PayShap could be a game-changer in South African banking, effectively eliminating the need to make cash payments.

From a banking customer perspective, PayShap is simply another payment channel to add to the various options already available. One can decide whether to use a regular electronic funds transfer (EFT), an instant payment, a Money Send (eWallet) or to use PayShap – depending on the need.

Yet PayShap is not just another payment method. It is in fact an entirely new payment system (or so-called “payment rail”) which modernises the South African banking system and brings it in line with global banking developments.

A payment rail is a platform or network infrastructure that allows all digital money transfers to be made between payers and payees. Each payment rail differs in how it carries out this process based on the payment type, speed, technology, or geographical location.

Examples of payment rails include Automated Clearing House (ACH), Mastercard, VISA (and other major credit card providers), PayPal and SWIFT.

In South Africa EFT rails have been around for over 40 years. EFT was started in 1975 (it was originally called Magtape) and was primarily for debit orders. Credit payments and salaries on EFT were introduced a few years later. In 2006 real-time clearing (RTC) was introduced which allowed for same-day settlement, including instant transfers.

PayShap, the brand name for the Rapid Payment Programme, is a new payment rail that the South African banking industry has been working on over the last five years.

It will reduce the cost and improve the speed at which banking transactions take place.

While instant transfers using the RTC rails settle the same day, they are not truly instantaneous and not as cost effective. With PayShap, funds are transferred within ten seconds. It is less expensive to run and allows for the use of a ProxyID rather than a bank account, improving customer safety.

In practice, a customer makes a payment from their Bank A account using the PayShap option to a customer of Bank B. The transaction goes from Bank A to PayShap (which is managed by BankServAfrica), which in turn pays it on to Bank B. This is done in a few seconds, similar to a card payment.

As Mpho Sidaki, head of real-time payments at BankServAfrica explains, the introduction of the PayShap rail is a significant milestone in the development of the banking system, and over time will most likely replace the use of RTC rails.

“This is a roadmap. It will not happen immediately. Currently PayShap only allows transactions of up to R3 000 while RTC allows for transactions of up to R5 million. PayShap needs time to mature. These payment systems will co-exist for a while, but over time all new innovation will happen using the PayShap rail, so it will naturally replace RTC.”

David Breetzke, Head: Payments Regulatory & Governance at Absa Everyday Banking, agrees that PayShap will eventually replace the legacy real-time clearing transactions in the long term.

“This is dependent on adoption and the increasing of the R3 000 transaction limit. Due to the difference in pricing that exists today already between the two services, we expect that the overall cost of real-time payments will come down.”

While the payment limit is currently set at R3 000, around 80% of electronic funds transfers are below R3 000, meeting the requirements of most people who wish to do instant payments.

Breetzke says the industry has agreed to this limit as they still need to understand the banking behaviour and adoption of PayShap.

“We need to make sure it is operationally sturdy and understand the risks that we may not be aware of before expanding the opportunity”.  The expansion could include payment corridors to other countries and creating regional payment systems.

Digitalisation of cash payments

The main vision behind PayShap at this stage is the digitalisation of cash payments. Because Payshap is so easy to use and instantaneous, it has the potential to largely replace micro cash payments.

According to Dayalan Govender, head of Solution Innovation at Nedbank, cash continues to play a huge role in the economy, with R166 billion circulating in notes and coins, and R70 billion per month flowing through the ATM and branch networks.

“The reasons for the continued high use of cash are complex but one thing is clear: using cash is expensive and its high costs are disproportionately borne by the poor.”

Many lower-income earners use cash as their main form of payment to vendors, landlords and taxis, who mostly only accept cash payments. Over time, with the adoption of PayShap, the use of cash could be reduced. This is safer for individuals, and a lot more cost effective for banks.

Govender says it will also benefit cash-based SMEs who currently have no way of demonstrating their financial status, and thus find it hard to access the loans they need to fund growth. This situation disempowers SMEs and hobbles the economy.

Banks are hoping that this will also encourage the so-called unbanked to open bank accounts or to use the bank accounts they already have to transact rather than draw cash.

“The seamless experience where a client no longer needs to remember a bank account number and can simply pay to a mobile number, is also a key feature which we believe will drive digitised payments,” says a Standard Bank spokesperson.

At this stage only four banks are piloting PayShap, namely Absa, FNB, Nedbank and Standard Bank. By July this will be rolled out to other banks including Capitec, TymeBank, Investec and Discovery.

The next phase will also include a “pay me” request, and Govender says there are also plans to integrate instant messaging applications such as WhatsApp, which will allow users to transfer funds using a proxy such as a cellphone number for each party’s bank account or e-wallet.

This article first appeared in City Press.