Country Spotlight:Botswana, Payments developments in Africa- Emerging new technologies,

Africa’s payments landscape is becoming more integrated, with deliberate and concentrated efforts towards modernization of various payment infrastructures. At the same time, the integration of national payments infrastructure into regional payments systems is setting the foundation for continental-wide payment integration. Africa’s payment system continues to rapidly evolve.

Botswana is widely viewed as one of the best governed economies in Africa and boasts a mature payments environment and ecosystem. In this country spotlight, we outline the foundations of Botswana’s payments markets, explore some of the recent developments impacting the payments ecosystem and look ahead to the wider adoption of digital and mobile payments.

Overview: A robust payment ecosystem

When Botswana gained its independence in 1966, it was counted amongst the poorest countries in Africa. GDP per person was just US$831. However, over the next three decades and more, Botswana has become a regional and global growth powerhouse. In fact, Botswana boasted the highest average economic growth rate in the world, averaging around 9 percent per year between 1966 and 1999. Private sector employment grew by 10 percent per year over the same period.

In part, Botswana’s impressive economic record was built on a foundation of diamond mining, prudent fiscal policies, international financial and technical assistance, and a cautious foreign policy. And today, it is rated the least corrupt country in Africa, according to international corruption watchdog, Transparency International. By one estimate, it has the fourth highest gross national income at purchasing power parity in Africa, giving it a standard of living comparable to that of Mexico and Turkey.

Botswana’s financial system includes a number of different types of intermediaries or institutions, such as commercial banks, other deposit-taking institutions, insurance companies, investment dealers and development finance institutions. The banking sector consists of a Central Bank (Bank of Botswana) and ten commercial banks. While Barclays remains Botswana’s largest commercial bank, First National Bank Botswana has grown rapidly to overtake Standard Chartered as the country’s second largest. Barclays is the largest bank based on deposits/ assets, whilst FNB is the biggets bank based on clients and revenue and profit.

Commercial banks are licensed under the Banking Act (1995) and are supervised and regulated by the Bank of Botswana. The banks are subject to reserve requirements, established by the Bank of Botswana. The banks also hold settlement accounts with the Bank of Botswana.

All non-banking financial entities are regulated by the Non-Bank Financial Institutions Regulatory Authority Country Spotlight: Botswana

(NBFIRA) which was established in 2006. It oversees all non-banking financial entities registered in Botswana including Pension Funds, Asset Management, Consumer/Micro lending, insurance and Collective Investment Undertakings. The principle objectives of the regulator are to ensure that investors are protected and that there is transparency in the management and operation of Botswana IFSC domiciled companies. The modernisation of Botswana’s payment systems started in 1995 under the umbrella of the SADC Payment Systems Modernisation Programme (see diagram below).

Since then, Botswana has achieved significant progress in enhancing and strengthening its payment systems and has introduced a number of new electronic payment products including a Real Time Gross Settlement (RTGS) system, debit and credit cards, automated cheque clearing systems, smart cards and mobile payments.

Preceded by the introduction of an automated cheque processing system based on MICR7 code-line clearing, Botswana’s RTGS system (the Botswana Interbank Settlement System or BISS) is now used by banks for virtually all high-value transactions while most low-value transactions tend to be processed using other payment facilities.

Botswana has focused on establishing an enabling legal and regulatory environment that better supports the operation of electronic payment products. The National Payments System (NPS) Act was passed in 2003 and the supporting Regulations were issued in 2005.

Legal and Regulatory framework: The rules and regulations supporting Botswana’s payments system

Creating a robust legal framework for National Payment Systems (NPS) requires regulators to strike a fine balance. On the one hand, the legal framework should ensure that risks are adequately contained to maintain confidence in the NPS. But, at the same time, it should

also promote, rather than stifle, innovation in the financial sector. Indeed, in a world characterised by electronic payment products, all markets require a legal framework that is open to innovation while providing clarity and certainty.

Botswana’s legal and regulatory framework appears conducive to financial innovation. In fact, it addresses many of the major issues that are of concern in NPS policy design and implementation. For instance, the legal framework recognises electronic entries and specifically

empowers the central bank to oversee retail payment systems. 

