Regional Spotlight: Southern Africa Development Community (SADC) - The journey towards regional payments integration

Regional Spotlight: Southern Africa Development Community (SADC) - The journey towards regional payments integration

Overview: The SADC journey Introduction

? The Southern Africa Development Community (SADC) was created through the SADC Treaty signed in 1992 by the Heads of States of Governments of Southern Africa.

? The SADC’s focus is on bringing about sustainable, collaborative development in several important areas— including financial services—with the ultimate goal of poverty eradication.

? The SADC currently includes 15 Member States: Angola, Botswana, The Democratic Republic of Congo, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, The Seychelles, South Africa, Swaziland, Tanzania, Zambia and Zimbabwe. It covers a population of more than 300 million people.

Key milestones in the SADC payments journey

The development of the SADC Finance and Investment Protocol

The Finance and Investment Protocol (FIP) aims to help harmonise Member States’ financial and investment policies. The aim of the protocol is to build stronger regional integration, grow trade within the region and encourage regional economic development.

The definition of legal frameworks and regulation

Supported by the mandate provided within the Finance and Investment Protocol, the SADC was positioned to define the regulations required to create appropriate governance structures and the guidelines that would underpin the SADC Payment Ecosystem.

The creation of the Committee of Central Bank Governors

In 1995, the Committee of Central Bank Governors was launched with the intention of helping all SADC Member States develop a Real Time Gross Settlement System (RTGS). All Central Banks committed to undergo the required regulatory and system changes to support a RTGS and, by 2010, most SADC Central Banks had achieved that goal.

With South Africa’s RTGS system considered the most advanced in the region, the Committee of Central Bank Governors asked the South African Reserve Bank (SARB) to take the lead in developing the system for the SADC.

The development of the SADC Integrated Regional Electronic Settlement System (SIRESS)

Funded through the South African Multiple Option Settlement (SAMOS) system, SIRESS has been in operation since July 2013. While the system currently offers only credit push transactions, system operators are also considering and evaluating the potential for debit pull transactions as well.

All SADC banks are eligible to participate and must hold South African Rand (ZAR) denominated settlement accounts with the SARB. Using the RTGS has allowed cross-border transactions (denominated in ZAR) to be conducted on the same day and at much lower costs than were previously available. Standard cross-border remittances using standard EFT and mobile channels were introduced in 2015.

Legal and Regulatory Framework

The SADC’s model is the EU’s Single Euro Payments Area (SEPA) framework which has resulted in an integrated trans-European payment environment. Payments integration in Europe was enabled through the creation of a harmonised legal and regulatory framework which is currently unavailable in the SADC region.

The basis for cooperation and coordination between central banks on payments, clearing and settlement systems within the SADC exists through the Finance Investment Protocol – Annex 6. Furthermore, SIRESS’ operational activities are regulated and managed in terms of the South African legislation, as the payments system is hosted and operated by the South African Reserve Bank (SARB).

SADC Member States participating in the SIRESS Proof of Concept project tended to structure their legal arrangements on a contractual basis through a number of multilateral agreements. However, these were widely viewed as short-term solutions aimed at providing legal certainty until a more appropriate SADC-wide legal and regulatory framework could be developed and adopted.

At the same time, Article 4(1) (e) of Annex 6 of the FIP explicitly requires Member States to “monitor, on an ongoing basis, international payment system best practices and align the payment system developments in that State Party in accordance therewith”. This includes several documents published by the Bank for International Settlements (BIS) Committee on Payment and Settlement Systems (CPSS)*, The Basel Committee and the Financial Action Task Force (FATF). Best practice benchmarks include:

? The Principles for Financial Market Infrastructures (PFMIs)

? The United Nations Commission on International Trade Law (UNCITRAL) Model Law on Electronic Commerce (1996)

? The FATF Recommendations (2012)

? The BIS/World Bank General Principles for International Remittance Services.

? Developments in other mature markets in Europe, the Americas and Asia.

