South Africa and the Smart Economy – Pearl Kgalegi – [Season 2 | Episode #9]

Jens Seidl 00:00:33 Welcome to another episode of The P.I.T. Exchange, P.I.T. standing for Payments Innovation and Technology. My name is Jens Seidl, and I’m your host for today’s episode. for which we have a very special guest from South Africa, Pearl Kgalegi. Welcome to the P.I.T. Exchange.

Pearl Kgalegi 00:00:53 Thank you. Yes. Looking forward to the discussion.

Jens Seidl 00:00:57 Excellent. I’ll let you introduce yourself in a minute and talk a little bit about your job. The organization you work for, etc. but before we do that, I always like to do three random personal questions just to get to know the person Perl a little bit better. the first question then do you prefer in wind in airplane or window?

Pearl Kgalegi 00:01:19 Window.

Jens Seidl 00:01:21 Okay.

Pearl Kgalegi 00:01:21 Just to see what’s going on. Yes.

Jens Seidl 00:01:24 Nice. Apples or oranges?

Pearl Kgalegi 00:01:29 Oranges.

Jens Seidl 00:01:30 Nice.

Pearl Kgalegi 00:01:31 But if somebody else is peeling it for me. But oranges.

Jens Seidl 00:01:36 It’s a good answer. And, it doesn’t have to be the favorite, but a favorite movie.

Pearl Kgalegi 00:01:46 Rush hour, a bit of laughter. Okay. they’ve got Rush Hour one and two and three.

Jens Seidl 00:01:54 Like that movie. Jackie Chan and.

Pearl Kgalegi 00:01:57 Chris.

Jens Seidl 00:01:57 Is Chris Rock.

Pearl Kgalegi 00:01:58 I think Chris rock. Chris Tucker. Yeah.

Jens Seidl 00:02:01 Yeah.

Pearl Kgalegi 00:02:01 Okay.

Jens Seidl 00:02:02 Nice. All right. Well, without further ado, then let’s jump in. Pearl, do you want to introduce yourself a little bit and tell us what you do, what you’re working on?

Pearl Kgalegi 00:02:13 All right, I’m Pearl, I’m the head of the currency management department at the South African Reserve Bank. What I’m responsible for is issuing out banknotes and new coins. I did that late 2023. The new series of both also responsible for reissuing them out to industries. So I run three care centres based in Cape Town, KZN, Durban and in the biggest one is in Johannesburg.

Pearl Kgalegi 00:02:45 Work very closely in South Africa. We’ve got our own printing works and our own mint. So we’re very closely. Those are the subsidiaries of the bank. That’s, in essence, my background.

Jens Seidl 00:02:58 All right. Great. And while we were going to talk about that in a minute, but I imagine that’s a pretty big responsibility in South Africa specifically because it’s still a very cash rich economy. And maybe let’s let’s start at that point. Can you tell us a little bit about what happened to cash over the last few years? Say, before the pandemic, during the pandemic, after the pandemic, what what kind of trends have you seen in the country?

Pearl Kgalegi 00:03:25 We often say that cash is king in South Africa because of the two economies, that we have a very heavy, informal, sector that currently uses cash a lot. We have the taxi industry that is sitting in that informal and uses cash only. If you look at the formal sector, also very advanced in South Africa, partially using cash, but mostly using electronic.

Pearl Kgalegi 00:03:56 So if I look at the numbers pre-COVID the growth was between 6 and 8%, so around inflation and slightly higher than that. However, during the pandemic, what we saw was, a decrease slightly to 4%. And in the next quarter it was there was an uptick to 7%. And our highest growth was 15% during the pandemic. But that was close to where, it was close to lockdown, completion of that lockdown. Post the pandemic, what we’re seeing now is a drastic change or a drastic drop, where we’re sitting at around 1.6 to 1.8 in terms of the growth of cash in circulation.

Jens Seidl 00:04:48 Okay. And do you have a feel for why that growth has now leveled off. Is that change consumer behavior, different demands. But what is driving that change in in growth of cash and circulation?

Pearl Kgalegi 00:05:01 I think that the change came in during the pandemic, where the media was talking about gems that you would find in the banknotes. A lot of countries saw a shift, but also the convenience of being at home and buying things and using the electronic payment.

Pearl Kgalegi 00:05:23 We also saw it trickling in South Africa. So there is more of a shift where there is, more transactions happening with electronic, but cash is still the playing a role. in terms of transaction, but very less compared to where it was previously.

