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August 2017 Regional Payments Integration, Financial Inclusion, and Remittances in the Southern African Development Community (SADC): Reflections on a Work in Progress Elizabeth McQuerry & Cici Northup, Glenbrook Partners

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August2017

RegionalPaymentsIntegration,FinancialInclusion,andRemittancesintheSouthernAfricanDevelopmentCommunity(SADC):ReflectionsonaWorkinProgressElizabethMcQuerry&CiciNorthup,GlenbrookPartners

2

Introduction

OverviewofSADC

FinancialInclusionintheSADCRegion

ThePaymentsProjectandtheSADCBA

LayingtheFoundation:High-ValuePaymentsandSIRESS

Low-Value,High-VolumePayments,andMPSPIntegration

Reflections

Conclusion

References

Contents

3

IntroductionImprovedavailabilityofaffordabledigitalfinancialservicesisapressingneedindevelopingeconomies.Thisneedis

alsoacuteforcross-borderpayments,bothgenerically,andforthegrowingnumberofregionalintegrationefforts

suchasthePaymentsProjectunderwayintheSouthernAfricanDevelopmentCommunity(SADC).Thiswhitepaper

providesathird-partyperspectiveontheSADCPaymentsProjecttodatetoincorporatelow-costremittances.The

outcomesareinsightfulnotonlyforthoseinterestedintheSADCregion,butalsoforotherregionsthatare

contemplatingasharedpaymentssystem.

TheSADCPaymentsProjectisnotthefirstregionalpaymentsintegrationeffortnorthemostambitiousinscope.

Nevertheless,itisachallenginginitiativeifonlyforthevastdifferencesinpaymentssystemdevelopmentamongthe

participatingcountries.Additionally,thereareothernotablecharacteristicsatplay:Theinitiativeisatop-down

mandateimplementedbytheprivatesector,thereisasharedindustryutilityoperatingwithmultilateralrules,

multiplepaymentstreamsareundercontemplation,andbothbankandnon-bankprovidersofpaymentservicesare

participants.Thecombinationofthesefactors—alongsidethefinancialinclusionobjectives—mostcertainlyqualifies

theSADCregionalpaymentsinitiativeasanoteworthyundertaking.

Thiswhitepaperattemptstosharekeydevelopmentsandprovideaninitialdiagnosticoftheeffectthatcertain

choiceshavemadeinshapingtheprogressandinterimoutcomesofthePaymentsProject.Theimpactandresultsof

theSADCinitiativewillmostcertainlybeofinteresttothegrowingnumberofregionalgroupingsthatarecurrently

onthejourneytopaymentsinteroperability;namely,ajourneytointegratingnon-bankpaymentprovidersintothe

formalpaymentsystem,andtoexploringoptionstobuildpaymentsystemvolumeandscale—withtheendgoalof

increasingfinancialinclusion.

Theseobservationswereformedduringtheauthors’involvementintheSADCeffort.Thissupportwasfundedbythe

Bill&MelindaGatesFoundation,buttheviewsandopinionsareentirelythoseoftheauthors.

4

OverviewofSADCSADCcomprises15MemberStates:Angola,Botswana,DemocraticRepublicofCongo,Lesotho,Madagascar,Malawi,

Mauritius,Mozambique,Namibia,Seychelles,SouthAfrica,Swaziland,Tanzania,ZambiaandZimbabwe.Accordingto

theWorldBank,thetotalpopulation(asmeasuredin2014)wasjustover300million.

In1992,MemberStatessigned

theSADCTreatycommitting

theregionalgrouptowork

togetherto:

Achievedevelopmentand

economicgrowth,alleviate

poverty,enhancethestandard

andqualityoflifeofthepeople

ofSouthernAfrica,andsupport

thesociallydisadvantaged

throughRegionalIntegration.

TheSADCTreatyisthebasisforarangeofeffortstobringaboutsustainable,collaborativedevelopmentinseveral

importantareas—includingfinancialservices—withtheultimategoalofpovertyeradication.Itwasagainstthis

backdropthattheSADCBankingAssociation(SADCBA)wouldultimatelylaunchaninitiativecalledthe"Payments

Project"tocreateaninteroperable,regionalpaymentsplatformthatwouldreducecross-borderpaymentriskand

drasticallylowertransactioncosts.

