Kissing cash goodbye in South Africa – there’s a big problem
South Africa is considering a future shift toward a cashless society, embracing digital payment methods as the future of the country’s economy.
While this vision is ambitious, it is a steep hill to climb, as cash still reigns supreme for the vast majority of the population.
Recently, Reserve Bank Governor Lesetja Kganyago said that South Africans are over-reliant on physical cash and should transition to safer payment methods.
The South African Reserve Bank (SARB) published a roadmap for the digitalisation of the economy earlier this year, which broadly aims to modernise the national payment system and educate people on digital payment channels.
However, the country still has a very long way to go in reducing its dependency on cash.
The roadmap itself shows that almost half of all adults withdraw all their money as soon as it is deposited in their accounts, and the majority of payments in the country are made using physical banknotes.
In a recent Business Talk with Michael Avery interview, Standard Bank CIB’s Stuart McDermid and Nthabiseng Mohale discussed the challenges and opportunities of becoming a cashless society.
Mohale noted that while there has been a trend away from cash towards digital payments, data from Statistics South Africa shows that cash circulation has not actually decreased since 2009, with the amount of cash in circulation in 2023 around R171 billion.
She said that there are numerous reasons why many people in South Africa continue to rely on cash, and argues that many consumers feel safer and more in control when using cash, as they:
- Can easily track their spending;
- Avoid unforeseen bank fees;
- Reduce the risk of becoming victims of unauthorised debit orders.
McDermid acknowledged that the perception of safety is a major factor in people’s preference for cash, even though carrying cash can increase the risk of robbery.
He suggests that this perception is rooted in:
- Past experiences with abuse of debit orders;
- A general mistrust of financial institutions.
The move towards a cashless society
Although this suggests that there is still a long way to go to achieve a cashless society, Mohale highlights that the growth in digital payments, particularly with cards and mobile payment systems, has been strong.
According to Electronic Payments International (EPI), in 2023, card transactions in South Africa totaled R2.07 trillion, which is a 13.4% jump from the previous year.
This growth in the card payments market is expected to continue in 2024, with the total market projected to grow by 11.4%, reaching R2.3 trillion by the end of the year, according according to GlobalData, publishers of EPI.
Mohale attributes this trend to several factors, including:
- Cost savings for businesses associated with handling and processing cash;
- The benefits of migrating transactions to digital platforms in terms of efficiency and security.
McDermid argues that the real safety issues of cash, such as crime, are significant and outweigh the perceived risks of digital payment systems.
He believes that the true efficiencies of going cashless will eventually become apparent to consumers, leading to greater adoption and identifies three key capabilities required for a successful transition to a cashless society:
- Regulatory capability: Strong regulations that promote open banking and cashless transaction;
- Technical capability: Robust and reliable payment systems, such as the card rails and PayShap, that enable seamless and secure transactions;
- Market capability: Consumer adoption and integration of cashless solutions into their daily lives.
PayShap
Mohale and McDermid also discussed PayShap.
The Reserve Bank partnered with BankservAfrica to launch PayShap, which is a real-time, low-value, interbank digital payments service already available through Absa, Nedbank, Standard Bank, FNB, Capitec, and Discovery Bank.
While this is a significant advancement to the country’s goal of going cashless, Mohale and McDermid acknowledge that the cost of PayShap in South Africa has been a barrier to adoption, unlike in countries like Brazil and India where it is free.
McDermid explains that this difference is because the South African government does not own the payment rails, which are instead owned by commercial banks.
As a result, the costs of building and maintaining the infrastructure for PayShap are borne by the banks and passed on to consumers.
However, this could all change.
He argues that:
- As PayShap becomes the dominant payment rail and transaction volumes increase, the unit cost will decrease, potentially making it free or very low-cost for consumers;
- Corporates may be willing to subsidise the costs of PayShap transactions to encourage adoption;
McDermid highlights economic benefits of a cashless society, like increased GDP growth, increased revenue for the fiscus, reduced working capital for businesses, as well as digital payments’ potential to promote financial inclusion by:
- Providing unbanked individuals access to financial services;
- Supporting the growth of small businesses.
He added that the immediacy of digital payments, such as PayShap, can improve small business efficiency by enabling quicker stock replenishment and access to credit based on digital transaction history.
Going forward
With that said, South Africa still has a very long way to go.
McDermid and Mohale stress that overcoming these challenges requires a multi-pronged approach, including:
- Building consumer trust by addressing security and transparency concerns.
- Reducing or subsidising digital transaction costs, especially for low-value purchases.
- Investing in infrastructure to bridge the digital divide and ensure equitable tech access.
- Launching financial literacy programs to educate consumers on digital products.
- Fostering collaboration and standardisation within the financial industry for seamless interoperability.
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