South Africa’s financial services sector boasts a strong and transparent regime anchored by effective regulation, where opportunities for modernisation and rapid developments in digital technologies are embraced. The banking, telecommunications, and retail sectors are well connected to provide a sound and robust digital commerce ecosystem. While there have been positive developments in the financial services sector, there still remains a sizeable segment of the market that is underserved, and one that is still predominantly cash-reliant.
Cash is Still King in the Informal Sector, for Now
Detailed studies have been conducted on the informal sector of South Africa over the years, and the conclusions from various study reports on this sector all seem to point to the fact that “Cash is still King.” Consumers who are mostly unbanked still show a strong attachment to cash, and the reasons for that vary and can include: cash is easily understood, has no apparent hidden fees, is widely accepted, and can generally be trusted without much level of digital literacy required. On the flip side, cash can also be easily lost and often without recourse, can be destroyed, and is perceived to carry germs. In addressing financial inclusion and digitizing the informal sector, there is only so much that the banks can do, as there are other factors that might prevent the banks from reaching the informal sector as much as they would like.
The Digital Gap: Only Fintechs Can Fill
Where the road stops for the banks, it is fintechs that can take over. The idea of broadening financial access and enabling equitable financial inclusion is very much like a relay race; the baton ought to be passed from one racer to the next in order to reach the finish line. Regulatory bodies in South Africa recognize the value fintechs play in disruptive innovation, which could help accelerate the informal sector’s switch from cash to digital. However, for a sector that is not yet weaned off its attachment to cash, that transition could still be costly and frowned upon if not done strategically.
Mobile Money Could be a Viable Alternative to Cash
Mobile Money could be a viable alternative to cash in terms of offering the same perceived features minus the cost and risks of cash, and it is the fintechs who would be best suited to usher in that change. Fintechs can switch consumers and micro-enterprises in the informal economy from cash by digitizing their commercial exchanges through mobile money. Fintechs can develop simplified, affordable, and easily understood digital solutions that can displace cash and unlock wider inclusion for everyone involved in a transaction.
Establishing a Mobile Money Payment Clearing House: Participant Group (MM PCH PG)
One of the reasons why cash is still king today is because the existing bank-led e-money transfer services apparently still promote cash usage for an ever cash-ready retail sector. One can therefore argue that the current e-money transfer solutions were designed to mainly offer convenience for the transfer of cash from banked users to the unbanked. But by addressing the one side while neglecting to implement adequate cashless digital options on the retail and merchant payments side, the environment perpetuates cash usage. While cards and EFT payments are also prevalent in the retail sector, these only seem to benefit the banked. With some banks having the option to load eMoney funds onto a wallet, such mechanisms are still exclusive as they are limited to that bank’s own digital channels.
The South African financial sector has Payment Clearing House Participant Groups (PCH PG) which are in place to set the business rules and technical aspects for the clearing and settlements of various payments instructions. The reason why we can swipe our cards and process EFT payments is because there are specific PCH PGs set in place to make all of that possible, secure and seamless. All this has been good for the banking sector and these PCH PGs ensure things work the way they should. However, inasmuch as there are PCH PGs for nearly every other banking instruction such as Cards, EFT, RTC etc. there is currently no PCH PG for mobile money and that could be the reason why cash is still king.
In simpler terms, the establishment of a Mobile Money PCH PG will introduce the clearing and settlement instructions for mobile money. Forming a Mobile Money PCH PG will therefore require the banks’ involvement as the key participants. A Mobile Money PCH PG will enable the creation of the relevant PCH Rules which can then see the appointment of the mobile money-focused PCH System Operators (PSOs) for which fintechs would be ideally suited. These PSOs could play a key role in broadening financial inclusion and driving mobile money payments innovation while introducing bespoke digital financial services for the unbanked and informal sector.
Some of the Benefits of a Mobile Money PCH PG
If such a Mobile Money PCH PG is implemented, then mobile money will provide the convenience of cash but with the security of a bank, and we could finally see cash being dethroned from its reign as king in the informal sector. This would be a groundbreaking innovation as it places emphasis not only on the payment mechanism itself but also on the overall service, with the customer at the centre of it all. Previous mobile money innovations operated in silos; you needed to be subscribed to a certain network/telco before you could use their product. With a Mobile Money PCH PG, mobile money becomes an industry-wide and interoperable solution which prevents fragmentation.
Mobile money under a Mobile Money PCH PG could also make way for instant payments which can challenge cash most effectively, especially when combined with various overlay services such as proxy services and request-to-pay. Additional benefits will include an open-loop Quick Response (QR) Code standard for merchant payment acceptance points, characterized by zero interchange fees. Incentivised mobile money transactions can also be provided, along with loyalty programmes and brand-to-consumer (B2C) rebates. All this would be designed to steer consumers away from cash via mobile money, which does not come with the perceived frustrations of a bank account.
Why Should the Banks Want In?
Does a MM PCH PG offer any benefits for the banks? The answer is yes! For those banks which choose to participate in the formation of a revolutionary Mobile Money PCH PG, there can be immense benefits for them. For starters, the elephant in the room is cash, and mobile money requires cash at bank equivalence in order to function. Mobile money is a fiat money backed commodity, meaning for every Rand value in circulation in eWallets, there must be a Rand value equivalent immobilized somewhere and that could only be at the bank. The PSO simply handles the mobile money clearing and settlements and the participant banks facilitate the clearing and settlements of the corresponding real value. Such a model will extricate cash from the informal sector while creating improved liquidity for the banks. But is that alone enough to convince the banks? Is there even a need for improved liquidity for them?
This is where the rubber meets the road at a micro to macroeconomic scale. Small, Medium and Micro Enterprises (SMMEs) are the economy’a catalyst and backbone for job creation, but with limited access to finance and banking, it means job opportunities are not created. However, with banks working hand in glove under a Mobile Money PCH PG with fintechs as PSOs, then the retail credit risk for the informal sector could be better analysed and understood. SMME focused digital solutions could then be implemented leading to banks rolling out cost-effective tailored mobile money credit solutions for the informal businesses. This will result in economic transformation, job creation, and poverty reduction where banks can again introduce a plethora of value-added services to this new consumer segment who can then potentially become fully banked customers for those same banks. A Mobile Money PCH PG could finally be the solution for transitioning South Africa’s informal sector from cash based to a digital one leading to sound and lasting economic growth and development for the nation.