Paradigm shift: the future of payments in South Africa

Author: Lesetja Kganyago; Source: 2024 Payments Conference; Compiler: Chen Yanting, FinTech Institute

1. Introduction

Hello everyone, and welcome to the 2024 Payments Conference.

To set the stage for our discussion over the next two days, I will first briefly look back to the past and assess our progress in modernizing payments. I will then turn to the present, where, despite the large-scale adoption of digital payments in other countries, a large part of society still relies heavily on central bank-issued currency, namely cash. Finally, I will look to the future and discuss our efforts to modernize the payments ecosystem and how, as the custodian of the national payment system, we have a strong desire to reduce our reliance on cash.

2. The past of South African payments

Let’s start with history.

South Africa used to be a global leader in payments. For example, in 2006 we pioneered one of the world’s first fast payment systems, Real Time Settlement. The DebiCheck system for verifying debit card orders, launched in 2019, was also the first of its kind in the world. But the frontier is always changing. As our Vision 2025 strategy document states, structural changes in the payments system are underway, so staying ahead of the payments revolution is critical to South Africa’s competitiveness. This is also where we can make a real contribution to financial inclusion and growth.

Normally I would explain that the South African Reserve Bank (SARB) makes a major contribution to supporting inclusive growth by maintaining price and financial stability, and that we need to continue doing what we are doing rather than making radical changes. But this is not the case when it comes to payments.

In wholesale payments – that is, large-value payments, typically between banks – you could argue that we need to keep doing what we are doing and make incremental improvements, such as adopting ISO 20022. But in retail, a paradigm shift is underway, which is full of promise but also challenges – not least the danger of falling behind peers.

3. South African payments now

Next I’ll talk about the present, and the problem with cash.

It’s exciting that we can now pay with our phones and even smartwatches. But as our payments survey reminds us, cash still reigns supreme for most South Africans. People consider it convenient to use and the cheapest payment method available. In our survey, it was the most commonly used payment method. Card-not-present payment methods ranked lower.

I’m proud of our cash – after all, my signature is on our banknotes. It’s a symbol of trust and gives the public access to the central bank’s money – it’s a liability on our balance sheet. But as we pointed out in our digital payments plan published a few months ago, South Africans are overly reliant on cash. Even though most South Africans now have a bank account, many still withdraw all their money as soon as a deposit is made into their account. This means they miss out on the security and convenience of digital transactions.

The truth is, cash is simply not that efficient. Whether it’s finding an automated teller machine (ATM), making change, dealing with transport security or facilitating payment innovation, cash is more inconvenient than digital payments. There’s also evidence that cash disempowers women by making it harder for them to manage household finances, including child support payments. A heavy reliance on cash is not optimal for society.

Nevertheless, change is happening.

For several years now, we have seen little or no growth in total demand for notes and coins. Last year, notes and coins fell by 0.8%, the largest decline in history recorded since 1960. Cash generally grows with GDP, but this relationship no longer exists post-COVID-19. If cash had continued to grow as fast as it has over the past decade, we would have an extra R60 billion or so in notes and coins in circulation – this ‘lost currency’ shows the changing payments landscape. Cash may still be king, but the crown is slipping.

One major reason is better ways to pay.

I’ve already mentioned cardless payments, technology that allows you to leave your wallet at home and pay with your device. Another interesting example is PayShap, a digital retail payment system launched last year. PayShap has quickly become widely adopted, but it is not yet a revolution in retail payments.

Other countries are further ahead in this space. Two notable examples are India’s Unified Payments Interface (UPI) system and Brazil’s PIX. They allow users to make instant, low-cost payments using simple tools like a mobile phone number or a QR code, rather than through a high-cost point-of-sale terminal. They have quickly become ubiquitous payment technologies in these economies. And they are inclusive: for example, you can use PIX to buy a drink from an informal vendor or pay for a taxi. You can even see beggars on the street asking for digital payments – in other words, these systems are doing the job that cash does, but better. Yes, we have these payment methods in South Africa, but they are not ubiquitous.

4. The future of payments in South Africa

This leads to the outlook. How do we transition from cash payments to digital payments?

To drive this change, we recently launched a payments ecosystem modernization program. This is the biggest and most ambitious move the SARB has made in the payments space since the launch of the South African Multi-Option Settlement System (SAMOS) more than 30 years ago.

At the heart of the plan is the development of a public payments utility that will provide a digital payments infrastructure.

Any such initiative must have security and fraud prevention at its core. As the recent scandal of government allowances being siphoned from postal bank accounts reminded us, security is a principle that payments must be guided by.

We also intend to make inclusivity a fundamental principle. This will be a payments system for all South Africans – rural or urban, rich or poor – rather than a product for any particular group.

Then we need to think about how to work with and modernize existing systems. We won’t rebuild everything from scratch – after all, we already have a good payments infrastructure in South Africa – but we are going through a paradigm shift in payments and not every old system will work in the future. Creative design, what is removed and what is added are equally important, we call this the principle of “maximizing and rationalizing.”

We also need to find a balance between getting everyone on board and moving forward. Our philosophy is to have a bias towards action. If we consult everyone and don’t deliver, if South Africa is one of the last countries to get fast, cheap, inclusive retail digital payments, we have failed.

We undoubtedly want creative collaboration, and we admire and value the talents of the many players in this system. But we care most about results, and we will work with the “Coalition of Intent” to achieve this.

5. Conclusion

Ladies and gentlemen, to sum up:

For centuries, central banks have been providing wholesale and retail payment services—large but small wholesale, small but large retail.

Sometimes central banks use a monopoly model, such as issuing notes and coins, or running wholesale payment systems. At other times, they participate alongside other service providers, often playing a supervisory or coordination role in a system where payment services are provided primarily by the private sector.

It is always difficult to know exactly what should be done by the private sector and what should be done by the central bank, which of course has a public interest mandate. There are some natural monopolies, such as large-value settlements, where central bank accounts seem essential. There are also cases where the private sector has failed to issue notes and coins, and countries have tended to have a single national issuer of cash - the central bank - rather than having different institutions competing to issue notes, as often happened in past centuries.

That said, a big problem with monopolies is that they tend to lack imagination. They don't invest much in innovation. Perhaps for this reason, countries' payment ecosystems tend to be built on a model where there is a private sector involved in payments to promote innovation, while the central bank provides stability and security. That said, central banks also often play the role of catalyst for change.

As a SARB, we are currently in an interesting situation where we are solely responsible for producing banknotes and coins, the most popular retail payment formats, but we want to innovate and move out of this profitable position. We are not seeking to monopolize alternatives to digital payments, we are simply insisting that as a country we move with the paradigm shift and benefit from it.

There has been a recent trend towards issuing central bank digital currencies (CBDCs), but frankly, the most successful retail payment initiatives by central banks have involved new payment systems rather than new central bank liabilities. Brazil and India did not need a CBDC to develop two of the most used retail digital systems in the world. In these cases, the central bank acted as a catalyst for change, which created many opportunities for the private sector to innovate using new platforms.

Fundamentally, I hope that we will use the new payments paradigm as a landmark opportunity to enable safer, faster, cheaper and more inclusive payments in South Africa.