FinancialInclusionintheSADCRegionCross-borderremittancesintheSADCregionarecommonplace.AccordingtoFinMarkTrust,annualcross-border

remittancestotal$11billionUSD.However,thesetransfers—astheyexisttoday—arelargelyinformaland/or

expensive.Only36%oftheSADCpopulationisconsideredbankedwithanadditional18%havingaccesstoother

formal(non-bank)financialservicesand12%havingaccesstoinformalmechanisms.Withanadultpopulationof

approximately125million,thisexcludesmorethan41millionpeople.Asaresult,manydonothaveaccesstoformal

mechanismstosendcross-borderremittances,andinstead,leverageinformalchannelsthatareoftenslowandrisky.

AccordingtoFinMarkTrust,only2%ofremittancesinSADCaresentthroughofficialbankingchannels;nearly70%

aresentviabusortaxi,20%aresentbackwithvisitingfamilyorfriends,androughly8%throughotherchannels.

5

Forthosewhocanorchoosetoleverageformalcross-bordertransferchannels,thecosttosendremittances

withintheSADCregionishigh.Forexample,SouthAfricaisrecognizedasatopcountryoforiginforremittances

intheregion,andaccordingtotheWorldBank,thecostofsendingformalremittancesfromSouthAfricatoother

SADCcountriesismorethandoubletheglobalaverage.Thismeansthatforeverydollartransferred,nearly17cents

(16.8%)isconsumedasatransactioncost.Bycomparison,theaveragecostofsendingatransactionintherestofthe

worldisonlyeightcents(7.7%).Moreover,mostcorridorswithintheSADCregionarewithinthetop20most

expensivecorridorsmonitoredbytheWorldBank.

Asaresult,anopportunityexiststoincreasefinancialinclusionintheSADCregion—avisionsupportedby

organizationsgloballythatareoutliningbestpracticesanddrivingmomentumaroundthisgoal,includingtheWorld

Bank,BankforInternationalSettlements(BIS),theGSMAAssociation,CenterforGlobalDevelopment(CGD),the

InternationalTelecommunicationsUnion(ITU),andtheG20.

ThePaymentsProjectandtheSADCBATohelpachieveaspectsoftheSADCTreatyobjectives(outlinedonpage3)andleverageregionalopportunities,

theSADCfinancialindustrylaunchedamulti-phase,regionalpaymentsinitiativein2010.ThePaymentsProjectwas

designedtoenhancefinancialmarketinfrastructuretobettersupportinter-andintra-regionaltrade.Atthecoreof

thisinitiativearetwokeyconcepts:interoperabilityandthecooperativespace.

Interoperabilityofthenewpaymentssystemservestobringallthecountriesandtheirbankstogetherusingthe

sameplatformtoexchangepaymentsacrossborders.Thecooperative(ornon-competitive)spacereinforcesthe

sharedaspectsoftheplatformbyfocusingeffortsonthedevelopmentofindustryimprovementsthatplayersinall

thecountriescanleverage.

Theend-statevisionfortheregionalpaymentsinitiativeisaseriesofoptionsforbanksandtheircustomersinthe

15countriestosafelyandsecurelytransactelectronically.Theinteractionbetweentheseregionalpayments

optionsinthecooperativespace,andthecommercialactivityonthesendingandreceivingends,isillustratedin

thediagrambelow:

6

Justasdomesticpaymentssystemsdefinepaymenttypesandusagerequirements,theSADCBAneededtodefine

operationalspecificationandbusinessrulesforparticipantsinthenewcooperativescheme.ThePaymentsProject

definedfivepaymentsstreamsinthecooperativespacethatwouldbeenabledinthenewscheme:

1 PRIORITYPAYMENTS:Paymentsthateitherabankortheinitiatorofapaymentprioritizeoverotherpaymentstheyareinitiating.Prioritymaybegrantedforavarietyofreasons,suchasriskmitigationoravailabilityofliquidity.Thesetime-sensitivepaymentsareoftenreferredtoaswires.

2 CREDITTRANSFERS:Paymentinstructionsfromanoriginatortosendfundstoabeneficiary.Credittransfersarenon-urgentpaymentsthatareoftenprocessedinovernightbatchesviaautomatedclearinghousesandaresometimesreferredtoaselectronicfundstransfers(EFT)orpushcredits.

3 DIRECTDEBITS:Theend-to-endprocesswherethepartyreceivingthefundssendsaninstructiontorequestfundsfromthepayer.Directdebitsaretypicallyusedforcollectionsorbillpayments,andareoftenreferredtoaspullpayments.

4 CARDPOSTRANSACTIONS:Transactionsdoneatadeviceallowingtheuseofpaymentcardsataphysical(notvirtual)pointofsale.Thepaymentinformationiscapturedeithermanuallyonpapervouchersorbyelectronicmeans.

