SARB eyes payments ecosystem regulation in SA

Admire Moyo
By Admire Moyo, ITWeb's news editor.
Johannesburg, 28 Jun 2022
South African Reserve Bank governor Lesetja Kganyago.
South African Reserve Bank governor Lesetja Kganyago.

The South African Reserve Bank (SARB) has set its sights on regulating the local payments ecosystem.

This was revealed by governor Lesetja Kganyago in the central bank’s annual report published yesterday.

“The SARB needs to regulate the payment ecosystem and ensure financial stability in a world of increasingly innovative and disruptive technology,” says Kganyago.

“We must account to market participants and the South African public transparently and in a manner that upholds the credibility of the processes we follow in executing our price and financial stability mandates,” he adds.

The move comes as emerging firms are quickly making inroads into critical financial services, and often taking on more risk than traditional banks.

The International Monetary Fund (IMF) says such changes also raise the stakes for regulators and supervisors – while most individual fintech firms are still small, they can scale up very rapidly across both riskier clients and business segments than traditional lenders.

“Digital banks are growing in systemic importance in their local markets,” the IMF says. “Also known as neo-banks, they are more exposed than their traditional counterparts to risks from consumer lending, which usually has fewer buffers against losses because it tends to be more uncollateralised.

“Their exposure also extends to higher risk-taking in their securities portfolio, as well as higher liquidity risks (specifically, liquid assets held by neo-banks relative to their deposits tend to be lower than what would be held by traditional banks).”

According to the Payments Association of South Africa (PASA), payments oil the wheels of the economy.

It notes that daily, millions of payments are made by South African citizens and businesses. South Africans have a wide variety of payment choices, ranging from cash to electronic payments (such as card, debit orders, mobile payments and real-time online internet payments), it adds.

Every day more than R576 billion is settled through the National Payment System (NPS), says PASA.

According to Statista, the total transaction value in the digital payments segment in South Africa is projected to reach $14.7 million (R233 million) in 2022.

It points out that the total transaction value is expected to show an annual growth rate (2022-2026) of 13.8%, resulting in a projected total amount of $24.7 million (R392 million) by 2026.

The central bank operates, regulates, supervises and oversees the NPS and is responsible for policymaking.

The SARB acts as an intermediary, or settlement agent, that enables financial institutions to make payments to each other.

Kganyago points out the payment and settlement system renewal programme continues and is expected to remain in development until 2025.

“Legislative amendments to the National Payment System Act 78 of 1998 were tabled during the year and will confer on the SARB the necessary powers to enhance the efficiency and safety of the payment system.”

He notes the SARB is also participating in the international work of the Cross-border Payments Coordination Group, which aims to address the challenges of cost, speed, transparency and access for cross-border payments.

Testing blockchain

Kganyago also states the SARB “achieved and celebrated several major historical, legislative and technological milestones in the 2021/22 financial year”.

Among the achievements, he says the SARB, in collaboration with the Intergovernmental Fintech Working Group (IFWG), published the Project Khokha 2 (PK2) report early in April 2022.

“This report is a culmination of over a year of work involving experimentation with distributed ledger technology (DLT). This comprehensive report highlights a number of legal, regulatory and policy implications when applying DLT in financial markets.

PK2 was a continuation of the first phase of Project Khokha, which was designed to trial interbank wholesale settlement using DLT and aimed to contribute to the global initiatives that assess the application and use case for DLT.

PK2 was launched by the IFWG to explore the policy and regulatory implications of tokenisation in the financial markets in South Africa.

DLT, commonly known as blockchain technology, refers to the technological infrastructure and protocols that allow simultaneous access, validation and record updating in an immutable manner across a network that is spread across multiple entities or locations.

According to the central bank, PK2 was able to issue, clear and settle debentures on DLT using tokenised money as part of the technical proof-of-concept.

It has also started work to establish the impact of climate change in South Africa, Kganyago says.

“Climate change will have a profound effect on South Africa’s economy and financial sector. The SARB, in collaboration with other financial regulators and National Treasury, has begun the work of understanding and mitigating against climate risks through the Intergovernmental Sustainable Finance Working Group.”