As a vital piece of financial market infrastructure (FMI), SIRESS is expected to adhere to the ‘Principles for financial market infrastructure’ (PFMI) standards issued by the International Organisation of Securities Commissions (IOSCO) and the Committee on Payments and Market Infrastructure (CPMI).

Limitations in achieving a harmonised legal and regulatory payments framework within the region are largely influenced by the absence of a regional institution (such as a Central Bank or parliament with legislative powers such as the East African Community, EU or ECOWAS) and the varied payments system maturity within each member country’s jurisdiction – member countries are at various stages of development of their national payments legal and regulatory frameworks.

While Annex 6 of the Finance and Investment Protocol establishes a framework for cooperation and coordination between Central Banks on payment infrastructure, there are no specific SADC Regulations and or Directives on Payments. SADC member countries’ commitment to attaining a harmonised legal and regulatory payments framework, depends heavily on their willingness to amend their local laws in order to establish institutional and organisational structures required for a fully operational and efficient payments system. The amendment will be supported by the creation of a regional payments system model law.

SIRESS is owned by the SADC, through the Committee of Central Bank Governors (CCBG). The SADC Payment System Subcommittee is accountable to the CCBG and is comprised of the SADC Payment System Project Team and the SADC Payment System Oversight Committee (SADC PSOC).

The SADC PSOC comprises of country leaders appointed by the Governors of taheir respective central banks and are accountable for SIRESS and payment system oversight-related matters. The SADC PSOC works together with the SADC Payment System Subcommittee to advance the payment, clearing and settlement systems of the SADC.

SIRESS is hosted and operated by the South African Reserve Bank (SARB), thus its operational activities are regulated and managed in terms of South African legislation. However, the SADC PSOC, in collaboration with the SARB, fulfils the oversight function (cooperative agreement between SADC members) with SARB as the lead overseer. The SARB executes the roles of Chairperson of the SADC PSOC, the chairperson of designees, and the secretariat.

Regulation of participants within SIRESS (payment schemes) is carried out by the SADC Payment Scheme Management Board (PSMB) – the self-regulated, autonomous body of the SADC Banking Association (SABC BA).

The SADC Payments Scheme Management Body – SADC Banking Association

Founded in 1998, the SADC Banking Association (SADC BA) was created to serve as an interface with the Committee of Central Bank Governors (CCBG) on matters related to regional financial integration in general and the SADC Finance and Investment Protocol in particular.

Over the years, the SADC BA has increased its participation on various CCBG sub-committees and – today – the organisation plays an active role in the payments, financial markets, banking supervision and exchange control subcommittees. As such, the SADC BA is a key actor in the SADC Payments Project and views it as both strategic and necessary for the advancement of the banking sector in the SADC.

Beyond the CCBG agenda, the SADC BA also provides a regional banking leadership platform on matters related to the transformation of the banking sector. Recognising their collective duty to promote and transform the SADC into a dynamic and well-integrated economic block, the organisation is working with its member banking associations to encourage:

? The creation of an environment that encourages the development and expansion of harmonised, inclusive and sustainable banking services across the SADC

? Greater cooperation with national regulators to align goals in order to improve the integrity and credibility of banking services in the region

? Improved member association technical and regulatory capacity aimed at making their financial markets more attractive to both regional and international investors.

Core work themes for the SADC BA Secretariat include financial literacy regulatory compliance issues and the SADC BA Payments Training program.

At the same time, the SADC BA is also the channel through which commercial banks are able to inform the development of financial market infrastructure to support inter and intra-regional trade. As a non-competitive association, the SADC BA is focused on defining

payments instruments, business rules and messaging standards in the interbank space. The SADC BA Board views this as an opportunity to improve overall customer service, deliver cost reductions and improve efficiency (through higher levels of automation) in the cross-border payments environment.