5 CARDATMTRANSACTIONS:Transactionsusinganelectromechanicaldevicethatallowsauthorizeduserswithmachine-readablecardstowithdrawcashfromtheiraccountsand/oraccessotherservices.

TheschemeleveragesISO20022paymentsmessagesandSWIFTmessagesforthecommunicationofsettlement

instructionsbetweenthebanks.Attheoutsetoftheproject,thelevelofexperiencewiththeseglobalstandards

acrossparticipantsandcountriesvariedwidely.EuropeancountrieswereadoptingISO20022messages,butithad

notyettakenholdinothercountries.

Thedifferentpaymentsstreamsandactivitiesallfallunderaformalgovernancemodel.Theoveralldirectionofthe

PaymentsProjectisdefinedbycentralbanksandimplementedbyprivatesectorplayers.Specifically,theCommittee

ofCentralBankGovernors(CCBG)setstheagendaforregionalactivitiesandtheSADCPaymentsProjectisan

initiativeoftheCCGB.

Inturn,theSADCBAworkswithmembercountriestorealizetheobjectivesofthePaymentsProject.Eachmember

countryappointsabankingrepresentativewhoisresponsibleforembodyingthesharedandcollectiveinterestsof

thecountry’sfinancialindustryandcontributingtotheSADCcommunityonitsbehalf.Itistheresponsibilityofthe

SADCBAtoworkwithmemberrepresentativestobalancecompetingprioritiesandcollaboratetowardsshared

goals.Notably,theCCBGcontinuestoplayanactiveroleinguidingthePaymentsProjectanditsactivities.

7

Oneimportantelementofthegovernancemodelwasthedevelopmentofamandateandkeyprinciplesattheoutset

oftheproject.ThemandatedefinesthescopeandguidestheactivitiesoftheSADCBA,whilethekeyprinciplesare

thehigh-level,operationalparametersoftheSADCpaymentssystem.Boththemandateandkeyprinciplesfocuson

thedevelopmentoftheregionalpaymentssystem,notablyseparatingoutdevelopmentsincountrypayments

systemsfromtheSADCregionalpaymentssystem.

MANDATE KEYPRINCIPLES

WorkswithcommercialbankstoinformdevelopmentoffinancialmarketinfrastructureinsupportofSADCframework.

Eachcountrymaintainsitsowncurrency.

Definespaymentsinstruments,businessrules,andmessagingstandardsforinterbankuse.

Eachcountrymaintainsitsnationalpaymentandsettlementinfrastructurefordomesticclearingandsettlement.

DevelopsSADCsinglepaymentsarea. Transactionssettleinacentralsettlementsystem:SIRESS.

Definesandimplementsregionalstandards. SettlementparticipantsholdsettlementaccountsinSIRESSforintra-regionalcross-bordertransactions.

Establishes—throughresearch—whichpaymentinstrumentsareappropriate.

Settlementaccountsoperateonapre-fundedbasis.

Promtoesdevelopmentofinteroperablesystems. Settlementcurrencyforintra-regionaltransactionisinSoundAfricaRand(ZAR).

Eachcountryorganizesparticipationthroughitsownbankingassociation

Clearingandsettlementinfrastructureisbasedonasoundlegalbasis,ensuringfinalityofsettlementobligations.

OperatinghoursarebasedontheCentralAfricanTimeZone.

LayingtheFoundation:High-ValuePaymentsandSIRESSInJuly2013,SADCdefineditsprioritypaymentsstreamandlaunchedahigh-value,bank-to-bankpaymentssystem

acrossborders.Theexchangeofprioritypaymentsnecessitatedtheneedforasettlementmechanismwherethe

valueofthetransactionsisrecordedandfinalizedbetweenthecounterpartiesinthedifferentcountries.

Asseeninthediagrambelow,theSADCIntegratedRegionalElectronicSettlementSystem(SIRESS)isthefoundation

ofthePaymentsProjectandenablesreal-timesettlementamongthebanksandtheircustomersinthe15countries.

ParticipantsholdsettlementaccountsinSIRESSforintra-regionalcross-bordertransactions.SIRESSisoperatedbythe

SouthAfricanReserveBank,onbehalfoftheSADCmembercountries,andallpaymentsaresettledinRand.The

sharedsettlementplatformservestocreateacommondenominator(i.e.,themostutilizedregionalcurrency)among

thecountriesandreducesriskbysimultaneouslysettlingcross-bordercreditanddebitobligationsbetweenbanks.

