Where Does All the Money Go?

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CIARAN RYAN: PayInc, formerly known as BankservAfrica, plays a unique role in South Africa’s payment ecosystem. One of the organization’s primary objectives is to foster financial inclusion for the unbanked and underbanked communities.

Recently, it launched the PayInc Economic Index, which evaluates the total value of electronic transactions processed through PayInc each month, now also accounting for cash demand in the economy. This index interestingly provides early signals of economic trends ahead of official data releases from Stats SA.

Joining us now is Shergeran Naidoo, the head of stakeholder engagements at PayInc. Welcome, Shergeran, and thanks for being with us. I’d like to discuss the PayInc Economic Index soon, but first, can you explain PayInc’s position and role in South Africa?

SHERGERAN NAIDOO: Hi Ciaran, thank you for having us and this opportunity to share. PayInc, previously known as BankservAfrica, has been around for about… 53 years. That’s correct—since 1972.

We function as a ‘payment clearinghouse system operator,’ which means we act as a conduit between banks to facilitate the movement of payments, ensuring ‘interoperability.’ Interoperability is crucial in the national payment system as it guarantees that transactions can flow securely and systematically among all parties with established protocols and advanced technology.

We are closely overseen by the South African Reserve Bank’s National Payment System Department. We are classified as a ‘systemically important payment system financial market infrastructure.’

This classification reflects the large volumes and values we manage annually, which the Reserve Bank considers critical for the effective functioning of the South African economy.

I hope that helps clarify our position and the importance of our role in the national payment system.

CIARAN RYAN: Who owns PayInc, if you don’t mind sharing?

SHERGERAN NAIDOO: PayInc is owned by the banking sector. At our inception in 1972, it was primarily established by major banks of that time with the intention of facilitating payment clearing, mainly focusing on cheque processing. Remember those? [Chuckles]

Back then, our primary role was to enable cheque clearing. Over the last five decades, payment methods have evolved significantly from cheques to cards, electronic payments, and beyond.

In terms of ownership, it has always been deeply rooted in the banking sector, as the banks are the main participants within the framework of the National Payment System Act. PayInc has remained bank-owned from the very beginning.

You might have heard in the news that discussions are currently taking place between the Reserve Bank and PayInc shareholders about acquiring a 50% stake in PayInc, pending approval from competition authorities.

CIARAN RYAN: One of your primary goals centers on financial inclusion, a topic we frequently hear discussed. Can you elaborate on how PayInc works to incorporate more individuals into this measurement and the economy?

SHERGERAN NAIDOO: As you pointed out, financial inclusion is a commonly used term that means different things to different people. It’s a recognized topic even at the World Bank level, which has published papers on financial inclusion and payments.

The Reserve Bank’s Vision 2025 serves as a strategic framework for the National Payment System aimed at enhancing financial inclusion. This means integrating more unbanked and underbanked individuals into the national payment system, allowing them to conduct digital payment transactions.

The rationale is that increasing the volume of digital payments through the National Payment System enables individuals to create a more substantial digital footprint, which in turn grants access to a broader array of financial products.

Access to additional financial offerings, like loans or credit, empowers both individuals and small businesses. This perspective underscores our commitment to what we call ‘financial inclusion.’

CIARAN RYAN: Gathering all this payments data seems like a complex task. I presume you work with various stakeholders. Could you tell us more about the parties connected to PayInc and contributing data?

SHERGERAN NAIDOO: The data we use in our economic indices is derived from the transactions we process.

As previously mentioned, we operate as a payment clearinghouse system operator in compliance with the National Payment System Act. For instance:

If you have a gym membership with Bank A while your account is with Bank B, the debit order for your gym fee must be processed through PayInc since you and your gym are affiliated with different banks.

If both parties are with the same bank, the transaction would take place through that bank’s internal systems, categorized as an ‘on us’ transaction. However, in case you bank with different institutions, it’s an ‘off us’ transaction through PayInc.

Now, extend this example to millions of transactions, encompassing electronic funds transfers (EFTs), PayShap transactions, RTC (real-time clearing) transactions, and some card transactions, which we supervise through our systems. For our Economic Index, we focus specifically on electronic payment transactions and the data they generate.

Moreover, we are now incorporating cash movements into our new economic index. One of the systems we administer, the Integrated Cash Management System (ICMS), tracks the circulation of cash between banks.

Nonetheless, tracking cash utilization in society presents a challenge.

Due to the inherent anonymity of cash, we cannot track its usage once it has been dispensed. However, concerning the National Payment System, since banks order cash from one another through PayInc, we can monitor this data and incorporate it into the economic index, offering a comprehensive view of payment activity and cash usage.

CIARAN RYAN: Let’s explore the PayInc Economic Index. This is a newly relaunched index, correct?

SHERGERAN NAIDOO: Yes, that’s correct—it’s a relaunch.

CIARAN RYAN: I noticed that transactions cleared via PayInc reached an all-time high of R177.8 million in August, signifying a nearly 10% year-on-year growth. I assume this is quite advantageous for those in decision-making positions in both the corporate and public sectors; it seems very well-structured—and you have incorporated cash into this assessment.

SHERGERAN NAIDOO: Indeed. This increase demonstrates progress toward our goal of improving digital financial inclusion, as these escalating volumes indicate. For example, in 2023, the figure was approximately R145 million, and now it stands at R177.8 million.

This illustrates a growing trust in utilizing digital platforms for payments, particularly for smaller transactions.

Additionally, we observed a trend where the total value of transactions has decreased, dropping from R1.351 trillion in August to R1.405 trillion in July. This suggests an increase in smaller transaction volumes, which may indicate a decline in cash usage.

Interestingly, although we have included cash in our analysis and recorded a 4.4% uptick in cash usage, we are witnessing a transition. Recent reports suggest that many banks are moving away from their ATM infrastructure, with only a few expanding their networks; instead, they are increasingly depending on retail outlets for cash transactions.

Thus, while cash usage in ATMs might be diminishing, retail settings are experiencing heightened cash activity, with banks supplying cash to retailers for these transactions.

This emphasizes our ongoing efforts to balance the coexistence of digital payments and cash.

The Reserve Bank is also advocating for a ‘smart cash society’ to integrate cash and digital payments harmoniously.

CIARAN RYAN: This is incredibly insightful. Thank you for your perspectives, Shergeran; we’ll wrap up here. Thank you very much for your time.

SHERGERAN NAIDOO: Thank you, Ciaran. I appreciate it.

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