Nicho Bouma
As expected, the announcement was met with some fanfare in the local payments industry, with many commenting favorably on the new system’s “person-to-person” focus at launch and pro-consumer benefits. But is that really the case? And for businesses who also stand to benefit from a viable alternative to cash, why does PayShap come with more questions than answers?
First off, it is important to understand why PayShap is a significant development for the local market. In South Africa and across the continent, cash has traditionally been considered king in the payments industry. This is because physical currency offers users an unmatched level of accessibility and usability; cash is fast, flexible, anonymous, and more importantly very affordable as a form of legal tender. It is for this reason that cash is also typically preferred by low-income households, who - in addition to factors such as limited financial literacy, distrust for legacy banking systems, and high sensitivity to costs - prefer to use hard currency for their high-frequency, low-value transactions.
Except cash comes with several drawbacks: Its physical nature makes it vulnerable to theft, loss, and counterfeiting. It can also be difficult to trace and recover, and it is often difficult to tell if a note is counterfeit until it has been presented to a bank or other financial institution. Then there is the inconvenience factor, with cash being cumbersome and inconvenient to carry, particularly if you need to make a somewhat large purchase or pay a significant bill. On the opposite end of the spectrum, cash can be difficult to track, particularly for small businesses that may not have sophisticated accounting systems, which can lead to errors and discrepancies in financial records.
It is thanks to a combination of these factors that South Africa - and the continent at large - has seen the emergence of new payments solutions, ushered in by the fintech revolutions that started in the 1990s and continue to this day. Together, the introduction of leaner and more consumer-friendly financial services have enabled more people than ever before to receive money, send it abroad, pay billers and utilities, and make payments both in-store and online. This has in-turn done wonders for financial inclusion in the South African context (although one cannot discount the role that growing demand for Social Security Agency grants has played, thanks to their requirement for all recipients to hold a formal account).
PayShap represents the latest in this long line of fintech innovations. Introduced in SARB’s Annual Report for 2022[2] and forming part of its ‘Vision 2025’ plan to modernise the local payments landscape - the new system offers a bank-based, cost-effective, and instant payment service for consumers, including a proxy service to embed user banking details, request payments, and provide support for several known retail payment use cases. In doing so, it aims to compete with the usability of cash, in a bid to blend the unique benefits of physical currency with those of digital innovation (such as improved security to counteract fraud, money laundering, theft, etc.).
At launch, PayShap is prioritising person-to-person transfers and allows consumers across all income levels and degrees of financial inclusivity to quickly transfer up to R3000 per transaction, without the need for a bank account number or a branch code. Instead, users can simply provide a cellphone number – an important innovation considering that 95% of South Africans have access to a mobile phone, with the country being home to some 112.7-million mobile connections for a population of just 59.4-million[3]. More importantly, the technology promises never-before-seen transaction times (of up to 10 seconds[4]) and will proposedly allow users to transfer money through instant messaging apps like WhatsApp[5].
In testing the solution, PayShap lives up to the hype and consumers can easily send money instantly to each other using only a cell number (or bank account number if one is on hand). However, several challenges still need to be addressed. This includes the sign-up processes, which is not intuitive and can lead to confusion and slow rates of adoption. This is a simple fix if banks can better communicate and educate users on the technology’s use cases.
More significantly, it seems as though the banks have missed an opportunity to drive PayShap transaction growth. This is primarily because the system launched with prices that are more expensive than existing channels (for example, wallet-to-wallet transactions by telecommunications companies are free and instant; it is also worth pointing out a price comparison completed by MoneyWeb[6]). Currently, banking applications also default person-to-person payments to normal EFTs, rather than PayShap, which further limits adoption. To their credit, the issue of price has been addressed by some of the banks, indicating that costs will come down as they develop trust around the solution - except it is incredibly difficult to regain trust and drive uptake when first impressions by would-be users are soured by high prices at launch.
But what about businesses and where do they stand amongst all this? At time of writing, the system does not cater for person-to-business transactions (although one could debate this if referring to sole proprietors). However, once all the challenges at launch have been addressed, and as the platform sees an uptick in use, it is likely that we will see PayShap expand to include person-to-business flows. This would present a great opportunity to businesses looking to capitalise on the technology’s speed, security, and potential cost-effectiveness which will in-turn help to improve cash flow, reduce transaction costs, and expand customer bases. Doing so successfully will require good planning and preparation – specifically, businesses will need to build-out the infrastructure needed to aggregate and reconcile high volumes of micro-payments.
In preparation for this, it is important to acknowledge that the system is housed in banking applications, such as those operated by ABSA, Standard Bank, Nedbank and First National Bank, with more banks and other financial service providers expected to join the cohort as the platform develops[7]. For businesses looking to develop the back end needed to facilitate PayShap, independently integrating with a wide range of potential payment frameworks and institutions will be no easy task. Doing so will require significant investment in the form of both time and capital to account for, administer, and manage this process.
It is likely then that we will see businesses look to payment aggregators such as Pay@ to support their integration with PayShap. On one hand, this is because payment aggregators enable cash-heavy businesses (like brick-and-mortar retailers) to digitise physical transactions. On the other, aggregators group various payment channels together – which includes integrations with the likes of Capitec, ABSA, Nedbank and First National Bank – and in doing so, unlock economies of scale for reduced transaction fees, as well as taking the burden off businesses to ensure they stay up to date with the latest payment innovations.
Considering that PayShap has only just been launched to the public, the full extent of use cases and impact that the new system will have remains unclear. Yet there is no doubt from industry that the technology will bring sweeping changes to the South African payments landscape – although doubt persists as to whether it will replace the role of cash in the short- to medium-terms (in fact, it may even increase the use of cash if current challenges are not addressed).
But considering the uptake of digital technologies in the African market, we can expect the platform to grow over time, as has been the case with most innovations in the financial world. As the banking industry gather more information from users, the market can expect updates to the system in the coming months. As such, the time is evidently now for businesses to set themselves up for the opportunities that lie in the immediate future, and in doing so, ensure they build solid foundations for those that PayShap will bring down the line.
Written by Nicho Bouma, Chief Innovation Officer at Pay@, and Clinton Leask, Business Development Lead at Pay@.
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