8

Therolesandresponsibilitiesofalltheparticipantsaredescribedinacommonreferencemanual,whichalsooutlines

thedifferentoperationalprocesses,includingwholesalepaymentsaswellasotherpaymentstreams.Thismanual,

calledthe"BeigeBook,"containsallschemedocumentationandmaterials,includingrules,governance,participant

requirements,messageformats,andflowsforthefivepaymenttypes.

Afteraslowstart,eachcountryunderwentthechallengingjourneyofensuringitssystemsreachedthequalifying

levelneededtojointheregionalpaymentssystem.Ultimately,thehigh-valuepaymentsschemewasproved

successfulandisnowwidelyused:AsofApril2017,14countrieswereparticipatingwith83financialinstitutions,

includingcentralbanks.SIRESShassettledatotalof733,597transactionsatavalueof$244.74billionUSD.

Oncethisfoundationwasinplace,theSADCBAturneditsfocustothenextphase:thedevelopmentofaregional,

low-valueretailpaymentssystem.Theretailpaymentsmessagescontaineddifferentcharacteristicsandservice

levels,butstillrequiredutilizingSIRESSasthecommonmeanstosettlecross-bordertransactions.

Low-Value,High-VolumePayments,andMPSPIntegrationThenextphaseofSADC'sworkfocusedonextendingtheprioritypaymentssystemtoenableintra-SADCcredit

transfers.Aroundthissametime,theneedtoimproveregionalremittances—whichasnotedpreviouslyarecostly

andoftenclearedoutsideoftheformalpaymentsystem—becameevenmoreurgent.

Otherchangestakingplaceinthemarket—thelarge-scaleadoptionofmobilephonesandtheexpandingpresenceof

Telcosubsidiariesintomobilemoneyservices—providedpowerfulincentivestodeterminehowtobringnon-bank

providersintothebank-basedretailpaymentsprojectinordertomorequicklyachievetheobjectivesofloweringthe

costofremittancesandincreasingfinancialinclusion.Financialinclusionwasalsoassumingaprominentpositionon

theregionalpolicyagenda,andby2013,theSADCBAbegantakingstepstoutilizethepaymentsplatformtohelp

facilitatetherealizationofthesegoals.

CreditorBank

Debtor (sender)

Beneficiary (receiver)

BeneficiaryBank

SIRESSSender could fund

transaction from bank account

Banks can serve as the sender’s

financial institution

Banks can serve as the receiver’s

financial institution

Beneficiary can receive funds into

bank account

SADC settlement platform to credit and debit transactions

between members

9

Today,intheSADCpaymentsscheme,authorizednon-bankprovidersoffinancialtransferservicesarereferredtoas

MobilePaymentServiceProviders(MPSPs).Additionally,paymentprocessingserviceproviders(PPSPs)areapartof

thescheme,andcanactonbehalfoftheMPSPinvaryingways.

Exchanginglow-valuepaymentsamongparticipatingfinancialinstitutionsinthe15countriesrequiredthe

introductionofaclearingmechanism.Inadditiontoclearingpaymentmessagesbetweenparticipants,theRegional

ClearingandSettlementOperator(RCSO),shownintheflowdiagram,talliessettlementinstructionsfromtheretail

paymentsandcommunicatesthecreditanddebitinstructionstoSIRESS.TheroleoftheRCSOiscarriedoutby

BankServ,theSouthAfricannationalpaymentsservicesprovider.

Oneelementofthegovernancemodelwasthedevelopmentofamandateandkeyprinciplesattheoutsetofthe

project.ThemandatedefinesthescopeofactivitiesandguidestheactivitiesoftheSADCBA,whilethekeyprinciples

arethehigh-level,operationalparametersoftheSADCpaymentsystem.Boththemandateandkeyprinciplesfocus

onthedevelopmentoftheregionalpaymentsystem,notablyseparatingoutdevelopmentsincountrypayment

systemsfromtheSADCregionalpaymentsystem.

Creditor Bank or MPSP

Debtor (sender)

RCSO

Beneficiary (receiver)

BeneficiaryBank or MPSP

SIRESS

Sender could fund transaction from bank

or mobile wallet account

Banks or MPSPs can serve as the

sender’s financial institution

Regional Clearing and Settlement operator (or ACH) carrying out bank

instructions

Banks or MPSPs can serve as the

receiver’s financial institution

Beneficiary can receive funds into

bank or mobile wallet account

SADC settlement platform to credit and debit transactions

between members

PPSPPayment Processing Service Providers

(PPSP) can act on behalf of MPSP

10

Bringingnon-bankproviders,whoarenotapartoftheSADCBAorganizationalstructure,intothepaymentscheme

topromote“mobile-enabled”creditpushtransfers,alsobroughtabouttheneedtoengagetheMPSPsinthe

processaswellastoexaminetherules,regulations,ortechnicalapplicationstodeterminewhethermodifications

wouldbeneeded.Themovetoalignaswellascombinebankandnon-bankeffortsmarkedasignificantinflection

pointintheproject.