The SADC BA’s mandate with regards to payments is to:

? Set and implement regional standards for payments messaging aligned to international standards

? Define and develop regional payments instruments

? Promote the development of interoperable systems

? Develop the business processes, rule books, operating manuals, messaging guidelines and formats required to support regional payments processing and settlement

? Assume the role of Payment Scheme Management Body for the SADC Integrated Real Time Electronic Settlement System (SIRESS) environment reporting in to the Payments SADC Oversight Committee (PSOC).

Currently, the Association is working on a number of payments related initiatives including:

? Supporting the introduction of a bank-to-bank low value credit transfer payment scheme. The SADC BA is helping the various Payment Associations access the intellectual property to support this scheme. This will enable them to comply with a Common Monetary Area PSOC Directive that aims to enable transfers to clear in batches through a SADC Regional Clearing and Settlement Operator

(RCSO) and settled over the SADC SIRESS system.

? Implementing a retail real-time clearing scheme for low value credit transfers. Working closely with both banks and non-banks, this effort aims to create a retail version of the real-time clearing scheme using SADC RSCO for clearing and SIRESS for settlement. While settlement via SIRESS must be conducted by banks, non-banks can be approved by Central Banks to be accepted into the scheme (as was the case with ADLA’s bank in South Africa when it received an Authorised Dealers in Foreign Exchange with Limited Authority licence).

? Harmonising Balance of Payment codes throughout the SADC. In an effort to ensure a uniform output of data across the regions and to assist banks who operate across several SADC markets, the SADC BA is working closely with regulatory authorities to harmonise the IMF Balance of Payments (BoP) codes across Member States. This will enable the STP of payments by ensuring the codes inserted into payments at initiation can be used by the receiving country to report upon receipt.

Payments System Infrastructure

SIRESS: An overview

The SADC Integrated Regional Electronic Settlement System (SIRESS) is a regional cross-border payment and settlement system. Operational since July 2013, the system provides automated interbank settlement between participating banks, either on a real-time or a

delayed basis.

SIRESS is operated by the South African Reserve Bank on behalf of the SADC Central Banks. Currently, the system only settles payments denominated in South African Rand (ZAR), but efforts are underway to include additional currencies in the near future. Participants in the system include Central Banks and those financial institutions authorised by the relevant Central Bank to participate in their country’s settlement system. There are currently 14 countries participating in SIRESS (Angola, Botswana, the DRC, Lesotho, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia and Zimbabwe) with 83 participating banks, made up of 7 Central banks and 76 commercial banks.11

The benefits of SIRESS

The benefits for customers

SIRESS essentially provides customers with a cost-effective way of transferring money between participating banks in the SADC. Rather than using traditional crossborder systems that are US Dollar based, the use of ZAR means customers only need to make one currency exchange on transfers in the region. Customers can leave their deposits in ZAR to further control their exchange rate. And, at some banks, exchanges conducted via SIRESS carry no commission fees.

The benefits for Member States

The introduction of SIRESS delivers significant benefits to participating banks and Member States, including:

? Improved risk reduction through Central Bank

? settlement Increased competition due to a more level playing field

? Enhanced transparency and regulatory oversight

? Strengthened resilience within the regional payment system

? The elimination of cross-border cheques

? Increased settlement process efficiency

? Better customer value

? Faster settlement and payment

? More simplified processing

? Standardised processes and formats

? Standard regional approaches to making payments

? More predictable payment timeframes and expectations

? Improved payment and access to social benefits and tax refunds

? The introduction of e-reconciliation and e-invoicing

? Enhanced business-to-business trade

? Increased service provider competition

? Improved development of the SADC Mobile Payments.

A deeper look at: Real Time Gross Settlement in the SADC

To support the execution of Real Time Gross Settlement (RTGS) and to discharge inter-bank obligations, all participating banks must maintain accounts with their Central Bank. In this model, banks electronically instruct their Central Banks to debit their account and credit the account of the bank of the beneficiary. Liquidity is ensured by banks lodging suitable collateral with their Central Bank.

