First mover

First National Bank is leading the charge as South Africa’s major banks gear up to take payments to a new level. Chief Digital Officer Raj Makanjee and CEO of Commercial, Gordon Little, explain how its partnership with HPS could transform the future of transfers

The digital payments landscape in South Africa is a challenging one for its native big banks.

An overwhelming majority of retail payments (73 per cent) were cash-based before the COVID-19 pandemic hit, according to the annual report from the Payment Association of South Africa. And yet 80 per cent of the population is banked, mobile penetration is high and the country’s payment infrastructure has been rated in the world’s top five.

As with most economies, digital transactions, by necessity, increased when communities locked down. One online payment platform in South Africa noted a 35-to-40 per cent rise in transactions, as well as a rise in the number of retailers requesting online payment systems, according to McKinsey.

But the extraordinary circumstances of 2020 mask systemic barriers to sustained and widespread digital usage that the banks are trying to address before they lose market share to South Africa’s growing number of challengers and foreign Big Tech.

“One of the challenges we have in South Africa is that we have this very formal economy where card acceptance and electronic payment acceptance is comparable with most developed countries. But then we have the informal, historically disadvantaged, township-based economies, that are still very cash-based,” says Raj Makanjee, chief digital officer and retail and private banking CEO for First National Bank (FNB).

Patchy network connectivity in rural areas and high data costs make mobile banking uneconomic for many. To add to the complexity, while nearly everyone has a mobile phone, less wealthy and non-metropolitan communities, in particular, have handsets based on the USSD (Unstructured Supplementary Service Data) format, a text-driven technology that doesn’t support most current mobile banking applications.

FNB itself has nearly five million transacting customers, but still only a little more than half (2.8 million) used apps on their phones to access its services by the start of 2021. For banks and consumers alike, this disparity means additional cost and less security in payments.

And it’s why the Payment Association of South Africa set out, in 2018, to create a payment system that’s ‘as good as cash’; a low-cost, secure, instant and easy-to-use capability that’s agnostic to where the payment originates (be it mobile wallet, bank account or card), thus ensuring universal access to digital transactions.

Meanwhile, banks are transforming their own payments platforms and back offices as they prepare to compete in an all-digital future while accommodating non-digital transactions for as long as they are needed by this two-lane economy.

FNB was the first of them to partner with payment technology provider HPS, to roll out its PowerCARD platform. This has allowed the bank to take a green-field approach to its payments architecture – so far with zero disruption to existing customers as the bank ditches its outdated, retrofitted internal payments system. Importantly, it addresses two co-dependent parts of its value chain – card issuing and merchant acquiring.

“On the issuing side, we’re using the HPS PowerCARD platform to build out new solutions that we believe will disrupt but then benefit both clients and ourselves,” says Makanjee.

All to pay for:

There’s huge opportunity in South African payments – and big challenges, too

“The more clients who use their apps to pay – whether it’s through a virtual card with one of the ‘Pays’, like Apple Pay, Samsung Pay, and even our own FNB Pay – the physical card will become less relevant. So, we are focussed on driving more into the virtual space, both for point -of-sale and e-commerce spend, and then, hopefully, the migration of the physical cards can follow. It’s an interesting and different approach that we’re taking to the issuing side of the PowerCARD rollout.”

The widespread use of USSD-based feature phones means there are technical challenges still to address.

“QR code, tap-to-pay, etc, is where the payments experience becomes very slick, but how does one replicate that in a non-feature phone environment?” ponders Makanjee. “Coping with that both on the issuing and the acquiring side, is one of the challenges we have to solve to make sure we get the adoption of card-based payments to scale.”

Meanwhile, using PowerCARD as a clearing and settlement platform will allow FNB to persuade more merchants to adopt digital acquiring and, ultimately, to formalise that cash economy for the benefit of the country; to reduce the cost and risk associated with cash.

“But we’ve got work to do, to make sure that people are comfortable using acquiring infrastructure in spaces that cash historically dominated,” acknowledges Gordon Little, CEO of commercial services.