Jens Seidl 00:05:45 Okay. And, we’ve heard a lot about a shift to a more smart economy. in South Africa, in our payment conferences, we were in Cape Town, for instance, two years ago with our payment conference. We were in Cape Town again with the cash cycle seminar last year. And there’s been a lot of talk about that shift to a digital economy and also the new faster payments based system pay up. Has that also made an impact on how cash is being used differently now?

Pearl Kgalegi 00:06:18 smart economy, we are very intentional around it in South Africa that it will never be a cashless society. We understand our shortcomings. We understand that we’ve got a lot of areas that are rural where network might not necessarily be there, and therefore we have to cater for that.

Pearl Kgalegi 00:06:43 The elderly, we have those that? they they’ve got, like, the blind, the visually impaired that we need to cater for. And therefore a cashless society is not what we are striving for in South Africa. Hence we talk about the smart economy, rather talking, helping the society to understand members of the public, to understand the convenience of moving, but also broadly financial inclusion, that once they are in the system, these are the benefits that they will get. I have said earlier on what is important also in communicating that is that an option is provided by the reserve Bank, where it allows people to or the interoperability between cash and digital. That is key for us. You’ve spoken about a few advances or initiatives that we have in the bank. And one of those is pay up, where the banks came together and they came up with the initiative. There has been it was launched and when it was launched, it started off very slowly. Obviously you want to see who else will go in there.

Pearl Kgalegi 00:08:09 But I must say that now they are around 29 million users of pay cash in a country where we are sitting at around 60 million. So almost half of the population is using pay up. So the uptake is really, good with currently around 236 million transactions since the launch of Asia. So there is one thing we recognize is there is a plethora of digital or electronic payments that are out there. The important thing is we want to make it possible for each and every individual to have a choice, whether they go with pay shop because there is, less cost or transaction cost on there, or whether they go with cash because they, see the benefits of cash. That is what is important for the shop.

Jens Seidl 00:09:19 I see and have you and just looking at, Brazil and picks there, which sounds like a similar success story. Like like pay sharp. they have seen a lot of the picks payments replacing card payments. Is that a similar thing that you’ve seen in South Africa that pay has actually replaced card payments?

Pearl Kgalegi 00:09:41 Not yet, because pay for us is still linked to some of the card payment.

Pearl Kgalegi 00:09:49 So we haven’t made that separation of pay up. with without the card payment. So still partially linked. And that’s why even in the payment system, we are trying to come up with more initiative than something that is called payment ecosystem modernization, that we’re busy within the bank. And that is also meant to assist, expand on, pay up, expand on other initiatives that we have in that, sphere of payments.

Jens Seidl 00:10:26 Okay. Interesting. Well, we were talking briefly about banks. Maybe we should talk a little bit more about that, and how the banks are adapting to that drive to a more a smart economy and how they continue to support cash within that.

Pearl Kgalegi 00:10:42 The one thing that is clear from banks is that they are not exiting their cash, because there’s a social responsibility that they’ve got for the country to ensure that there’s brick and mortar for those that still want to go into a branch and communicate with a person, and to the ATMs, because that’s where most of the people get their cash from. So that interaction and that clarity is upfront from all the commercial banks that they’ll still be in the cash.

Pearl Kgalegi 00:11:16 However, realizing that they there is a move. And in South Africa there’s still a move worldwide. There is. They also need to jump on that bandwagon in terms of digital. So some of the branches you’ll see there’s less interaction with people. But in the areas where there’s probably more elderly people who want to talk to somebody, they will still remain with the interaction with the person. So there is a slight shift. we some of the ATMs have closed, not necessarily because of digital versus physical cash. Some of the reasons are banks just looking at their footprint and trying to be more efficient. A lot of the ATMs would be the five big banks in South Africa close together, and they are looking at a white label ATM, which not all five of them. But they’re being more efficient. So, that’s the that’s the issue around the commercial bank. What we are seeing also in South Africa is cash moving Closer to retailers. If you go into any big retail store, a pick and pay as an example.

Pearl Kgalegi 00:12:43 One can withdraw cash from the teller while you are paying. You simply withdraw cash. There’s something called money market. You can actually deposit for somebody that is sitting. If you’ve got a family member that is sitting in Lesotho or Eswatini. You can actually deposit in the. So the convenience of this is that commercial banks would open their branches at 8 a.m. as an example, and close at 4 a.m. at 4 p.m.. Where else when you’re looking at retailers, they go until 8 p.m. in the evening. People finish their work at five, and they want a cash so that they can pay their taxes. So they go through the retailers. So it’s providing also the back up where people cannot necessarily go into a commercial bank branch, they can go to retailers and get cash. So the broader thing is availability at source very close to where the members of the public are. We need to have cash there. So that’s the two worlds in terms of commercial banks and retailers in South Africa.

