An address by Francois Groepe,
Deputy Governor of the South African Reserve Bank,
at the Payments Innovation Conference
Sandton Convention Centre, Johannesburg
5 October 2017
The South African Reserve Bank's perspective
on a changing and innovative payments environment
Introduction
Fellow Deputy Governors, other distinguished guests, ladies and gentlemen.
It gives me great pleasure to welcome you to the first Payments Innovation Conference
organised by the South African Reserve Bank (SARB), which we are hosting in
collaboration with domestic and international payments stakeholders. This conference
takes place at an appropriate time as innovation and technology have the potential to
spur growth and development.
According to EY's FinTech Adoption Index1, South Africa boasts financial technology
(FinTech) adoption levels of 33%, which is in line with the global average. The survey
respondents expect this type of adoption to increase to an average of 52% globally,
with South Africa counting among the countries with the highest intended use among
consumers at 71%.
The purpose of this conference is therefore to develop deeper insights into emerging
innovations in the payments ecosystem, which we hope will provide a better
understanding of regulatory frameworks, stimulate debate, and spur development
within the payments space in support of our country's developmental objectives.
My address today will focus on the SARB's perspective on the changing and innovative
payments environment.
We are in an era of unprecedented exponential change, where rapid advances in
technology have the potential to fundamentally change financial services. The
International Organization of Securities Commissions (IOSCO), for example, reports
that, in 2014, there were 1 800 FinTech companies with a total funding of
US$5.5 billion. This has risen to over 8 800 FinTech companies with investment of
US$100.2 billion by 2016.2
Technology's impact extends beyond mere services. It also allows for the
democratisation of communication and information, and thus for the transfer of power
to the end user. Countries and institutions were previously the main controllers of
communication and information due to high barriers to entry, such as information
asymmetries and the large capital investment that was required to facilitate access.
This has fundamentally changed.
Powerful and super-fast processors, cheaper computing power, wide availability of
access devices, and the roll-out of high-speed broadband have created an
environment primed for a burst of innovation and ideas. Due to these rapid advances
in technology, there has been an increasing effort to take advantage of these
developments in service offerings, including within the financial services sector.
The emergence of FinTech, that covers digital innovations and technology-enabled
business model innovations in the financial sector, also presents exciting opportunities.
Examples of innovations that are fundamental to FinTech today centre around value
provision in the lending environment, value storage in the form of wallets and tokens,
value protection in the form of insurance and investments, as well as value transfer in
the payments and remittances areas. Cryptocurrencies that utilise block chain
technologies, new digital advisory and trading systems, artificial intelligence and
machine learning, peer-to-peer lending, equity crowdfunding and the Internet of things
are some of the better-known developments that are normally cited. The drivers of
these developments, from the demand side, emanate from shifting consumer
preferences and an expectation for more, faster and cheaper services. From the supply
side, they emanate from opportunities presented by evolving technology, as well as
the changing regulatory environment. Currently, there is intense global interest in these
developments, as is evident from numerous research initiatives, consourtium efforts,
collaborative bank experimentations, venture capital deployment, as well as a number
of central bank projects.
According to the Bank for International Settlements (BIS) working paper on The
FinTech opportunity3, these innovations may:
a) disrupt existing industry structures and blur industry boundaries;
b) facilitate strategic disintermediation;
c) revolutionise how existing firms create and deliver products and services;
d) provide new gateways for entrepreneurship; and
e) democratise access to financial services
Although FinTech enterprises have changed the way in which financial services are
structured, provisioned, and consumed, they have not acquired dominance yet. They
do, however, have the potential to significantly change the competitive landscape. The
World Economic Forum4 (WEF) highlights eight factors that have the potential to alter
the competitive landscape of the financial ecosystem, namely:5
a. the commoditisation of cost bases;
b. the redistribution of profit pools;
c. ownership of the customer experience;
d. the delivery of financial services through platforms;
e. the monetisation of data;
f. automation in the workplace;
g. systemically important technology firms; and
h. financial regionalisation due to differing regulatory priorities and customer needs.