“Part of that is making sure that we’ve got affordable solutions for smaller, informal merchants, for instance, using QR codes. Having PowerCARD on the backend facilitates some of that. We’re also moving away from requiring hard terminals, to software-enabled terminals. Consequently, the need to have a physical device will disappear, and people will be able to use their smartphone for acquiring.”

Crucially, he’s hoping the PowerCARD platform will allow the bank to challenge the perception that card and electronic fund transfer (EFT)-based payments are more expensive for merchants than cash.

“In many circumstances, we haven’t correctly priced for cash,” says Little, “so, currently, the incentive isn’t in the system for people to migrate to card. We’ve worked really hard on that over the last 10, 20 years, but it’s an ongoing journey. Cash continues to grow, as a basis of settlement. But, within that, is some of the opportunity for us.”

Little believes that HPS, which is already integrated with global payment platforms, will deliver a world-class banking infrastructure for FNB, capable of handling payments as diverse as prepaid and virtual cards and vouchering, enabling the bank to not only upgrade services for existing merchants, but also make it easier to onboard smaller businesses.

“Rather than focussing on repairing and enhancing [our payments system], which has historically been the focus, this ability to leapfrog has been fantastic,” he says.

“A lot of smaller businesses are looking for revenue-generating opportunities and we think that allowing devices to not only acquire cards, but provide additional services, is a key differentiator [for us].

“Payments is a very competitive space and we see some convergence across the classic credit card, debit card and EFT rails. So, we’re trying to make sure that, as a bank, we remain front and centre in terms of our ability to service our own client needs and protect against challengers trying to disintermediate that relationship.

We are focussed on driving more into the virtual space, both for physical and e-commerce spend, and then, hopefully, the migration of the physical cards can follow

Raj Makanjee

“There’s a lot of work for us to do, to find solutions for small merchants, but a lot of opportunity for us to sell additional products through the channels we have in play. So, we’re upbeat about what needs to happen in that environment.”

The country’s digital transition is now getting a hefty kick in the right direction from policymakers. The South African Reserve Bank decided that cheques would not be supported by the country’s national payment system from January 1 this year.

“And the banking regulator is pushing us to find innovative ways to solve instant payments, which in turn can address inclusivity,” adds Little.

A further challenge, acknowledges Makanjee, is that South African banks have failed to keep pace with modern, global real-time payments infrastructures. He would like to see a closer convergence between card-based and EFT real-time payments, which are currently developing in an inexpedient fashion. Closer convergence, he says, would help in areas like settling disputes and fraud prevention.

South African banks, like banks all over the world, are facing challenges from home-grown and international fintechs looking to expand in the payments space.

Yoco, the B2B South African payments company, has seen rapid recent growth, while Jumo, the native banking services provider, is building on its success by looking to expand its offering. Some of these fintechs will aim to disintermediate services offered by banks.

FNB is looking to squeeze this threat. It has already developed in-app, real-time micropayment, person-to-person and bill-sharing payment services. But another counter move it hopes to build on is a closed-loop FNB marketplace, which facilitates real-time transactions between its retail and merchant customers.

Little says: “If we can build a relationship of trust between clients on the retail side, and business banking, clearly we wouldn’t have to worry about disintermediation, because that’s a closed loop.”

The bank dipped its toes into the water in December 2020, launching a home services marketplace that connected retail customers with 1,500 plumbers, electricians, builders, home caterers and others banked with FNB, initially in Gauteng, Durban, and Cape Town.

Driving the revolution

Established banks, native fintechs, and overseas challengers are all looking to monetise the untapped potential of this contrasting economy, comprising rich and poor, the tech-savvy and those that simply use bank accounts as mailboxes to withdraw funds and hold as cash. By implementing a state-of-the-art payments platform, aided by helpful regulation and entrepreneurial thinking, FNB believes it can be one of the flywheels driving a payments revolution across the whole of South African society.

“If we can master things like small-value payments and get a closed circuit going between FNB retail clients paying FNB business and corporate clients… there are lots of smarts to be applied,” says Little.