Over the course of the past 12 months, the world has learned a lot about uncertainty. The financial space is no exception, having gone through the kind of ructions not seen in nearly a century. As governments around the world look beyond recovery and towards avoiding a similar crisis, financial regulators will look to take the risk out of their local financial markets and payment systems.
The Covid crisis has highlighted the risk of an increasingly perilous debtor book. This usually implies increasing capital adequacy and provisioning requirements and increasing the audit and fraud detection controls. Further consolidation can be expected. But one particularly poignant impact has been related to fraud with the spike in online transactions. Securing online payments and mobile banking channels has never been more urgent.
Tightening credit and doubling down on legacy payment security will have an economic dampening effect as African markets plunge into recession. A powerful tool that regulators have to respond to this crisis is by encouraging in-country digital merchant centric payments to focus on stimulating the local SME and informal business sector. Doing so not only improves the efficiency and security of payments, the digital transparency deepens the relationship between banks and business, which in turn is good for consumers and producers alike.
Benefits from SMEs to Financial Institutions
One of the biggest benefits in-country digital payments have when it comes to de-risking local business environments is that they bring a greater degree of transparency and formalisation of the financial relationship between the bank and the SME.
In the SME space, for example, the advantages include contactless payments, instant access to funds on acceptance of payment, and digital transparency with their acquiring bank. The digital transparency and reliability of the in-bound receipts from digital payments to the acquiring bank promotes access to a wider range of financial services (insurance, savings, credit facilities, EFT payments) and establishes a business track record with suppliers and other service providers. A bank that can see the SME’s cash flow and rely on regular inbound payments can safely extend credit and other essential services that it could not reasonably do otherwise.
It also gives businesses a chance to open new sales channels, such as e-commerce and sales agent networks, and to offer value-added services to promote customer loyalty, sales campaigns, and partner programmes.
Importantly, these measures bring a greater degree of stability to these businesses and their workers, further helping the economies they operate in to reduce risk.
Financial institutions, meanwhile, benefit by being able to use digital transparency and data to understand the business and reduce lending risk and cost, increasing the size of the addressable market. Technology reduces the transaction costs associated with on boarding merchants as customers and creates a data-rich relationship that turns a thin file client into a data-rich client that is bankable. Digital merchant payments are a gateway to more comprehensive and conclusive finance to support and stimulate the productive economy.
Regulation and incentivisation
This is why it is important that governments embrace digital merchant payments on account rails, away from cards in a local scheme governed by local rules. This is a gateway to more comprehensive and meaningful finance to support growth and development of the productive economy.
It is often cited that digital disruptors run ahead of legislation by finding ways around the rules that were not anticipated when the rules were designed. The South African Reserve Bank has recently warned about a new activity with “Instant EFT start-ups that use a practice called “screen scraping” where a third-party is given access to a consumer’s bank account data and acts on behalf of said-consumer, using that consumer’s online banking access credentials to simulate instant clearing.
It’s important that regulators protect consumers and the confidence the public has in digital payments and needs to set parameters for the kind of digital payments adopted in their markets. Payments must be safe and customer data must be protected. But the payment also has to be sufficiently valuable to merchants and profitable enough for the financial institutions to build a meaningful commercial financial relationship bringing the merchant into the formal economy and create a merchant customer.
While it is impossible for regulators to totally eliminate risk particularly from unpredictable “black swan events” such as we have experienced in 2020, they can prepare payment systems for shocks and defend financial markets by encouraging transparency and financial inclusion with secure account rail digital payments.
While in-country digital merchant payments are just one measure, their use is one of the most powerful ways of generating growth in the local economy and “lighting up” the shadow economy. Ultimately, a local digital payment on the account rail can prove vital to a more comprehensive and conclusive impact to stimulate the productive economy.
Gardiner is Managing Director, Bluecode Africa