What’s new in South Africa? PayShap, Regulations and more. – Ghita Erling [Episode #24]

Podcast Intro 00:00:03 Hello. Welcome to P.I.T. Exchange, a podcast by Currency Research. Join us as we discuss the latest in payments, innovation and technology with the industry’s most innovative thought leaders. Today’s payments are changing and moving around the world faster than ever before and P.I.T. Exchange gives you the knowledge and insights to keep up. Sit back and relax as we join Currency Research, exchanging ideas with today’s special guest.

Jens Seidl 00:00:08 Welcome to another episode of The P.I.T. Exchange. Payments, innovation and technology. We’ve got a very special guest from South Africa with us today. Welcome Ghita Erling, the CEO of Pasa.

Ghita Erling 00:00:24 Hello. And thank you for the opportunity to chat to you today. I’m looking forward to it.

Jens Seidl 00:00:28 So am I. Glad to have you here. And as usual on, well, at least when I’m hosting the podcast, I like to start with a little icebreaker with the three random questions. Nothing too, too difficult. Hopefully. Let’s see. First one, on an airplane. Do you prefer aisle or window?

Ghita Erling 00:00:49 Short haul window, long haul. I’ll just to be difficult because then you can walk around on long haul. You can walk around without disturbing everybody else. But I like seeing out the window. Particularly short haul in daylight.

Jens Seidl 00:01:03 I can completely, agree with that. I’ll do the same, actually. That’s good. All right.

Ghita Erling 00:01:08 It was not just me who was difficult. Good.

Jens Seidl 00:01:13 Next question. The Big Apple or New York or the big five in South Africa? The wildlife. What’s your preference?

Ghita Erling 00:01:21 Oh, I must say, I love visiting New York, and I love walking around New York. But for myself and my soul and my happiness, it’ll have to be the big five. New York’s an experience. The big five is is life and and meaning to life. So I’ll take the South African bush any day. Thank you.

Jens Seidl 00:01:42 Lovely. All right. And the last question. Do you have a favorite songwriter, composer or musician?

Ghita Erling 00:01:52 That’s difficult. I’ve talked to so many musicians who have the favorite that they play versus the favorite that they listened to. I’m probably a classical. I never get tired of listening to Brahms, I guess. Just to be a little bit different. But if you had to ask me the question, what would I choose to play at my have played at my funeral, that would be an entirely different answer as well.

Ghita Erling 00:02:16 So it’s never as simple as favorite composer, favorite, favorite songwriter.

Jens Seidl 00:02:23 Okay, well, let’s go with Brahms. Nice. Thank you very much. kay. Well, let’s jump in then, with, maybe a brief introduction of yourself. If you want to tell us a little bit about yourself, what you do in your current role and how you got there, I think that would be a great start.

Ghita Erling 00:02:40 So I’m the CEO of the Payments Association of South Africa. We’re a private sector self-regulatory organisation with delegated authority from the Reserve Bank to manage payment streams and to admit participants to the national payment system. We are facing quite a lot of changes, regulatory as regulation changes in this country, which will mean that the regulatory elements, you know, admittance, licensing that we currently do today fall away. But it gives us the opportunity to admit a much broader range of members. So today, our members are only clearing and settlement participants in the future world. Far more activities in the payment system will be licensed and they will all be our members.

Ghita Erling 00:03:27 So that’s a little bit about what I do, in terms of how I gotcha, it’s been a rather interesting route. So I’ve spent, I don’t know, more than 20 years in the banking sector, which included my last, and being building the payments and card systems for a fintechs, challenger bank startup. Which was incredible experience in terms of understanding how the system works. Before that, I worked in transactional banking, often in corporate and transactional banking. So that side of the business, I did do a bit of expansion work. So, work into Mozambique, setting up of an India branch office or office, as well as a couple of other countries on the continent, our continent, not yours. so I’ve had a very broad exposure across banking. Even when I started, I spent a bit of time as a relationship manager. So I feel like I’ve seen the banking world from all sides. And I’m very happy now to be in a role where it’s looking at a world that’s broader than just banks and bringing in allied parties and activities or playing in the financial sector.