At the same time, the government continues to review the Bills of Exchange Act to ensure it caters to new developments in the retail banking sector. With the government’s Cheque Imaging and Truncation System (CITS) project now at an advanced stage, the revised

draft Bills of Exchange Act looks more specifically at the ‘Duty of Care’ in the new CITS environment. The Botswana payments sector is subject to a number of key Acts and Regulations which now serve as a guide for the main function of licensing and regulating payment

systems in the country:

? National Clearance and Settlement Systems Act (Cap 46.06), 2003: The Act provides for the recognition, operation, regulation and supervision of clearance and settlement systems.

? National Clearance and Settlement Regulations, 2005: This regulation provides policy guidelines on the recognition of clearance and settlement system operators.

? Banking Act (Cap 56:06), 1995: This Act provides for the licensing, control and regulation of banks, and for matters that relate to banking sector regulation.

? Anti-money Laundering Regulations, 1995: In line with global AML and KYC regulatory changes, these regulations focus on controlling illicit activity within the banking sector.

The payment sector is also governed by regulation related to:

? Botswana Interbank Settlement System (BISS);

? National Payment System Oversight;

? Policy guidelines on the Recognition and Settlement systems Operators; and Electronic Clearing Rules

A closer look: Botswana’s payments ecosystem

Botswana’s payment system consists of five main systems:

Electronic Clearing House Botswana (ECHB)

The ECHB was established in 2003 to facilitate the transfer of retail payments including cheques, electronic funds transfers and other payment orders between participants via a secure and private communications network. In Botswana, Electronic Clearing Houses (ECHs) are operated by the private sector which essentially relieves the Central Bank from incurring additional investment and operational costs. While this may be desirable for the Central Bank, it does create the potential for a time lag between the emergence of a risk, its identification by NPS authorities, and the implementation of corrective measures.

Delivery vs. Payment (DVP) Clearing System

The DVP Clearing System is operated by the Central Securities Depository Botswana (CSD), a private company wholly-owned by the Botswana Stock Exchange (BSE). The CSD’s mandate includes providing clearing services for transactions undertaken through the BSE and settlements are conducted through accounts held at the Central Bank to avoid any credit, liquidity or settlement risk. The DVP system allows for a significant reduction in the errors and delays associated with paper-based manual processing and, as a result, has improved efficiency in clearing and settlements in the securities market. With investors now able to use their securities accounts in the same way as

paper certificates as collateral for loans, market liquidity has improved.

SmartSwitch Botswana

SmartSwitch is Botswana’s Universal Electronic Payment System (UEPS) technology platform. Accredited by the Bank of Botswana, the system allows merchant banks and cell phone companies to offer affordable financial services to the unbanked and underbanked segments of the population, particularly in remote areas. Founded in 2006, the system now boasts a network of more than

1,000 merchants across more than 240 cities, towns and villages who are able to offer cash in and cash out transactions. Merchants also act as agents for a wide range of products and services.

Botswana Interbank Settlement System (BISS)

BISS is Botswana’s Real Time Gross Settlement (RTGS) system designed to allows funds to be transferred between participating institutions on an irrevocable and real time basis. As with any RTGS, the intention of BISS is to facilitate safe and secure payments, reduce risks and enable Botswana to meet international payments and settlement standards. BISS is managed and operated by the Bank of Botswana in its capacity as settlement provider mandated by the National Clearance and Settlement Systems (NCSS) Act, 2003. Membership of BISS is open to all clearing banks operating in Botswana as well as the Bank of Botswana. BISS was upgraded

to the latest Montran RTGS version 3.0 in June 3, 2016, thereby allowing participants to settle payments in central bank money with immediate finality, thus reducing the settlement risk between participants in net settlement systems.