A deeper look at: Clearing services under SIRESS

In order to facilitate cross border retail payments among participating financial institutions within the SADC region, a regional clearing house (RCH) was introduced. The RCH’s objective is to reduce the time and cost of cross border retail payments such as card, EFT credit and debit, and ATM payments. The introduction of the RCH has had a positive effect on critical economic areas by streamlining and facilitating transactions such as salary, trade and person to-person cross-border payments.

In 2015, BankServ was appointed as the first Regional Clearing and Settlement Operator (RSCO) for the SADC region by the SADC Banking Association Payment Scheme Management Body (PSMB). As the RCH, BankServ clears payment messages between participants, aggregates settlement instructions for low value, high volume transactions (retail payments) and communicates the credit and debit instructions to SIRESS.

Progress to date

One million transactions settled

SIRESS settled its one millionth transaction in February 2018 after an impressive rise in transaction volumes through 2017. The system’s peak volume of 30,575 transactions was reached in November 2017 and peak transaction value (ZAR119.53 billion) was reached in November 2017. In March 2018, the system was processed an average of 1,415 transactions per day with an average value of ZAR5.38 billion.

The introduction of USD as a settlement currency In May 2017, the Committee of Central Bank Governors (CCBG) approved the inclusion of the USD as an additional settlement currency for SIRESS. According to SWIFT Business Intelligence data, around 60 percent of the intra-SADC crossborder transactions conducted in 2015 were denominated in USD while just 35 percent were conducted in ZAR. The project to implement the change was launched in September 2017 and the business model was approved by the SADC Payment System Oversight Committee in March 2018. The project team is currently reviewing and developing the necessary legal agreements to support the USD inclusion.

The introduction of mobile payments

As part of its cross-border payment initiative, the SADC Banking Association is actively exploring mobile payments in the region. With the support of the Bill and Melinda Gates Foundation, the Association is working with banks and mobile money service providers (MMSPs) to conduct initial proof-of-concept testing. Proof-of-capability tests were conducted in 2018 between the Regional Clearing House, the Regional Clearing and Settlement Operator, two banks and two non-banks.

Next Steps

According to the SADC Banking Association, the SADC Payments Project will focus on a number of key activities going forward. These include:

? Preparing the operator for regulatory approval

? Setting up an Association that includes all participants in an effort to ensure the long-term sustainability of the scheme

? Obtaining continued funding and support to enable adoption, on-boarding, communications, etc.

? Completing the most recent Proof of Concept and preparing for the soft launch.

The future of SADC Payments

Like most other developing markets around the world, SADC member countries will need to manage the pressures of on-going regulatory change, significant demographic shifts and the need to adapt to new models being developed by FinTech and digitisation. The SADC is also keenly focused on improving financial inclusion and promoting activities and initiatives that can bring more of the unbanked and underbanked into the mainstream system.

There is, of course, much hype around new technologies such as Blockchain and Distributed Ledger Technology (DLT). However, the hype will need to be tempered by the realities on the ground. For example, the region suffers from underinvestment in key infrastructure such as electricity generation, DLT skills and a growing imbalance between the banked and unbanked population. The adoption of emerging technologies will likely move faster given these limitations.

Lessons learned from the SADC journey

While the drive in many developing markets to develop better payments infrastructure continues, progress is often being slowed by a lack of coordinated approach, comprehensive value chain mandate, regulatory framework and cross-border capacity. The reality is that the incentives favour the status quo and barriers to entry are rather high.

For the growing number of regional groupings that are currently on the journey to payments interoperability, the key will be to reach sustainable scale. Modernising the payment system requires the inclusion of non-bank payment providers within the formal system and the growth of system volume and scale. Formal service providers will also need to embrace the financial inclusion agenda.

Achieving payments integration at a regional and continental level will require an understanding that various member countries are at differing levels of payments maturity with sometimes distinct priorities – differing economic policies, limited payments regulatory framework, disparate IT infrastructure and limited cross border payments exposure, for example.

The hope, however, is that the SADC’s journey will offer valuable lessons and approaches that, in time, can be leveraged by other regional groups around the region as they move towards their own improved payments integration and – eventually – Africa-wide integration.

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