Jens Seidl 00:04:44 All right. Very interesting. But we’re going to talk a little bit more about those changes. But maybe before we go there, if you could tell us a little bit about the payments landscape in in South Africa for those that haven’t been. I think it would be quite interesting to understand what to imagine. Is it cash heavy? Digital heavy? What’s actually happening in South Africa?

Ghita Erling 00:05:06 So we’re a very interesting almost dichotomy in that we have highly sophisticated payment systems. We rolled out one of the globe’s first real time payment systems back in 2006 already, which was kind of a, a bastardization, for want of a better word of the debit order switch. But it is a real time system, and it still functions today in in an environment that remains very cash dominant and very informal sector dominant, with massive volumes of cash going through those environments. If you look at our formal statistics, we look great on paper. More than 85% of South Africans on the last debts I’ve seen have bank accounts, but that’s only half of the story.

Ghita Erling 00:05:54 At least a third of them use them as what we would call mailboxes. So get the money in, withdraw it all in one go. And that’s the last time that we would see transacting happening within the digital system. So there’ll be two transactions, balance inquiry followed by a cash withdrawal of, of everything that’s available. And, and our problem therefore is not about rolling out bank accounts, but it’s about getting people to use the transactional capabilities that come with those bank accounts.

Jens Seidl 00:06:25 Okay. So it’s not the the unbanked, it’s the underbanked, really. Which is your main concern for financial inclusion?

Ghita Erling 00:06:31 Yes. And and being very aware that the behavior we see is completely rational. So a very high portion of that sits in social grant recipients. They would typically have to travel to withdraw the cash, probably to a retailer to to withdraw the cash and remember that the scale of our country is is very different to to what you are dealing with in Europe. And the cost of getting to the point where you can go from digital to cash is a significant enough portion of your overall monthly allowance that is completely rational, even with the risk that you could fall victim to crime and lose all of your money in one go.

Ghita Erling 00:07:14 It’s still rational to go to withdraw your money in one go. So our real challenge, in my view, is building out acceptance networks that work in the most informal of environments. So the guy sitting on the side of the road with his pile of tomatoes, selling one tomato at a time, or our informal taxi environment, which is the minibuses that can traverse pretty much anywhere across the continent, if you’re willing to, to tap into the system. So, so the real challenge is to enable acceptance in all of those environments. And we, we’re very aware that payment systems are necessarily unnecessary but not necessarily sufficient because you’ve got to then in the more rural areas have reliable access to electricity, cheap data that’s available to even start talking about the digital, migration. So we deal with part of the problem. We know that we can’t solve the whole problem, but we at least want to create awareness of what else needs to be done elsewhere in order to get the underbanked to use the card that they already have.

Jens Seidl 00:08:25 Yes. Well, but it’s not only about card, is it? Because when we were in Cape Town last year with our, central Bank payment conference and the Global Payments Summit, we heard a lot about Payshap, which, I believe is a real time payment system using the real time payment rails that you used before. Can you tell us a little bit about that and what what’s happening with Payshap.

Ghita Erling 00:08:49 So Payshap being a kind of South Africanism that cool? Everything’s okay. It’s all right. Is is where we got to the name Payshap. Payshap is actually a ISO 2002 two real time payment system. So we built it with dual intent. The one was modernization of our legacy EFT, and the, the real time payment system I mentioned earlier environment. And the second one and actually the business case for the build of of Payshap was cash disbursement was cash displacement. Because cash is an enormous cost to the economy with the kind of distances that we have to travel, we do famously or infamously still have something of a crime issue.

Ghita Erling 00:09:35 and so that also layers costs onto the whole cash conversation. It’s enormously expensive, and it is not optimal for the user because they put themselves at risk. So the business case was built on saying, if you can remove and display some of their cash and circulation and replace it with digital transactions, and the research at the time suggested that that could. And I’m sure you’ve seen similar research elsewhere lead to a real uptick in GDP growth as well. you know, even 10% of cash transactions. And I say even but I think 10% is enormously aspirational and in many respects can actually lead to a sustainable growth in GDP. So the business case was about our underbanked problem. And with the added benefit that we start building out the modern architecture that would enable us to modernize all of our EFT systems, some of which are kind of over 40 years old now.

Jens Seidl 00:10:34 Okay, so Payshap, access your bank account directly. You can make retail payments at retailers, e-commerce as well.