These developments also have the potential to rapidly alter the payments space.
Innovation in the payments ecosystem is resulting in an expansion of payment
services, broadening the reach of payments platforms and networks.
Payment services innovations have recently included the leveraging of mobile devices
and connectivity to make payments simpler and more convenient and to reduce the
use of cash and make payments less visible to payers.6 A preliminary analysis
conducted by the SARB reveals that the current crop of innovations leverages the
existing foundations of the payments infrastructure and that these new firms integrate
themselves into existing value chains.
For example, mobile technology has catalysed the introduction of new mobile
point-of-sale (POS) players in South Africa. These players have deepened the reach
of electronic payment networks by targeting flea markets, self-employed artisans such
as plumbers and spaza shops in rural areas - all previously underserved markets in
terms of access to card payment networks. The potential of this type of technology
means that, in the near future, we could possibly triple the level of the current 600 POS
devices per 100 000 citizens to close to 2 000. This vividly demonstrates the potential
of FinTech to broaden the network and deepen inclusion.
Other benefits that innovation may bring about include, operational simplification,
counterparty risk reduction, clearing and settlement time reduction, liquidity and capital
management improvement and fraud minimisation.
It should, however, be recognised that while these developments present tangible
benefits, they may also give rise to certain challenges, including, but not limited to
issues related to privacy as well as regulation, criminality and law enforcement. Given
this reality, a balance necessarily need to be struck when developing regulatory
frameworks.
The innovation trade-off
The possible benefits of innovation are numerous and broad, and those that are often
touted relate to costs, convenience, and speed. Big Data and information analytics that
allow financial intermediaries to understand and cater to their customers' needs at an
individual level presently exist and already in wide use. These developments have the
potential to lead to advances in risk management, credit extension processes and an
economy that potentially makes less use of cash. The inclusion of previously
under- and unserved consumers into formal financial services through the introduction
of novel and bespoke products is a promising and welcome development.
As stated above, the pursuit of these developments, in the absence of appropriate and
sound regulatory frameworks, could lead to the emergence of new risks. As an
example, with these advances in technology, some of the platforms and systems have
moved to the cloud. This is compounded by the rapid improvements and usage of
mobile devices.
A WEF white paper highlighted that in order to improve risk management, it is important
to highlight that the right tools should be used, including:7
a. data on the emerging new innovation and its potential impact;
b. assessment tools for the systemic risks introduced by innovation;
c. a more standardised regulatory treatment framework for new competitors across
jurisdictions; and
d. an improved mechanism for public-private cooperation to combat cyberattacks.
A further key regulatory consideration is to support initiatives that could assist in easing
frictional costs, within the system and the economy, and to respond to the need for all
interbank payments to be processed and finalised in near real-time.
Cybersecurity
There is no doubt that cyber-threats have increased substantially over the past few
years. As technology evolves and is more widely embraced and become more
accessible, criminal activity is rapidly expanding to the cyber-world. The source of this
threat vector is both privately and state-sponsored - the latter is far more difficult to
counter. Cybersecurity and strengthening resilience across the entire value chain is
therefore non-negotiable. In response to this reality, the SARB hosted a Cybersecurity
Conference with the theme of 'Collaboration for building cyber-resilience' last year. The
conference was an important event for creating a platform to share experiences from
both global and local stakeholders, creating awareness and a common understanding
of the fundamental issues, and assisting in determining the deficiencies that needs to
be addressed.
Through this Payments Innovation Conference, we will also explore payment threats
and security interventions in the digital age, with a focus on the analysis of emerging
threats in the payments domain and counteracting threats (the tactics, tools, and
techniques) in order to remain safe and secure in the digital age.
It is important to recognise that, in an interconnected world, one is only as safe as the
weakest link. It is, therefore, crucial for us to think about how to strengthen the
resilience of the wider financial system.