Ofcourse,mobileisnotapaymentsystem,butratherachanneltoreachsendingandreceivingendusers.

Nevertheless,becausebanksandtelcosystemsandbusinessmodelstendtobedifferent,itwasnecessarytodefine

howthetwoplayerswouldinteractinthenewpaymentstream.Itwasnotablethatinsomeoftheearlydiscussions

theMPSPshadnotbeeninthesameroomwiththeirindustrycompetitorsandthiswasthefirstinstancewhere

banks,mobilemoneyproviders,andregulatorswerecollectivelydiscussingopportunitytocollaborate.

Tohelpkickoffthisopportunityandengagenon-banks,theBill&MelindaGatesFoundation,togetherwithglobal

partners,includingFinMarkTrust,GSMA,andtheWorldBank,agreedtosupportaseriesofthreeregional

conveningsfollowedbyafinalcollaborationconveningdesignedtobringtogethercriticalstakeholders—regulators,

banksandmobilenetworkoperators—foraninteractivedialogueonhowtofurtherdigitalfinancialinclusion

amongthe15membercountriesusingtheSADCpaymentsframework.

Theprimarygoalswereto:

• EducatekeystakeholdersabouttheSADCpaymentmodel• Understandanyissuesthatneededtobeaddressedinorderforthevariousstakeholderstoengageinan

SADC-widecreditpushpaymentscheme• Determineroles,responsibilities,andnextstepsforapossibleSADCmobilepaymentspilot

Theconveningswerecompletedinlate2015withthestakeholdersreachingagreementtodrivetheinitiative

forwardasseenbelow:

CreditPushPaymentsStreamScheme CreditPushPaymentsStreamObjective

Therulesandsupportingframework(e.g.,regulatory,operational,technical)enableaffordable,low-valuecreditpushcross-borderpaymentsacrosslicensedpaymentserviceprovidersintheSADCregionlinkingtotheSIRESSsettlementsystemforSIRESSsettlementcurrenciesandotherauthorizedsettlementmodels.

Tovalidateandrefinetheschemewithmorethanonecountryandmorethanoneprovidertomoredeeplyunderstandthecharacteristicsofascalable,sustainablescheme.

11

20102011-2012

20132014

20152016

2017

Testing/ProofofConcepts

LowValueDevelopment&StakeholderAlignment

StakeholderEngagement onLowValuePayments

SADCBAPaymentsProjectKickOff

Workstreamdevelopment–mainfocusonPriorityPayments

Launch:SIRESS&PriorityPayments

AdditionalCountryOnboarding;WorkStreamsContinue

Lowvalue,cross-bordertransferdevelopment2015- Current

Fiveworkinggroupswereestablishedinordertomeettheobjective,ensurecontinuedengagementbybanksand

non-banks,andoutlinethecorrespondingrules,regulations,andtechnicalneeds.

WORKINGGROUP KEYTOPICS

Regulatory ConsumerProtection,BoPReporting,Governance,HarmonizedRegulatoryGuidelines,AML/KYC

Operational OperatingModel,OperatingRules,RiskManagment

Technical Security,MessagingStandards

CommercialModel PricingReviewandPrinciples,CostModeling,RegulatoryCosting,MarketingPrinciples

Pilot ImplementationProcess

WorkgroupscomprisedvolunteersfromtheinterestedbanksandMPSPsandmetseveraltimesinpersonandvia

eMeetingsthrough2016andearly2017.Theseinteractionsledtogreaterunderstandingofthekeyconcernsand

challengesofthedifferentgroups.Thekeyrecommendationsoftheworkgroupsareattachedtothiswhitepaperas

anappendix.

Currently(asofAugust2017),theSADCretailpaymentinitiativeisinthemidstofaseriesofproof-of-concept

phasesdesignedtotesttheplanningtodateandensureparticipantreadinessforthestartoflivepaymentsina

controlledpilotinearly2018.Therearemorethan40participatinginstitutions—bothbanksandMPSPs—

representing14outof15countries.Thislevelofearlyengagementreflectsthestrongparticipantinterestin

improvedoptionsforretailfinancialservices.Itisalsoatestamenttothefoundationalworkandinstitutional

developmentoftheSADCPaymentsProject.Thetimelinebelowillustrateshowthelow-valuepaymentstreams

buildsontopoftheworkonthehighlevel.