Ghita Erling 00:10:43 So it’s account to account. It’s been live for I guess almost a year and a half the years flying fast.

Ghita Erling 00:10:50 It went live in March last year and we’re still rolling out functionality. So account to account, we do allow payments to proxy that’s already live. So payment can be made to a mobile phone number or a few other iterations along those lines. In October, we’re going live with a request to pay functionality. We have standardized QR code in place, but we haven’t yet mandated the use of that. We are hoping that that will will come in the coming months. And, we’re aware that there are various conversations going on, even with multi-lane retailers, about how they can adopt. From my perspective, the real challenge and the real benefit, though, is the adoption in the informal sector. I show you the QR code and I tell you my proxy and you just pay me then and there, and I get the ping, and you walk away with your tomato or your, ice cream on the beach or whatever it happened to be. So that for me, is the real power, as opposed to the multi-lane retail environment, which is already very well served, in the Cod environment.

Ghita Erling 00:11:59 So it is, as I say, early days, we’re starting to see quite reasonable volumes. So I was just looking at the numbers now. We had about 13 million transactions through it in July. In a country of the population that’s probably 50 million. just to give you a sense of scale, but a lot of that looks like it is migration from legacy channels. So on the one hand, while that is fantastic because it means the amount of pushing we have to do to migrate off the legacy is not massive. It’s happening. The market is driving that anyway. I haven’t yet seen compelling evidence that we truly managing to penetrate the environments in the markets that we want to. I have no doubt that it will come. but I think there’s still quite a lot of, of work to be done. And to that end is quite interesting. Our regulator has taken a very good look at what’s happened in other jurisdictions where similar systems have had massive uptake very quickly. So examples would obviously be pix in Brazil, UPI and India.

Ghita Erling 00:13:09 and they’ve kind of come back to us and said, so does this model work optimally, and are there more pieces that we need to put in place? And if there are, is it fair to expect the private sector to build that kind of infrastructure that will have to be provided on a free or in your free basis? And and to that end, we’re actually seeing our Regulator, having very publicly announced and actually started making quite reasonable progress on saying we’re going to get more involved in the payment system. So digital financial ID to help you deal with some of the, the fraud and, risk, financial crime risk elements that go with digital systems. We think we’ll build that for you and we’ll make it available to you. KYCs, perhaps for some of the, for the the entrance to haven’t quite built out that infrastructure themselves or the participants who haven’t quite got there. And some very interesting thinking around how, what has already been built could be optimised to solve the financial inclusion imperative, which is really what’s driving these conversations.

Jens Seidl 00:14:26 Okay, so if I understand you correctly, you’re saying that the regulator is going to pay or play a larger role in the actual operating of the payment systems. What is it clear what the driver is behind that? Has it been clearly expressed? And then could you share that with us?

Ghita Erling 00:14:46 The principles we’ve heard articulated are ones that say we’re the market provides the solution that’s needed and solves the problem, then there’s no need for the regulator to play. However, in this construct where you are asking private sector to build quite expensive infrastructure, given the the level of robustness that it has to have, we, we understand that we can’t necessarily ask the private sector to build that and provide it for free or near free, and therefore we will do that and we will provide it to you. so they are talking about a and we’ve seen this concept, as I’m sure you have, occurring in a number of jurisdictions, a public payments utility that would provide much of this functionality. So so today, just to give you a sense of the construct.

Ghita Erling 00:15:39 We do have a utility that provides ACH services in real time payment services. It is owned by a number of the banks, but and has talked about things like digital ID or something along those lines for years, but never quite managed to develop the business case. What this says is, you know, either regulator will build their own, or perhaps they would acquire the one that exists or part of the one that exists and build it. And one way or another, build out this public utility with this additional functionality that can help with much faster digitalization and adoption of digital within the South African market. It they’re also talking in that context of being much more interventionist. So our organization for all that, it does have regulatory authority is self-regulatory when it comes to things like adoption, modernization, migration between channels. I think what we are going to or what it’s very clear we’re going to see a lot more of is mandating of use of, of some of these systems. Mandating as opposed to reaching consensus and agreement as to when we’re going to shut down systems.