The SADC Integrated Regional Electronic Settlement System (SIRESS)

SIRESS is an electronic payment system developed by SADC member states, to settle regional financial transactions among banks within the region, on a gross basis, and in real time. The implementation of SIRESS has relied on the active participation of the commercial

banks that are members of the SADC Banking Association, and facilitation by Central Banks. Botswana’s banks were granted permission to join SIRESS in 2015 and the first commercial bank (First National Bank of Botswana) went live on SIRESS in October 2016.

Towards e-Money: The movement from physical to electronic payments

As financial and telecommunications technologies evolve, non-cash payment initiatives are gaining momentum in Botswana. Virtually every bank now provides new and innovative mobile payment and internet banking options; two of the country’s three mobile service providers have also partnered with banks to deliver money transfer services.

The need to transfer money quickly and safely from one person to another is, and has always been, important in emerging economies. And all signs indicate that these products are being widely accepted and adopted in Botswana.

While cash remains in high use across the economy, Botswana’s customers are embracing a number of different electronic payment options including:

Automated Teller Machines (ATMs): The ATM system is relatively sophisticated in Botswana and ATMs are available and widely used in most cities, towns and some major villages. For the most part, ATMs are used for cash withdrawals and deposits. The number of ATMs

nationwide continues to grow: In 2008 there were a total of 197 ATMs processing a total of 3.82 million transactions. As of the end of 2018, this had increased to 482 ATMs processing 11.26 million transactions. Barclays alone boasts some 53 branches and more than 115 ATMs throughout the country.

Credit cards: In 1995, only one of the four banks operating in Botswana offered credit cards; today, all 10 banks do. However, credit card ownership in Botswana appears to differ according to demographic characteristics of cardholders: low income, low education, youth, male, and married customers are more likely to own one card while those categorised as high income, high education, adult, female and single are more likely to own more than one card.

Electronic banking and funds transfer: Through access to SWIFT, the Bank of Botswana and other banks use electronic transfers to transmit domestic and international payments. In addition, certain corporates are linked to their parent companies in South Africa via

the VANS computer network which, in time, will permit these companies to link up with full Electronic Data Interchange (EDI).

EFTPOS (Electronic Funds Transfer at Point of Sale):

Most ATM cards in circulation in Botswana can be used by customers at point of sale. There has been a significant growth in the usage of the EFTPOS system from around 2.2 million transactions across 2,500 POS terminals in 2010 to about 33.3 million transactions across 4,271 POS terminals at the end of 2016.

Mobile banking and payments: Great opportunities remain for Botswana’s banks

Mobile money services offer an inexpensive and convenient way to bridge the gap between the banked and unbanked. And the African continent is the perfect place for its application. Not only is it one of the fastest-growing mobile phone markets in the world, it’s also home to significant populations of unbanked people.

The opportunity in Botswana is particularly significant. The country is ranked higher than countries like Kenya and other East African countries on mobile telephone density. And, according to a FinScope Botswana survey, more than half of Botswana’s population remained unbanked in 2009.

Perhaps not surprisingly, mobile money provision has been growing rapidly in Botswana. According to the Bank of Botswana 2014 Annual Report, the number of mobile money transactions jumped from around 5,000 in 2010 to more than 1.1 million in 201814.

Currently, just two banks – FNB and Barclays – have developed operational mobile money transfer service platforms in Botswana. And this has opened the door for a number of joint-venture opportunities between mobile service providers and banks.

The two main joint-ventures providing mobile money services are Mascom’s MyZaka and Orange’s My Money. With almost twice as many subscribers as the closest competitor, it seems that Orange’s service has been more widely adopted. However, given the rapid growth of the sector, it is clear that there is more room for development.

Both service providers have evolved to include a more physical presence through the launch of the Orange Money Visa Card and My Zaka Visa Card. With the (physical) card, customers can withdraw money from any Visa ATM and swipe for goods and services at POS devices in stores. Customers can also get a virtual card that allows them to shop online. This has not only helped take these platforms to a new level, it also improves access to financial services for Botswana’s unbanked.

Looking ahead, there are several factors that may influence the wider adoption of mobile banking and payments in Botswana. These include mobile network problems, high barriers to customer entry, concerns regarding security and a general lack of awareness about interoperability. Given that the top uses of mobile money in Botswana are for airtime purchases and money transfers, it seems clear that significant opportunity remains for payments players with mobile capabilities in Botswana.

