MTN has announced plans to secure a banking license once the South African Reserve Bank (SARB) opens up its national payments system to fintech and other non-banking entities. According to reports, SARB is already developing an initiative that will authorize fintech and non-banking entities to access the national payment system directly.
Through MTN Mobile Money (MoMo) services, MTN operates in banking transactions but with a limited operation such as the inability to gain direct access to the core clearing and settlements system. This applies to other fintech companies.
Currently, fintechs that operate in this circle without a banking license work through a licensed bank that serves as a sponsor. MTN’s MoMo uses the African Bank in this regard.
In recognition of the framework, SARB National Payments System Department Head, Tim Masela, said that although banks were the backbone of the financial system in terms of savings and accounts, non-banks were offering convenient transactional services to people.
“Banks are the backbone of the financial system in terms of savings and accounts, but the non-banks are emerging in this space, offering wallet services that are convenient to us as the public. We believe that we (the Reserve Bank) should move with the times and open up the system for the entry of non-banks” Masela said.
Also confirming the development is MTN South Africa Chief Fintech Officer, Kagiso Mothibi, he pointed out that the regulatory plan will provide fintechs an opportunity to participate in the banking system after the review of the payments system. “When that is rolled out, we’ll definitely be looking to pursue our own license,” Mothibi said in a conversation with Business Times.
He added that bypassing a traditional banking partner would allow MTN to exercise much more control over the future of its banking operations with direct access to the national payment system.
What this means for MoMo and other fintech
MTN’s MoMo is one of several fintechs that participated in the SARB’s committee on developing the regulatory framework. Once it materializes, this project will seek to enable greater direct participation of non-banks in core banking services.
In addition, the financial inclusion framework is necessary to balance fintech innovations coupled with the associated risks for a more open and flexible financial system.
MoMo currently offers payments and money transfers to individuals and businesses where customers use their phone numbers instead of bank account numbers to identify digital wallets holding their money. Their target with this approach has been small with their primary target on shops and the low-income mass consumer markets who mostly rely on cash.
The clearance and settlement system will allow standalone fintechs and those managed by retailers and mobile operators to facilitate payments between parties without necessarily having a traditional bank involved.
Moreover, SARB believes that this initiative will help underserved communities, where fintech has their significant customers, to transact more efficiently.
“We recognize that where we are coming from, transacting traditionally happens from bank accounts, and historically bank accounts are where we save our money. We recognize that today people don’t necessarily need to bank, but they do need to transact. And thus I could have my money in a bank account, but for ease of transacting, I could take some of that money and put it into a digital wallet to be able to transact,” Masela said while expressing the balance of operations between banks and non-banks services.
He further expressed that an essential way fintechs have been driving financial inclusion is their ability to be available even when traditional banks are not. For retailers who operate on weekends, mobile operators ensure that their services are available to these users 24 hours a day.
Associated risks
The SARB faces a challenge in the introduction of non-banks to the national clearance and settlement system. The challenge lies in the ability to balance innovation and flexibility with a focus on managing the risks that come with a less rigid system. This is important to the protection of South Africa’s financial system.
With banks alone, these risks are better managed through their strict compliance with regulations. The fear is that fintech have less ability to shoulder regulations which might affect their operations and flow of innovation.
To tackle this, SARB, with other fintech operators on board, has been working on a “fit for purpose” regulatory framework that helps non-banks mitigate these risks. This also allows fintech to participate more deeply in the national financial system.
“We have started this journey and we have allowed non-banks in some aspects of the system, and there were others that were still restricted. We are moving in a direction of changing the law and changing our regulatory frameworks so that non-banks can enter the core of the system, which we call clearing and settlement,” said Masela.
Mothibi also suggested that allowing more non-bank operators into the system can help arrest the risks for a better financial system. “We welcome any regulations and policies that remove barriers to entry and encourage innovation. If you crowdsource the problem by including more players in the system, the solution has a better chance of being solved. It will be a great service for the overall financial system and the consumer as well,” he said.
MTN’s MoMo service in South Africa currently boasts 11 million registered users with 3 million active users. The second largest mobile operator in the country also has an ambitious plan to make its MoMo service an alternative to traditional banking accounts by rendering a low-cost service.
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