Ghita Erling 00:16:57 And that’s not to say we’ve been unsuccessful. It’s one of the first global jurisdictions to close down the cheque environment and having closed down a couple of legacy debit order environments in the past few years, we have a good track record of actually closing down legacy payment systems and moving to new ones. But that is and there’s a there’s a there’s difficulty in negotiating the, the arrangement and the agreement to do it because then you start potentially falling foul of competition rules. So it’s much easier if your regulator steps in and says, okay, we will tell you and this is when you will do it and so we expect to see more of that kind of mandating coming into play as well. Okay. So it’s I think I think a lot of the industry is still coming to grips with what’s happening in our world, because it’s a very radical departure from what’s been an enormously market led environment to an environment that says, at least for the short to medium term, while we need to create this big digital infrastructure, the regulator is going to step in bold finance, own and run.

Ghita Erling 00:18:02 and at the same time is going to be much more interventionist in how drives the market towards adoption of these kind of solutions.

Jens Seidl 00:18:10 Yeah, that’s really interesting because I guess one of the, the most prominent, examples of the regulator getting involved in payment operations recently was, the Federal Reserve System creating the Fed now system, but I think it was different there because my perception at least was that was created because the existing services weren’t really covering the whole market. It was especially those small players that were struggling, to, to connect to real time payment systems. So there was it was more about market inclusion. I think here it’s a matter of really creating a whole set of functionalities, that the it sounds like the private sector just can’t agree on how to fund that kind of thing. Is that fair to say?

Ghita Erling 00:18:55 It depends who you ask. In the private sector you would find very different voices on it. But the point is there are different and they don’t agree. So your explanation is, is is absolutely, absolutely spot on.

Ghita Erling 00:19:07 Our problem is very different. We have currently 36 members who participate in clearing and settlement or soon to participate in clearing and settlement. So the scale of the problem, compared to the sheer number of US banks that are playing, is, is dramatically different. The other big difference, though, in some respects, is the role our organization plays versus, for example, the role that a nature plays. So nature, who we do engage with quite regularly, looks after the environment. Our world extends across the real time environment and the cloud environments, and indeed, whichever payment stream needs to have an element of interoperability. And that means as a market that even where there is more than one provider of a solution, we cant force interoperability, across those providers. And that, in fact, is the intent and the whole purpose of the new organization and, and the continued existence of our organization because into that new structure, because it was debated quite heavily. And it’s around ensuring that the center doesn’t fragment, that you can force interoperability across disparate systems and schemes.

Ghita Erling 00:20:18 and that you can, for example, enforce common entry standards like QR code standards. So that’s very core to what we have a private sector organization doing, but with the with the power of the Reserve Bank and the backstop of the central bank, as and when we need it to, to make those things happen.

Jens Seidl 00:20:38 Okay. And again, is it fair to say that a lot of these initiatives are meant to drive financial inclusion? Is that one of the big motivators?

Ghita Erling 00:20:48 That would be the primary motivator we’ve had? Well established, as I said, digital solutions in this market for, for many decades, and certainly for anybody who’s in the digital economy and, formal employment, it’s, it’s a no brainer. But we very unfortunately do it with one of the highest unemployment rates, globally. And I think that is supplemented by a very strong informal sector, which is harder to measure. But you still want to reach that informal sector with the same digital environment that you can offer to the to the more formal environment, so that that’s a big driver of it.

Ghita Erling 00:21:34 Other drivers of the kind of work we’ve seen over the last few years have been, for example, to stop abuses that occur within the direct debits environment. And again, we have some very specific, almost socioeconomic, drivers that have meant that the the behavioural elements that we’ve seen in our system are very different to, I think, what many other jurisdictions have encountered. And so maybe just to give you an example, we talk about abuse in the debit order system, and we see abuse happening in two sides. The one side is on the collector side where you sometimes see overly aggressive selling and people who almost kind of reluctant to, to, vigorously say no and. Almost get bullied into handing over bank account details. But we also saw what amounted, some years ago to a massive organized crime effort where people were simply collecting money through the debit order system and we’ve done an enormous amount to stop that. So you’ll hear South Africans talk about 199 and 99 rand scams because those were typically below. It was before the days where everything was notified that hit your bank account.

