SWIFT Community Update – Focus on South Africa: The Future of Payments in an Evolving Digital Landscape

The global payments industry is undergoing major change and transformation. With the rate of change accelerating, the financial industry must continue to evolve and innovate in order to stay ahead of customer expectations and deliver instant, frictionless, transactions. SWIFT’s 2020 Community Update – Focus on South Africa, brought together market leaders and industry experts to discuss key trends and the latest developments impacting SWIFT customers and their communities in the region: from SWIFT’s new strategy to enable instant, frictionless transactions, to managing risk in unprecedented times, adopting new technologies, and more.

Cross-border payments are the lifeblood of the global economic system. Digital transformation is radically reshaping the provision of financial services, and the Covid-19 pandemic has further reinforced the shift to digital payments and highlighted the importance of safe, convenient, transactions for businesses as well as consumers. Denis Kruger, Senior Key Account Manager at SWIFT and Tim Masela, Head of National Payments System Department at the South African Reserve Bank (SARB), discussed the future of payments in an evolving digital landscape.

Commenting on the current evolution of the digital landscape in Africa specifically, Masela noted a definite rise in the demand for instant payments, a rise in the number of non-banks entering the payment system, and the rise of innovations throughout the payment system.

“We should be looking at the governance and the ownership structures within the payments system in order to support its evolution. In this regard, we are seeing the changing role of the central bank,” said Masela.

On the subject of regulation, Kruger noted that the review of South Africa’s National Payment System (NPS) Act began about 2 years ago. “One of the areas that was highlighted was that the SARB would in future wish to allow or require settlement of emerging currencies such as central bank digital currencies (CBDC), virtual currencies, or designate other settlement systems,” he said. Masela added that when it comes to broader access and the construction of the future settlement system, the goal is to have a system that is constructed to facilitate settlement and can work with a number of assets, including potentially a CBDC or crypto assets.

Kruger put forward the question as to whether this initiative is intended to open up the banking industry in South Africa to new players. Masela answered that while the SARB’s intention is for the Act to be enabling, the extent of that rests on market uptake. He added that the Act looks to extend both clearing and settlement to non-banks – as this facilitates a level playing field in the industry in terms of regulatory requirements.

Kruger then highlighted the topic of distributed ledger technologies and current settlement systems, asking Masela for his thoughts around whether this means that the central bank will lose control of the money supply. Masela, using the example of the central bank wanting to explore the introduction of a CBDC, explained that the SARB is focused on the business model, rather than the technology, and will choose the type of technology that lends itself to the chosen model best – whether this is centralised or distributed.

Commenting on the reasons for and benefits of exploring a CBDC, Masela highlighted that there were several drivers for this. “In other jurisdictions they are already experiencing shrinkage in the use of cash,” he explained, noting that this is not currently the case for Africa but the SARB aims to be proactive in testing whether it is possible to have a CBDC running alongside the use of cash. Secondly, Masela noted the fact that the private sector is currently exploring the use of crypto assets and digital tokens. “This may pose a risk to the system,” he said, “but there might also be benefits that could be derived from that. So, central banks would like to explore their own issuance of CBDC and look at the possible benefits that we may derive, while taking care of the possible challenges that may emerge.”

Kruger noted that in South Africa there is a paradigm where half of the economy never carry cash and frequently make use of digital  payments, while the other half  use cash for 90% of their transactions. Talking to how the industry should go about changing the mindset of those who work strictly with cash, Masela commented that for those already comfortable with using digital means to use and transfer their funds, developments like crypto currencies and a CBDC should solve a real need.

For those using cash almost exclusively, Masela noted that a lot of work still needs to be done, including addressing   perceptions that electronic transactions are expensive or unsafe. He notes that this highlights the need for more consumer education.

Discussing the characteristics that a CBDC would need in order to succeed, Masela stated that it should be acceptable and ubiquitous, interoperable with current conventional payment systems, must comply with regulations and be easy to use.

The session wrapped up with a question from the audience about Masela’s views on whether the industry would see the end of cash in the next 5 – 10 years. “We believe that if you take cash away, there should be mechanisms offered that are close to how cash is used,” he explained, adding that ‘displacement of cash’ was one of the SARB’s initial goals looking toward 2025. While that strategy has been reviewed due to major pushback, Masela noted that the SARB now has a strategy to promote the use of electronic mechanisms. “Our drive should be to offer convenient electronic mechanisms, with the appropriate access points and ubiquity that we can offer. Then the migration to electronic will be natural.”

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