Pearl Kgalegi 00:14:01 Yeah.

Jens Seidl 00:14:02 That’s really interesting because I think retailers are too often forgotten about when talking about the cash cycle.

Jens Seidl 00:14:08 And we see that more and more now. We we were in Mexico a couple of years ago with our currency conference, and they have a big player there called OXO, for instance, tens of thousands of, well, 10,000, I think, branches across the country providing care services. I think there’s a real shift now happening in many countries towards retailers becoming more involved in the cash cycle, which I personally think is a good thing from a sustainability point of view as well. Right. You’re you’re cutting out unnecessary, transportation, that way too.

Pearl Kgalegi 00:14:42 And I think the convenience with retailers is that we’ve got people that get government grants, so they get it. It’s staggered throughout the month, the first week of the month, if it’s the elderly, they buy groceries there because they get their money, they buy groceries, or you’re doing two things at the same time. When you go home, you already have your groceries. So that’s the convenience of retailers.

Jens Seidl 00:15:10 Absolutely makes perfect sense. well, why are we talking about retailers in the convenience side of things? There’s also, I guess a risk consideration too, right? Because we’ve seen issues in South Africa with attacks on CIT trucks Specifically.

Jens Seidl 00:15:29 And I think that that goes back a few years at least, when I heard a lot of reports from, organized crime probably attacking, city trucks. Have you seen a shift in the risk profile in South Africa in the last few years? And and what what’s the kind of crime you’re observing at the moment?

Pearl Kgalegi 00:15:48 You’re right. I mean, I could recall just before the pandemic, every, conference that I was attending, this used to be a question that I was asked about South Africa and what is going on with cash in transit heists. They used to be the highest. We are seeing a decline in that, which for us is a good thing because more than cash that is either spoiled in there or taken, what was worrying the reserve Bank is the loss of life because that we cannot replace. So that’s important that we are seeing a slight. In fact, it’s a huge decline in that. However, where we are seeing that there’s more of this that is happening is cross pavement. There’s a slight, slight uptake on the cross pavement, which is worrying because or maybe criminals are thinking it’s easier.

Pearl Kgalegi 00:16:58 The one is to 1 or 1 is to two. In terms of tackling, cash in transit. So that’s where we see the uptick. however, we’re working very closely with our police to ensure that we protect our city colleagues.

Jens Seidl 00:17:18 Okay. Yeah. And it’s, and again, I’m I’ve got more of a European perspective on this. We’ve seen gangs moving around Europe as well, and they specialise then in one type of attack. You and ATM attacks were very prevalent here in Europe for a while. blowing up ATMs, trying to get to the cash that way. so you see these patterns moving around? Do you see that also in in sub-Saharan Africa, that there’s gangs moving around, or do they typically stay in one area, or do you not have any data on that?

Pearl Kgalegi 00:17:52 not much. In CMA countries, I think because of how big South Africa is, it’s easily targeted as compared to our neighboring countries, especially the CMA countries. Botswana is an example, not a lot because of the visibility from the army and the police.

Pearl Kgalegi 00:18:17 so I guess that is the deterrent. But in South Africa we might see a shift. but that shift is around the different provinces. So predominantly it used to be in housing because Johannesburg is called the place of gold. has got a bigger population. Very metropolitan. Now we are seeing that shift going into the Eastern Cape. Eastern Cape has got a lot of rural villages. However, the road spread very big. So very big landscape. So it’s easier for them to either bomb a car and get away with it because there’s stretch and stretch of road in Eastern Cape. So that that’s the shift that we normally see that it would move from province to province or what I’ve just explained now. Either moving from cashing heist to cross pavement or even to ATMs. What we see a lot is standalone ATMs or ATMs that are in a, a garage that would be bombed easily, but those that are inside a mall, not necessarily because you have to go in the bomb it. So there’s a lot of admin, I suppose, in those ones, but those standalone ones and the ones that are in danger.

Jens Seidl 00:19:51 Yeah. We again, we’ve seen similar trends in North America, in the US specifically where these standalone ATMs, where they’re being filled from the back as well. It’s just a vulnerable environment. So I guess it’s also something where the industry will have to learn from these bad experiences to, adapt and hopefully prevent these attacks going forward. Because, as you said, it’s it’s the risk of human life, which is the the biggest issue we need to prevent.