Ghita Erling 00:22:48 So it was just below the notification threshold in the hope it would take longer before it was noticed. And we saw what we think was literally billions of rands worth of over a number of years money being collected from the system. We solved that through the due diligence process, but it has to be a very thorough one because the bad actors and the simply go and set up a new entity when you close down the current one. So you literally have to track individuals in this conversation as well. So we we’ve seen collector abuse but we also see payer abuse. So in a market that’s as over indebted as ours, with perhaps not as much financial education as we would like in the school system. You find people are stretched to the point where they have to make a choice between which debit orders are they going to allow through this month? Or maybe there’s an unexpected school expense or medical expense, and I simply can’t pay my insurance this month. And then what were completely valid, contract or debit orders are disputed through the system and of course, reversed.

Ghita Erling 00:23:56 So a lot of the work that we’ve had to do in the debit order system has been to try and find the balance of power between the user and the between the collector and the payer, so the payers consumer rights are protected. but at the same time, the collectors have at least some level of certainty around what money they’ve collected is going to stay into their account, and a limited period under which it can be disputed. and, and also, trying to build systems where you can create more certainty. So one of the things we did, and it was our first ISO 20022 for a was in the debits environment was created a mandate authentication system where a collector and a pair can agree. This can via the messaging stored on the bank system. The payer’s bank system have a authenticated mandate that says the payer agrees. This is what I pay that collector per month. That reduces the disputes because if you have formally authenticated, you can’t claim I didn’t agree and it also creates more certainty for, the collector and under which circumstances, but protects the payer because they also know that, anything that comes without the authentication can be disputed and returned.

Ghita Erling 00:25:21 So it’s been a very interesting space to watch because it’s socioeconomically driven this these days when I wake up and I think, you know what the payment systems really should not be trying to arbitrate between what are ultimately social and contractual issues. But we’ve landed up where we are, in creating payment systems that do allow for this extra level of certainty. We find we still having to regularly, tweak to get the balance right. And it’s public domain that we have, in fact, been sued by one of the large collectors, over our approach that says when in doubt, we assume on the side of the consumer, because that’s just the right of the payer, because that’s the right thing to do. So that also has been a very dynamic, interesting environment, but from a payments perspective, it’s where we learnt our really hard lessons about ISO 20022, because as I’m sure you hear from everybody, that first ISO 20022 implementation is a very good source of scars and learning.

Jens Seidl 00:26:30 Yes, indeed. But this, this is really interesting because we at our recent conference in Kuala Lumpur, we were talking a lot about fraud, mostly in the context of faster payments, because now with real time payments, obviously there’s a whole new world of fraud opportunities being opened and where the bad actors can not only embezzle money very quickly in real time from people, but then move it into other accounts very quickly, which makes it so hard to then follow the money, basically. And the, the whole aspect of consumer protection. I think that’s what you just described there. Right. You spend quite a lot of effort already in protecting consumers. That’s a whole thing that still needs to happen in the faster payments world.

Ghita Erling 00:27:18 And that is one of our concerns as an industry. So for all that, we’ve had faster payment systems since 2006, and there are well used and a lot of it has been used in the corporate environment. And we’re quite concerned about, about how much greater volume to a very different market is going to drive out those elements. So we’ve put a lot of effort into starting to build centralized fraud engines. We’ve watched very carefully what’s happened in a couple of other jurisdictions in, in the hope that we can learn from that. And we’re very carefully actually managing the transaction limits of the stage as well. So the transaction limits on The current system is 3000 rands, so divide by 20 to get to US dollars. You know, it’s very low at the stage.

Ghita Erling 00:28:15 We are looking at increasing it in the next few months. But each bank again would choose by channel by segment what amount they are allowing. So we are taking a slightly slow approach to driving the volumes, having seen what’s happened elsewhere. So we do have some experience. What we do have experience in real time systems, and we do believe that this new one is more secure than the previous one. But we’ve watched what has happened elsewhere. And, we’re trading very carefully and lightly into the space because, as you said, it becomes a consumer protection issue very quickly.

Jens Seidl 00:28:51 Yeah. And I guess there’s two aspects to this as well of course. One is the technology and processing point of view, which is again, I think all of the payment operators are looking into that, looking at tools that help identifying fraud earlier, etc., etc. but then there’s also, of course, the question when the damage has happened, who’s actually going to help out those consumers. So that’s that’s also not an an easy discussion. Do you think that’s something where again, the industry will sort it out themselves. Or the regulator might have to step in or a bit of both. What’s what’s your view on that one?

