The Reserve Bank has been working to add non-banks as players in South Africa’s national clearing and settlements system as part of a plan to drive financial inclusion to the unbanked and underbanked.

Allowing non-banks into the clearance and settlement system will allow standalone fintechs as well as those run by retailers and mobile operators, for example, to facilitate payments between parties without necessarily having a traditional bank involved at all.

This, the Reserve Bank believes, will help underserved communities, which form a significant portion of the fintech market, to transact more efficiently.

“We recognise that where we are coming from, transacting traditionally happens from bank accounts and historically bank accounts are where we save our money,” said Tim Masela, head of the National Payments System department at the South African Reserve Bank, in an episode of the TechCentral Show to be published later this week.

“We recognise that today people don’t necessarily need to bank, but they do need to transact. And thus I could have my money in a bank account, but for ease of transacting, I could take some of that money and put it into a digital wallet to be able to transact,” Masela said.

One of the ways non-bank fintechs drive financial inclusion is by being available at times when traditional banks are not.

Retailers, for example, are usually open on Saturdays and Sundays when a large number of people need to transact. Similarly, mobile operators ensure that their infrastructure is available to users 24 hours a day, he said.

Backbone

“Banks are the backbone of the financial system in terms of savings and accounts, but the non-banks are emerging in this space, offering wallet services that are convenient to us as the public. We believe that we (the Reserve Bank) should move with the times and open up the system for the entry of non-banks,” said Masela.

But bringing non-bank participants into the national clearance and settlement system is fraught with complexity. The challenge for the Reserve Bank is to balance the innovation and flexibility that allowing new players into the system brings while managing the risk that a less rigid system presents to the stability of South Africa’s financial system.

Read: MTN takes MoMo fintech battle to South Africa’s streets

With banks this risk is mitigated through comprehensive regulation, and large banks have entire departments within their organisations dedicated to maintaining compliance with regulation. Fintechs, however, are often limited in the amount of regulation they can realistically shoulder; bogging them down in red tape might stifle the ability to innovate.

To tackle this conundrum, the Reserve Bank has opted to design “fit for purpose” regulatory frameworks to govern fintechs that mitigate risk to the system at large on one hand while enabling these companies to participate meaningfully and still remain nimble.

According to MTN South Africa Mobile Money (MoMo) CEO Kagiso Mothibi, MoMo and other fintechs were part of working groups organised by the Reserve Bank that participated in formulating the regulatory framework that will allow fintechs to participate more deeply in the national financial system. MoMo and other fintech players took part in “regulatory sandboxes” that were used by the Reserve Bank as lab environments in which they could observe the impact fintechs would have on the system as a whole. These experiments were combined with inputs from various stakeholders to draft regulations to govern fintechs in payments and settlements.

“We welcome any regulations and policies that remove barriers to entry and encourage innovation,” Mothibi said in a Tuesday interview with TechCentral.

“If you crowdsource the problem by including more players in the system, the solution has a better chance of being solved. It will be a great service for the overall financial system and for the consumer as well.”

The Reserve Bank’s Masela said that in opening up the system, the Bank applied the principle of “proportionality”, meaning the regulatory framework should meet the risks it is trying to manage without expecting non-banks “to meet the onerous requirements that banks need to meet”.

“We have started this journey and we had allowed non-banks in some aspects of the system, and there were others that were still restricted. We are moving in a direction of changing the law and changing our regulatory frameworks so that non-banks can enter the core of the system, which we call clearing and settlement,” said Masela. – © 2024 NewsCentral Media

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