What’s next? A Vision and Strategy for Botswana NPS Modernisation

As part of the Bank of Botswana’s efforts to further modernise the country’s NPS and strengthen its oversight of NPS, the Bank is working with AFRITAC South (the Regional Technical Assistance Centre for Southern Africa) to develop the vision and strategy for the modernisation of Botswana’s NPS. The resulting ‘Issues Paper’ offers an overview of the status of the NPS, identifies challenges and developmental needs, and recommends a range of strategic actions to address them.

The strategy proposes six key strategic areas of focus:

1. The Payment and Securities Settlement infrastructure: Botswana’s existing large-value and low-value payment systems are generally considered to be safe and efficient. It is therefore critical that the Bank continue to assess, identify and remediate potential weaknesses and risks.

Strategic actions include: Assessing the BISS and BACH systems; introducing a threshold for large value payments; reviewing and amending BISS and BACH system fee structures and participation; and setting up a collateral-based guarantee scheme in the

BACH system to ensure timely settlements.

2. The Retail Payments: Botswana requires a retail payments system (RPS) that gives customers the widest possible choice of payment instruments for conducting day-to-day payment transactions across the region while also adequately protecting customers. 

Strategic actions include: Strengthening the commitment of the RPS stakeholders; incentivising the diffusion and use of electronic payment

instruments; ensuring price transparency in the payment service market; and involving the Bank and NPS stakeholders in the ongoing national effort to develop a cyber-security framework.

3. The Government Payments: Given their scale and impact, government payments have the potential to play a critical role in the development of the NPS and in influencing people’s payment habits. Innovation in government payments could help expedite the

modernisation of payment systems and instruments.

Strategic actions include: Engaging government in a dialogue with NPS stakeholders on integrating government payments in the strategy to modernise the NPS; and ensuring consistency between the ‘Vision and Strategy for Botswana NPS Modernisation 2017-2021’ and the ‘Botswana Financial Inclusion Roadmap 2017 – 2021’.

4. The Oversight of the NPS: As part of its effort to maintain public confidence in the domestic currency and in the systems and instruments utilised for transferring funds, the Central Bank promotes the safety and efficiency of the NPS by monitoring existing and planned systems, assessing them and, where necessary, inducing change.

Strategic actions include: Adopting and publishing the revised Oversight Policy Framework; drafting operational guidelines for the implementation of the Oversight Policy Framework; identifying relevant standards for the oversight of RPS; and investing in capacity building for oversight, especially in the areas of legal, market and risk analysis.

5. Co-Operation: Modernising the NPS and running it effectively requires cooperation between the Central Bank and other regulators and supervisors, between the NPS oversight function and its stakeholders, and among other stakeholders.

Strategic actions include: Signing a Memorandum of Understanding between the relevant authorities; re-establishing the National Payments Council (NPC) (possibly grounded in the new payment system law); and designing an appropriate governance and

organization for the NPC and National Payments Task Force (NPTF).

6. The Legal Framework: A comprehensive review of all relevant laws relating to the NPS should be undertaken to address gaps and inconsistencies which could potentially compromise the integrity of the infrastructure, create uncertainty regarding its use and hinder future progress.

Strategic actions include: Undertaking a comprehensive review of all laws that are relevant to the NPS, the drafting of a National Payments System Act, and a law on e-money; expediting the finalisation and adoption of the Electronic Payment Service Regulations; and considering the need for a legal framework for government payments.

The intention of the ‘Vision and Strategy for Botswana NPS Modernisation 2017 – 2021’ is to formulate strategies and initiatives to achieve these six pillars. The paper encourages stakeholder discussions and inputs from various sources on the perceived reforms that must

be achieved in the Botswana payments landscape. And, in the coming months and years, the Bank of Botswana intends to extract and define specific strategic actions to be pursued and incorporated into the NPSS document for formal adoption.

Source:Bisi Lamikanra, Partner & Head, Advisory Services, KPMG in Nigeria