Developments in regulations and policy objectives
The South African Reserve Bank Act 90 of 1989 (SARB Act) bestows the mandate of
ensuring the efficiency, safety and soundness of the entire payments value chain and
related matters on the SARB. Aligned to this mandate in the SARB Act is the enabling
legislation, namely the National Payment System Act 78 of 1998, which ''provides for
the management, administration, operation, regulation and supervision of the payment,
clearing and settlement systems in the Republic of South Africa8. In the quest to
execute this mandate, the SARB endevours to increasingly establish an enabling
regulatory environment for innovation to take place.
One of the benefits of payments innovation is the potential expansion of access to
financial services and achieving financial inclusion to reach the under- and unserved
consumers and to reduce transaction costs while providing greater transparency with
simpler products and greater convenience and efficiency. By leveraging technology
and proactively shaping a conducive environment for innovation through regulation,
the payments system can serve as a gateway to achieving financial inclusion and
address the need to deepen and strengthen access for both consumers and providers.
As the payments industry becomes increasingly innovative and continues to improve
the traditional payments landscape, regulatory and legislative frameworks need to be
flexible and adaptable to these changes and provide an enabling environment for
innovation to thrive. Furthermore, the regulatory framework should remain robust and
resilient to risks that may be posed to the safety and efficiency of the payments system.
A number of developments have necessitated a rethink of the adequacy and relevance
of the existing payments regulatory framework. These include global policy
developments, relating to financial inclusion, access, financial stability, financial
integrity and competition, international best practice and standards, and
recommendations from global policy-setting structures, including the assessments
undertaken by institutions such as the World Bank and the International Monetary
Fund.
How the South African Reserve Bank collaborates with the industry
In 2015, the SARB initiated a project to develop a vision for the national payment
system. This process culminated in the drafting of the National payment system
framework and strategy: Vision 2025 document (Vision 2025). The SARB is currently
in the last phase of consultations with the industry regarding the strategies that will be
implemented to advance the development of the national payment system. The
Vision 2025 process has and will continue to be consultative and collaborative.
In March 2016, the SARB Executive approved the establishment of an internal Virtual
Currencies (VCs) and Distributed Ledger Technologies (DLTs) Steering Committee
(SteerCo) and working group. Subsequently, we established a FinTech SteerCo and
working group. These structures are tasked to strategically review the emergence of
FinTech initiatives and assess the related use cases. Their primary responsibilities
include the facilitation of the development and review of policy positions for the SARB
across its regulatory domains. This will be undertaken through an analysis of both the
pros and the cons of emerging FinTech innovations, as well as through the testing of
appropriate regulatory responses to these developments.
The SARB is also looking forward to exploring the potential for sandboxes and
innovation hubs to test the relevance of existing regulatory frameworks and make the
necessary changes, where appropriate.
An intergovernmental FinTech working group consisting of various government
agencies - including the SARB, National Treasury, the Financial Intelligence Centre,
the Financial Services Board and the South African Revenue Service - was also
established in December 2016. Its main purpose is to assess different FinTech
innovations and their impact on the South African regulatory landscape. This is aimed
at fostering safe FinTech innovation in South Africa.
Conclusion
I hope that the focus of the next two days will be on the potential innovative
developments within the payments systems environment and the possible benefits that
these may give rise to. This calls for critical reflections, including on how we may
collaborate in order to advance the development of and growth in our economy. This
conference thus presents an opportunity to jointly contemplate the payments system's
development potential and the roles that each one of us could play in realising this
aspiration. Frank and open discussions are required on our strengths and
shortcomings, with a specific focus on where we can do better and how we should
position the South African payments system going forward.
As a regulatory authority, the SARB will also continue to focus on areas where policy
and regulation may be improved to provide the financial industry with a more enabling
regulatory environment. I would like to reassure you that the SARB is committed in its
support of innovation and the responsible improvement of the services offered to all
our people in a manner that does not give rise to increased threats to the soundness
or stability of the wider financial system.
Finally, I would like to encourage the industry to continue collaborating and innovating,
while also supporting policy objectives and taking cybersecurity risks into account.
Thank you.