12

ReflectionsGiventhattheSADCPaymentsProjectisstillworkingtowardsimplementingthelow-valuecredit-pushcross-border

paymentsstream,itisprematuretomakeanydefinitiveobservationsaboutlessonslearned.Whatwecanreflecton,

however,ishowkeychoiceshaveshapedtheprogressandinterimoutcomestodate.

BelowwebreakdownsomekeyelementsoftheSADCpaymentsschemeasawaytoexaminetheireffectonthe

goalsofreducingthecostofcross-borderremittancesandincreasingfinancialinclusion.Wealsoassertthatthe

progressachievedtodatewouldlikelynothavebeenachievedifaformalpaymentsschemehadnotbeenin

place.Still,itisimportanttonotethatacriticalenablingelementcanhavecross-cuttingeffects:Afactorcan

haveadecidedlypositiveeffectinonearea,whilealsoinsertingapotentiallynegativeorevenuncertaineffect

inanotherarea.

Fromtheoutset,theSADCmodelattemptedtochannelinputfrombanksineachofthe15countriesthroughthe

domesticbankingassociation.Thisrequiredallofthebanksineachcountrytodeterminetheneedsoftheir

individualbranchesandoutlinethestepstowardsachievingasharedminimallevelofoperationalreadiness.In

addition,eachdomesticbankingassociationchosearepresentativefortheearlyworkgroups.Theoveralleffectwas

toheightenthecollaborativeandregionalfocusand,atleastwithintheSADCdiscussion,minimizethecompetitive

commercialdiscussion.Theindividualcommercialneedsshouldkickinoncethenewplatformisoperationalinthe

collaborativespace.

ThismodelwasalsoemployedwhentheMPSPsjoinedtheSADCdiscussions.SincetheMPSPsdonothavedomestic

industryassociations,theorganizingconceptfocusedonthecountry-levelpreparationsneededtoparticipateinthe

newretailpaymentsstream.Theabilitytoleverageanestablishedandworkingorganizationalmodelofmultiparty

stakeholderengagementallowedtheprocesstomoveforwardmorequickly.Differentpartieswereallconsultedand

everyonehadampleopportunitytoprovideinputandparticipateinthedifferentworkgroups.Inaddition,the

inclusivenaturehelpedbreakdownperceptionsandfosteredinteractionamongpartiespreviouslyoperatinginsilos.

Inclusionalsoappearstohavefurtheredstakeholderbuy-in.

Theorganizationalmodelprovidedastructuretochannelthevariedneedsandinputfrombankandnon-bank

participantsin15countries.Atthesametime,thecollaborativeaspectofthemodelalsoinsertedacollective

dependencyonthepartofalltheparticipantstoassumethedifferentroles.Sendinginstitutionsneedreceiving

institutions—justasthepaymentsneedaclearingandsettlementmechanism.Putanotherway,thewholecannot

moveforwardwithoutthecomponentparts.Inaclosed-loopsystem,everyrolewouldbecarriedoutbythesingle

owner.Inordertobesuccessful,theSADCmodelneedstoensurecontinuedinterestinallroles.

+ OrganizationalModel

13

EventhoughtheSADCBAwasformedtopromoteregional,cross-borderbankingneedsandthefundingforthe

initiativecamefrombanks,theSADCBAalsowelcomedMPSPsintothelow-valuepaymentsstream.Thishelped

maketheschememeaningfulforbothbanksandnon-bankparticipants.Notsurprisingly,MPSPswouldlikeamore

formalvoiceintheSADCscheme,butthecurrentgovernancemodeldoesnotprovidethat.TheRegulatoryWork

GrouprecognizesthisneedandrecommendstheMPSPsformanindustryassociationtochanneltheircollective

interestsintheSADCdialogue.

TheSADCexperiencehighlightstheimportanceofinclusioninfosteringinnovation,especiallywherediverse

participantsareinvolved.ThereisstillanopenquestionofwhethertheformalSADCgovernancewillincludeMPSPs

asparticipants,investors/owners,and/ordecisionmakers.Theidealbalancewilllikelyvaryineverycontext,but

SADC'ssuccessinmovingthefinancialinclusionagendaforwardsupportsthenotionthataninclusiveapproach

fostersbothcollaborationandparticipantbuy-in.Thechallengenowishowtosustainthisinterestandwhether

governancewillpromoteorinhibitparticipationbydifferentplayers.

Sincethepaymentsschemerequiresdevelopmentandsupport,thereisasmallmanagementteaminplacetosteer

thevariousactivities.Theseindividualshaveprovidedstrongleadershipthathasconsistentlypropelledactivities

forward,broughtalltherelevantstakeholderstogether(includingfinancialservicesprovidersandregulators)fora

shareddialogue,andensuredcontinuedprogresstowardimplementation.

