Nearly 70% of remittances sent from South Africa are in cash, carried by friends or bus drivers across hundreds of miles. Those who do use formal channels like banks and established vendors have to pay fees ranging from 5% to 20% of the total amount they’re sending. The immense flow and importance of remittance payments, combined with the costs and inconvenience of transacting them in the current system, make a robust, secure system supporting cross-border payments absolutely necessary. The good news is that such a system is already taking shape in southern Africa.
Imagine this scenario: A young woman from a small town outside Johannesburg, moves to the city and begins working as the manager of a local hotel. After settling in and establishing herself financially, she makes a thrilling discovery: She can afford to send R150 home every month to her family, who recently moved to Lusaka.
It’s a difficult time for her family. Her parents were forced to pull her little brother out of school because they couldn’t pay his annual fees. The extra R150 will allow him to return to school and help her parents with other expenses. To get this cash back to them, the young woman entrusts it to a friend who is traveling to Lusaka later that week and has agreed to deliver it on her behalf. Grateful that she’s found a way to get the money home, the young woman breathes a sigh of relief.
Stories like this are common around the world. Money from fathers, mothers, aunts, uncles, cousins and siblings abroad can be a lifeline for their families back home. Among the 15 countries in the Southern African Development Community (SADC), remittances total as much as 5% of the national gross domestic product. Much of this money originates in South Africa, the economic epicentre of the SADC region—and therefore, the chosen home of 3.3-million migrants. Remittances from South Africa to other SADC nations top R11.2-billion ($800-million) each year.
However, most people making these payments use informal—and, therefore, insecure—channels. Nearly 70% of remittances sent from South Africa are in cash, carried by friends or bus drivers across hundreds of miles. Those who do use formal channels like banks and established vendors have to pay fees ranging from 5% to 20% of the total amount they’re sending. In fact, the average cost of sending money from South Africa is 16.79%. All of this—the immense flow and importance of remittance payments, combined with the costs and inconvenience of transacting them in the current system—is why a robust, secure system supporting cross-border payments is absolutely necessary.
The good news is that such a system is already taking shape in southern Africa. A leading effort by the SADC Banking Association has helped establish the SADC Integrated Regional Electronic Settlement System (Siress), which currently supports wholesale cross-border payments. Nine of the 15 SADC nations participate at present, and five more are joining in the near future. Launched just two years ago, Siress has already completed transactions totalling more than R1.4-trillion ($102-billion). Critical to its success has been the cross-border collaboration of SADC nations. At the upcoming SADC conference in Johannesburg, regulators, banks, mobile network operators and other critical stakeholders will convene and discuss how member countries can take part in, support, and extend the SADC payments framework to include low-value payments.
The Financial Services for the Poor programme, which I lead at the Bill & Melinda Gates Foundation, sees great potential in Siress and the innovative partnership of the SADC nations behind it. Two billion people are excluded from the formal economy, and robust, low-cost, interoperable digital platforms are vital to their inclusion. And vital to building such platforms will be regulations and policies that enable those living in poverty to open accounts and allow providers to develop new financial services that benefit everyone, including the poor. With innovations happening in southern Africa, and in countries around the world, we are beginning to see a global momentum building behind digital financial services, and their potential to help the poor escape poverty for good.
The reason we see such promise in digital financial services is largely in response to the two primary consequences of financial exclusion: First, the unbanked poor lack the security and financial manoeuvrability that formal financial services afford. Second, their transactions are corralled in a closed, cash-only system, isolating them from untold numbers of merchants, banks and other commercial entities. Together, these consequences conspire to make poverty a trap that people find nearly impossible to escape from.
But in today’s digital and mobile age, SADC nations and others around the world have the means to nullify that trap. Ninety percent of the world’s poor are already covered by a mobile signal. Whereas reaching rural and remote communities with traditional bank branches and accounts has long been impractical, reaching them with digital financial services they can access over their phones is not. Digital accounts also cut the costs of transactions by as much as 90%. When done digitally, not only remittances but all kinds of transactions can be more convenient and affordable.
Imagine everything the young hotel manager in Johannesburg could do using digital money. She could send her monthly remittance to her parents’ personal account. If her brother’s school is set up to receive payments, she could send money there directly. Her paycheck could deposit directly into her digital account. She could make purchases from merchants set up to receive digital payments, and—perhaps most important of all—she could save money for emergencies and future planning more easily than she could with cash.
If she could do all that whether she’s in South Africa, Zambia, Botswana or anywhere else in the region, then her financial life would be truly transformed. She would have the manoeuvrability and security that many of us take for granted. And all of it would hinge on digital payments that are blind to borders.
SADC member nations are taking bold, critical steps to make this transformation happen. In the case of digital financial services, it is not the global West that leads. Rather, all eyes are on southern Africa, Southeast Asia, and other emerging markets. The innovation and collaboration brewing in these areas have the potential to help shape and change the world economy so that it truly includes, and benefits, everyone. DM