SARB: National Payment Systems Bill Shifts to Activity-Based Regulation

• SARB Governor Lesetja Kganyago announced the National Payment Systems Bill aims to modernise South Africa's payment ecosystem and expand financial inclusion.
• The Bill will introduce an activity-based regulatory framework, requiring non-bank payment service providers to meet core obligations like governance, customer fund safeguarding, and AML controls.
• This regulatory shift will allow fintech firms, which number around 400 in South Africa, to directly participate in clearing and settlement.
• The SARB views payments modernisation as a top strategic objective, supported by initiatives such as its new national payment utility subsidiary, PayInc.
• Kganyago stressed that fostering trust through clear, proportionate, and risk-based rules is essential for sustainable innovation and for South Africa to reap the rewards of digital payment advancements.

The principle is straightforward: similar payment activities should be subject to similar regulatory expectations, whether performed by a traditional bank or an innovative fintech.

South African Reserve Bank (SARB) Governor Lesetja Kganyago recently underscored the critical need for a balanced approach to innovation and regulation within the nation's payment ecosystem. Speaking at the second annual MTN Group Fintech Summit in Johannesburg, Governor Kganyago delivered a keynote address under the theme, "The future of Africa's digital economy," where he highlighted the SARB's strategic focus on modernising the national payment system. This objective stands as one of the institution's top three priorities, alongside maintaining price and financial stability.

Kganyago detailed several challenges currently facing modern payment systems in South Africa, including the persistent reliance on cash over digital cards and the reluctance of some merchants to accept credit cards due to associated fees. He stressed that sustainable innovation in payments is intrinsically linked to trust. To cultivate this trust, he argued for the implementation of clear, proportionate, and risk-based rules designed to protect confidence without creating unnecessary barriers to innovation or imposing undue burdens on participants.

It is within this context that the SARB National Payment Systems Bill emerges as a pivotal legislative initiative. Championed by the SARB, this forthcoming Bill aims to significantly upgrade the country's payment infrastructure. The legislation seeks to modernise the existing statutory framework, providing a more robust and durable foundation for the entire payment ecosystem in South Africa.

A pivotal aspect of this legislative overhaul is the transition from an entity-based regulatory model to an activity-based regulatory framework. Governor Kganyago articulated a straightforward principle: similar payment activities should be subject to similar regulatory expectations, irrespective of whether they are performed by a traditional bank or an innovative fintech firm. This approach is designed to support broader participation in the payment system.

The Bill's core objective is to expand financial inclusion beyond conventional bank-sponsored channels by enabling non-bank payment service providers and fintech firms to directly participate in clearing and settlement processes. This is particularly relevant given the significant growth of the fintech sector in South Africa, which now comprises approximately 400 firms. While the new framework encourages wider involvement, it also stipulates that new participants must accept core obligations as a prerequisite for entry.

These essential obligations for non-bank payment service providers include robust governance structures, stringent safeguarding of customer funds, ensuring operational resilience, implementing comprehensive anti-money laundering (AML) controls, and submitting to ongoing supervisory oversight. Governor Kganyago emphasised that adherence to these rules is expected from the industry, urging robust engagement with the Bill to collaboratively shape the future ecosystem.

The SARB's commitment to modernising South Africa's payments system extends to ensuring that merchants are more willing to accept digital forms of payment. As the custodian of the national payment system, the SARB is not undertaking this fundamental upgrade of the country's payment infrastructure in isolation; it involves a collaborative effort with various stakeholders, including both incumbent firms and new entrants.

Part of this modernisation strategy has led to the establishment of PayInc, the SARB’s newest subsidiary. PayInc is envisioned as a national payment utility, designed to be accessible to all players who meet the stipulated rules for participation within the South African payment ecosystem. Fintech firms are already acknowledged for their important contributions to this evolving landscape.

Governor Kganyago highlighted the increasing complexity of modern payments, which can initiate on a mobile phone, rely on cloud infrastructure, and traverse multiple technology providers before completion, often within seconds. He cautioned that if South Africa's digital payments acquire a reputation for being cumbersome or insecure, the country risks failing to fully realise the benefits of its payments modernisation efforts. Despite these challenges, Kganyago concluded that the payments space remains one of the most exciting areas within South Africa.

Lawyers and compliance officers advising fintechs or payment service providers in South Africa must closely monitor the progression of the National Payment Systems Bill. This legislation will introduce an activity-based regulatory framework, imposing new obligations on non-bank participants regarding governance, safeguarding customer funds, AML controls, and supervisory oversight.

Source: Original reporting based on statements by SARB Governor Lesetja Kganyago.