Theteamnotonlykeptthelargerprojectmovingforward,butalsounderstood,inthegeneralsense,howto

integratethenewfocusonremittancesandrevisionsintotheexistingscheme.Somenecessarymodificationswere

evidentfromtheoutsetoftheprocess,includingestablishingthebasisforbringingthenon-bankfinancialservices

providersintotheschemeandrevisingthelow-valuepaymentrulestoensureusabilitybyallparticipants.Strong

leadershipwithalong-termvisionhasbeenessentialtothesuccessfultransitionfromtheoriginalbank-onlyscheme

totheinclusionofMPSPsintheretailpaymentexchange.

TheadditionofphilanthropiccapitalfromtheBill&MelindaGatesFoundationempoweredtheSADCBAteamto

quicklypushforwardthefocusonremittancesandallowedforexpeditedstakeholderengagement.Webelievethis

outsideinterestintheSADCpaymentsschemeonthepartoftheBill&MelindaGatesFoundationandsimilar

organizationsservedasamarket"signal"thatsomethinginterestingwashappening,whichcaughttheattentionof

localparticipantswhootherwisemightnothaveprioritizedtheinitiative.

+ SchemeGovernance

+ Leadership

14

Fromthebeginning,theSADCplanfocusedoncreatinganewpaymentssystemtoservethegrowingcross-border

paymentneedsamongthe15countries.Thenewsystemleveragedmanycurrentbestpracticesinfinancial

services,including:

• Interoperability:makesitpossibleforanyonetopayanyonewithinthescheme

• UseofISO20022standards:XML-basedmessagesareflexibleandadaptable

• Multilateralbusinessrules:sharedservicelevelsdefinetheinteractionsamongparticipatingprovidersand

fosteracommonend-userexperience

• Real-timesettlement:providesthefinalityneededtosettlecross-borderobligations

• Designedforusebymultiplepaymentsteams:morevolumehelpslowercostsoverall

• Stakeholderengagement:openconsultationandinputallowsallpartiestomaketheirviewsknown

Leveragingthescheme—firstbuiltoutforwholesalebank-to-bankprioritypayments—allowedforreuseofmostof

therulesandrailsforretailpayments,potentiallyexpeditingtheprocessandreducingthecostofcreatingadditional

system(s).Evenso,stakeholderengagementrequirestimeandextendsthetime-to-markethorizon.

Theefforttobringcross-borderremittancesintotheSADCpaymentsschemehighlightedkeydifferencesin

regulationsamongthedifferentcountries.Forexample,countriesmayhavedifferentdefinitionsofauthorized

providers,differentlicensingbodies,anddifferentlimitsontransferamounts.Whilenoneofthesedifferencesare

insurmountableobstacles,thevariationshighlighttheneedforparticipantstounderstandandcomplywiththe

differentlegalparametersineachofthe15countriesinwhichtheychoosetodobusiness.

Incontrast,Europe,whichhastheSingleEuroPaymentsArea,hasaPaymentsServicesDirectivethatprovidesa

commonlegalbasistoexchangecross-borderpaymentsthroughoutthearea.RegulatorsintheSADCregionare

evaluatingamodelpaymentslawtopromoteasabaselineforeachcountrytoadopt.Completionofthistypeof

processwillsurelytakealongtime.Intheinterim,cross-borderpaymentswithinSADCwillhaveoperational—

butnotlegalorregulatory—harmonization.

+ IndustryBestPractices

? Regulation

15

ManyaspectsoftheoriginalSADCschemehavetransferredseamlesslyorprovenadaptablewithcertainrevisions.

Perhapsthebiggestgap,fromtherequirementsoftheoriginalschemetoincludingmoreplayersandremittances,

issettlement.ThekeyslearninghereisthattheSADCmodelwasdesignedforbanks—whicharedirectparticipants

inSIRESS—andcannotbedirectlytransposedontothenon-bankparticipants.TheMPSPstypicallyfinalize

transactionsbyusingabankastheirsettlementagentorahubcalled"paymentprocessingserviceproviders

(PPSPs)"whichactsontheirbehalftosettlepayments(aswellasprovideotherneededservices).Additionally,

finalizingtransactionsinanintermediaryaccountnecessitatedtheevaluationofthenewmodelstoensureits

workabilityandsecuritywithinSADC.