Ghita Erling 00:29:24 So so my view on this one is the industry will sort itself. It sorted out itself or the regulator will step in to make sure it happens. And the first is vastly preferable.

Ghita Erling 00:29:37 The question the real question is can the industry sorted out. And that’s not always so easy because like much of the rest of the world, we have protection of personal information rules. Each of the participants takes a different view around what information can be shared and under what basis. So even collecting data isn’t in these kind of scenarios isn’t totally trivial without some regulatory guidance or dispensation. But having said that, I think as a community and as a market, we’re very aware that if we don’t manage it, we will be told how to manage it and we would far rather get it, get it right ourselves. We don’t we don’t always think that the solutions put in place elsewhere have been optimal for solving that.

Ghita Erling 00:30:26 And we do have some local things we’ve played with, some of some of which have existed for years. So we’ve we’ve had an account verification service, for probably at least a couple of decades, but it’s never been mandatory. And it’s not the easiest to use because you have to know the ID number or the company registration number of the party that you are paying. And in a country where fraud and crime is an issue, the last thing on earth anybody wants to do is give their ID number out to some other person who’s standing in front of them, wanting to pay for the tomato. Thank you. You can rather give me the note. So we have in the new system, built in automatic, verification of the account, or at least verification that it looks legitimate. And in our proxy resolution, we bring back, the name of the party. So if you pay, if I pay to your mobile number, it will come back and it’ll say you it might have a couple of stars on the E and the S and maybe on the I and the D, but it’ll bring back most of your, your name that I can validate.

Ghita Erling 00:31:33 That may not be fully foolproof. We’ll see. And I think the request to pay creates a whole new attack vector. So we don’t really know how that’s going to to play out. But we have some ideas around how we can reuse the existing functionality for confirmation of payee, for example. Okay. many of our participants would have, already would have processes and fraud engines that is paying to a relatively new account or relatively new beneficiary kicks in extra levels of validation. But that’s not something that’s ever been formalized as an industry practice. And I think we might end up having to go in those kinds of directions to manage the risks ourselves before we could get to the scenario within elsewhere, which is okay, because you carry the liability even when your customer willingly paid away to a scam, or willingly gave away data they shouldn’t have given away.

Jens Seidl 00:32:31 Yes, indeed. Very interesting. I wish we could keep going, for I don’t know how much longer, but we are about to run out of time. If I can just maybe finish with one more question. And it’s very, very broad question for my perspective, I think we’re living in one of the most exciting times when it comes to payments and payment innovation. Do you see more opportunity or more risk in that?

Ghita Erling 00:32:59 So I think that our world is changing massively. And, you know, one of the things that will play out very strongly, of course, is the geopolitical elements and the risk that is associated with that and potentially the costs is are absolutely massive. So we see more localization, more creation of alternative payment systems, and move away from interoperability. Although we’ve known that interoperability as always is always the answer. So on one level, you get geopolitical elements that are completely outside of any of our control, but that will play in our space. You’ve got the enormous technology, the new forms of money, the whole DLT conversation, on the other hand. And then you’ve got tightening around [inaudible] and recommendation 16 thinking. So this balance between more risk or less risk, I think is fundamental. And at the heart of everything we’re doing, we want faster payments.

Ghita Erling 00:33:53 We want more financial inclusion. We don’t want increases in scams and fraud. So I don’t know the answer to that. All I know is that that fundamentally, our jobs boil down to navigating the balance between the question you’ve asked more risk versus less risk and I guess that’s what keeps us all employed.

Jens Seidl 00:34:12 Excellent. No, I think that’s a very fair summary. Thank you for that. Thanks very much for joining us today. It was a really, very interesting conversation. Really enjoyed this. I hope you did too. And hopefully see you soon again somewhere in South Africa, ideally.

Ghita Erling 00:34:30 And grateful for the opportunity. I also enjoyed this conversation. Thanks Jens.

Jens Seidl 00:34:34 Thank you very much, Ghita. So that concludes today’s episode. Thank you all very much for listening in. My name is Jens Seidl and I look forward to our next episode and see you and hear you all then bye bye. Okay.

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