic of 2020 accelerating the shift away from Cheques to more efficient, consumer friendly digital alternatives.
With reducing economies of scale, the cost to service Cheques increased to the point where it stopped meeting the needs of the majority of South Africa’s population. The socioeconomic challenges faced in South Africa demand payment solutions that are intuitive and provide value to users and communities thereby making Cheques less relevant to the general public.
Market forces and industry initiatives accelerate the shift away from Cheques
With evolving consumer demands, PASA’s Member banks continuously adjust their product strategies and offerings and as a result, participating banks actively migrated user groups and large consumer segments away from Cheques in favour of safer and more efficient digital payment solutions over the last decade.
This was further supported by industry-wide risk mitigating measures that were applied on the Cheque payment system, specifically the introduction and gradual reduction of the Cheque item limit. In 2002 an item limit of R5 000 000 was introduced to the Cheque payment system as part of risk mitigating measures to ensure the safety and efficiency of the National Payment System (NPS). This item limit was subsequently reduced to R500 000 and then R50 000 given the increased risks faced. The risk of fraud was prevalent (e.g., forged cheques, Payments Association of South Africacounterfeit cheques, altered cheques, cheque washing etc) while the business continuity risks associated with cheque payments was growing with a reduction in the availability of skilled personnel to manage and operate the cheque payment system.
Increasingly, more banks stopped offering cheques as a product to their customers and participation in the Cheque payment system began to reduce. The Cheque Sunset initiative aimed to bring about an orderly retirement from the Cheque payment system as more of the larger participating banks indicated their intent to stop offering Cheques as a product to their consumers while at the same time also opting to continue to accept Cheques from other banks over varying timeframes. This fragmented approach could have resulted in confusion amongst cheque users. In addition, the Cheque payment system required minimum volumes to continue to exist as a viable payment. An orderly exit of the cheque payment stream was the main objective of the Cheque Sunset Steering Committee which comprised of participating banks, the South African Reserve Bank (SARB) National Payment System Department (NPSD) and the Banking Association of South Africa (BASA).
Continued regulatory support
A major factor that played an important role in the successful retirement of Cheques has been the continued support from regulators, in particular the SARB NPSD. As far back as 1995, through the publication of the National Payment System Strategy and Framework (Blue Book) the SARB NPSD had already expressed concern over the risks associated with Cheque processing and the desire to move towards more real-time credit push payments.
Over the years, the SARB NPSD supported the reduction of the Cheque item limits and actively consulted with other regulators, government entities and the public to ensure alignment around the future of Cheques in South Africa. The SARB NPSD also played a key role in catalysing the industry to consider an accelerated phase out of Cheques given the coronavirus pandemic and the potential impact this might have on the entire Cheque processing value chain (e.g., courier companies, bank branches, operators etc.).
The close collaboration between industry bodies (PASA and BASA); regulators (SARB NPSD, Financial Sector Conduct Authority and National Treasury) and the participating banks was a crucial enabler for the success of this initiative despite the various uncertainties faced. This also represents an important step for the payments industry’s modernisation aspirations. Retiring legacy paper-based payment systems is as much a part of modernising the national payment system as developing digital solutions.