ThepresenceofadditionalhubsinthesettlementflowaddscomplexitytotheSADCschemeandperpetuates

inefficienciesinthecurrentsystemofcorrespondentrelationshipsfortheseplayers.Thiswilllikelyhaveanegative

effectonbothliquidityandcostcomparedtotheidealscenario.Theseintermediaryplayerswillbeneededinthe

foreseeablefuturebecausetherearecurrentlynoplanstoallowMPSPstohaveaSIRESSsettlementaccount.

ThesecondcomplicationinthecurrentSIRESSsettlementmodelistheuseoftheRandasthesinglesettlement

currency.Certainly,theRandisthemostwidelycirculatedoftheregionalcurrenciesandisthesharedcurrencyof

theCommonMonetaryAreabetweenLesotho,Namibia,SouthAfrica,andSwaziland.Nevertheless,therequirement

thatallpaymentssettledinSIRESSmustbedenominatedinRandcanaddcostforaremittancebetweencountries

wheretheRandisnotwidelyaccepted.Forexample,atransferfromBotswanatoTanzaniawouldneedtoundergoa

double-conversionfromPulatoRandandfromRandtoSchilling,resultinginacostlylossofvaluetothebeneficiary

andeffectivelyensureanundesirableSADCchannel.Intheshortterm,settlementviacorrespondentbanksis

suggestedfortransactionsnotbasedinRand.Also,planningisalreadyunderwayforSIRESSsettlementtotakeplace

inadditionalcurrencies.

ThethirdareawheretheoriginalSIRESSdesigncomplicateshigh-volumeretailpaymentsisrelatedtoitsoperational

model:Itsettlesinrealtime,simultaneouslyprovidingpaymentfinalitytoobligationsinmultiplecountries,butdoes

notoperatecontinuously.Theimpactforretailpaymentsisthatsettlementobligationspotentiallyincreaseoverthe

courseofthedayandareonlyfinalizedonthemorningofthenextbusinessday.Thereisalsoaliquidityimplication

forMPSPsthatmaylimittheamountoffundstheycantransferorrequireaccesstointra-daycredit.Thisissueis

likelytobecomeaconcernovertime,asmostsuccessfulretailpaymentsexchangesoperate,ataminimum,

throughoutthebusinessday.AnevaluationisunderwayonhowtoincreasetheavailabilityofSIRESSsettlement—a

movethatwouldbringthesystemcloserinlinewiththeevolvingbestpracticeofreal-timesettlementamong

financialserviceproviders.

-- Settlement/SIRESS

16

ConclusionThereflections inthiswhitepaperpointoutanumberofnotabledevelopmentsthathaveoccurredtodate in the

SADCPaymentsProject.Thisboldexperimentinpaymentsinteroperabilitycontinuestoofferinsightintoarangeof

keyquestionsinthepaymentsindustrytoday.Still,itiscertainlyprematuretoofferanevaluationofthesuccessof

theSADCpayments initiative.Onlyaftertheprojectbeginsacontrolledpilotphasein2018andlatermovestofull

availabilitycanwebegintoobservechangesinthemarket.

Atafuturepoint,wehopetoofferadditionalinsightintotheseopenquestions:

• Financialinclusion:WhateffectwilltheSADCpaymentsplatformhaveonthepriceofremittances(andother

cross-border retail payments) in the region? Will the availability of lower cost remittances encourage

consumerstoopentransactionaccountsatthebanksandMPSPsthatoffertheaffordableservices?

• Settlementandriskreduction:Cantheefficienciesenvisionedbythesharedregionalplatformbeextendedto

non-Rand-denominatedpayments?OrcanSIRESSsettlementbeextendedtoothercurrenciesquicklyenough

toovercomethesinglecurrencylimitation?

• Regulatory:Canregulatorsactwithsufficientspeedtoprovide theneededregulatoryharmonizationacross

countries that encourages providers to enter the market without incurring additional costs attributed to

complianceneeds?

• Governance:Will the SADC payments initiative continue to attract participation by both banks and non-

banks?Willthebank-ownedinitiativecontinuetorespondpositivelytoMPSPs'participationorwillchangesin

pricing, investment requirements,or ownershipbenecessary?Willwesee greater industry organizationby

thenon-banksasameanstocollectivelyvoicetheirsharedneedsinthemodel?

References• FinMarkTrust:www.finmark.org.za

• FinScope:www.fimmark.org.za/finscope/finscope-consumer

• SADC:www.sadc.int/documents-publications/sadc-treaty/

• SADCBankingAssociation:www.sadcbanking.org/index.aspx

• TheWorldBank:www.worldbank.org/en/topic/migrationremittancesdiasporaissues/brief/migration-remittances-data