Pearl Kgalegi 00:20:21 The one thing that the data that we collect shows is that mandates are the highest in terms of the risk days. And I think, like you said, city companies probably need to reposition, think about their strategy differently where they say, is it really Monday where we carry a lot of cash from retailers? What else can they do differently? Because stats shows that Mondays are the highest risk days.

Jens Seidl 00:20:52 Interesting. Okay, well, let’s move off. the the risk and and attack topic to, the CMA that you mentioned briefly. Then I don’t want to assume that everybody on this podcast that’s listening to it knows what the CMA is, the common monetary area.

Jens Seidl 00:21:09 Right. So do you want to maybe explain a little bit what that is and how it’s quite special? actually.

Pearl Kgalegi 00:21:17 There’s actually a special relationship between the four countries. So South Africa included in it. So it’s Eswatini, formerly known as Swaziland, Lesotho and Namibia. The three countries have got dual currency that, they’re operating with. So they’ve got their own. They’ll have a malady that is operating in Lesotho and the South African rent. So that’s the special arrangement that we have with the three countries. Although the rand would spend broader with countries like Zimbabwe, Mozambique, Botswana around South Africa will still be using the rent. But the special arrangement is within the CMA countries.

Pearl Kgalegi 00:22:09 Okay.

Jens Seidl 00:22:10 And what makes that arrangement special? So for instance, is the exchange rate fixed between the South African rent and their local currency. And what other special arrangements do we need to imagine here?

Pearl Kgalegi 00:22:24 They’re very close to South Africa. Yes, that’s one on one in terms of our currency and their currency. And I think that that goes.

Pearl Kgalegi 00:22:34 I mean, years back, why we had CMA countries and why, there was a decision to even have dual currencies in those countries. Part of it was to assist those countries. Part of it is most of the, people from those three countries actually work in South Africa. They would work in South Africa, and they still have their families out there. So that’s the relationship people from Lesotho and Eswatini working in South Africa and therefore having to take money to their families in those three countries. A country like Botswana is an example. Slightly higher. It’s not 1 to 1 to South Africa, so you’ll have to do the conversion similar to what we do in, in Europe with, the rent. So that’s where the speciality, as you said, comes in for CMA countries.

Jens Seidl 00:23:35 Okay. And that’s of course also true for cash. Right. There’s a lot of cash moving across borders, enabling, as you just said, either taking money that you earned in one country to the other or paying for goods, etc., etc..

Jens Seidl 00:23:48 Is that is that true?

Pearl Kgalegi 00:23:49 Yes. There’s a lot of people in the CMA countries coming to shop in South Africa. So for them, for their livelihoods, anything, groceries or even what they are selling back in their countries, they would get it in South Africa. So yes, a lot of trade movement happening, a lot of family. if you have left any of your family members there to survive. That’s how, the 2 or 4 countries interlink.

Pearl Kgalegi 00:24:20 Okay.

Jens Seidl 00:24:21 All right. Well, I’m conscious of time. Pearl. And before we we wrap up. maybe I can just ask you one one more generic question, I guess. What’s what’s your outlook? for South Africa, from a payments perspective, and particularly for, from a cash perspective as well. what what do you what trends do you expect to see in the next few years?

Pearl Kgalegi 00:24:46 financial inclusion is crucial. Financial literacy is crucial. I think if we can get those two. choice is important. So ensuring that even though we have the electronic payments that are out there.

Pearl Kgalegi 00:25:06 But we provide the choice in terms of cash, and we do not let the infrastructure because we’ve got good cash infrastructure. We do not let that dilapidated. in favour of going the electronic payments way. There’s a lot of work that we’re putting in as the reserve Bank to modernize our payment, in the next year or two. We are hoping to see the results of that, from the teams that are working with, with, payments in terms of cash. We still talking the same that cash is here, and we will make a provision for cash in South Africa.

Pearl Kgalegi 00:25:52 Excellent.

Jens Seidl 00:25:53 Sounds all very positive. So I wish you all the best with all of your undertakings. it’s I’ve been to South Africa several times now. It’s a beautiful country. It’s it’s a lovely country. and I can see really a bright future ahead for South Africa. And I think you’re playing a pivotal role in making sure that these things are going to fall in place. So good luck with that, and I hope we’ll check in again soon and see how things are progressing.

Jens Seidl 00:26:23 Thank you.

Pearl Kgalegi 00:26:24 Thank you so much. We’ll always be willing to talk about any progress that we have. Please do reach out.

Jens Seidl 00:26:32 Lovely. Thank you. All right. That concludes another episode of The Pit Exchange. Thank you all for listening in. Please do follow like to what you need to do on your platform so you don’t miss the next episode. Thank you all very much. Bye bye.