Changes to the regulatory landscape in South Africa will lead to greater financial inclusion and the digitisation of payments because banks will no longer be the only institutions allowed to clear transactions from one party to another.
This is according to Lesaka Southern Africa CEO Lincoln Mali, who was speaking to the TechCentral Show in an episode to be published soon.
“At a macro level, there are some fascinating changes that are being mooted by the Reserve Bank, and some of those changes will help the digitisation of the economy. They are trying to bring non-banks into the payments system so that a non-bank player can settle and clear without needing a bank. This is a profound development,” said Mali.
Fintechs like Lesaka have been a driver of financial inclusion and payment digitisation, particularly in the informal sector, where cash continues to dominate.
However, fintechs are still reliant on banks for the clearance of payments between parties. According to the Reserve Bank’s National Payment System Framework and Strategy: Vision 2025, the introduction of fintechs into the payment clearance system will increase competition and innovation, helping to drive financial inclusion. But onerous regulatory requirements often hold back fintechs, which tend to be smaller and less suited to dealing with red tape.
“Competition in payment systems is vital to ensuring high service levels to end users and for spurring innovation,” the Reserve Bank document stated. “Due to the nature of their business and the related regulatory environment, banks have historically been the primary providers of payment services to consumers and businesses as well as the main conduit in providing access to clearing and settlement infrastructures for non-banks.”
Brazil, India and Egypt
“However, as innovations in technology and communications make possible the entry of non-bank payment service providers such as fintech firms, and as regulation evolves to enable access to payment infrastructures for non-banks, competition in payment services is increasing,” the document said.
Mali cited the examples of Brazil, India and Egypt, which have all seen growth and innovation in the payment landscape through the introduction of fintechs into their payments systems. In these countries, regulatory interventions coincided with efforts to drive the cost of transactions down to the point where neither consumers nor merchants were disincentivised from using digital payment methods and turning to cash instead. The result? Fintechs’ market share compared to banks went from below 5% to double digits in less than a decade, said Mali.
“In South Africa that picture is only 5% because these changes coming from the regulator are yet to take shape,” he said.
Creating the optimal regulatory environment in which both banks and fintechs can function in a single payments system is, however, easier said than done. Regulatory constraints are there to protect the payments system on behalf of all stakeholders, but their restrictive nature stifles innovation, leading to losses in potential growth. To balance these considerations, the Reserve Bank is looking to enact fit-for-purpose regulations where the requirements placed on fintechs will be less onerous but still sufficient to protect the integrity of the system. To determine what “just the right amount” of regulation might be, the Reserve Bank is using “regulatory sandboxes” to test how different frameworks applied to fintechs affect the rest of the payments system.
Read: Back in black: Lesaka swings from operating loss into profit
The same principle is being applied by the Reserve Bank in its goal to achieve the regional integration of payment systems across Southern Africa. This bodes well for fintechs like Lesaka, whose goals extend beyond South Africa’s borders.
“The latest studies reveal that Africa is going to be the fastest growth environment for fintech as compared to other markets. If you picture an environment where we can play in that payment space as fintechs, I see fintechs taking bigger [portions of] market share from incumbent banks because the innovation is going to come from the fintechs,” said Mali. – © 2024 NewsCentral Media
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