KAMPALA — A national payment system (NPS) is a set of systems, policies, and infrastructures that enables consumers, businesses and other entities to effect financial transactions, including making payments to one another and using the accounts and payment instruments issued by financial institutions. The essence of a payment system is that it uses cash-substitutes, such as cheque’s or electronic messages, to create the debits and credits that transfer value.
Well, a payments bank could be a bank operating on a small scale without involving the issuance of credit, but carrying out most bank-like operations and transactions. They operate current and savings accounts, where interest could be paid, and can also issue ATM or debit cards to their customers.
In markets like India where they have started several payments banks like Airtel and Fino, the beginning was not smooth, but certainly stability was achieved. With the National Payments System Act 2020 in place in Uganda, there is no turning back. The Act classifies payment systems into systems operated by the Central Bank, Payment services provided by Commercial banks and private sector payment systems.
Let’s observe that the NPS is a significant part of the financial infrastructure and ensures that payment systems operate in a secure and efficient manner. The NPS entails a framework of institutions, instruments, procedures and technology used to facilitate the circulation of money within the country and internationally. The ability to make payments easily and safely is important in ensuring the smooth and timely flow of goods and services throughout the economy.
Accordingly, the National Payment Systems Policy seeks to put in place a framework to: facilitate the enactment of a Payment System law, specify the roles and responsibilities of all the payment systems stakeholders, ensure safety of all payment systems in the country, foster consumer protection, enable increased access to electronic payment systems and reduce cash-based payments and promote innovations.
A key provision in the Act is a requirement for a payment service provider, a financial institution or microfinance deposit taking institution, that intends to issue electronic money to incorporate a subsidiary legal entity for that purpose. This requirement is going to affect the telecommunication companies which currently provide mobile money services. They will have to set up different entities to continue issuing electronic money, and these are the firms that culminate into payments banks.
Payments banks could come into being, thanks to the Central Bank’s resolute push to ensure that the banking sector delivers a comprehensive set of financial services to the poor and the unbanked. With full-service banks clearly finding it uneconomical to deliver to low-income and rural Uganda by closing off some of their up country branches, a more appropriate solution would be to conceptualize and deliver new models under a differentiated banking system to sustain the banking operations and be in position to serve the hard-to-reach population more efficiently and effectively.
Since the payments banks are an untested model in Uganda, the intent should focus purely on payments and deposits, targeting the bottom of the pyramid and underserved segments. In opening a new narrow bank model, there is a message to the already existing big boys – the incumbent scheduled commercial banks-that in order to remain relevant in the marker, they must align their business to this swing, and will certainly need to get their retail footprint together on competitive and innovative terms.
The payments banks will need to craft models based on innovation, customer service centricity and economies of scale. This, therefore, will give a fair chance to others who have the financial capability and wide distribution networks in the rural areas to deal. Payments banks models are designed with low-value, high-volume transaction profiles befitting the bottom of the pyramid. And thus, payments bank money trees may not sprout leaves too soon, not until they have sunk their roots in unbanked land.
Truly, the big picture is indisputable: Mobile money transactions are to surge as soon as the national payments system guidelines come in. The National Payments Interface is set to be another game-changer in payments. Access through mobile phones has become cheaper, and rural connectivity is improving under the digital age. The successful institutions will be those who have strengthened access to banking and other financial services across the country through an agent network and expanding the direct benefit transfer programmes plus appropriate customer value propositions.
There is another factor at play here. At the core of the payments banks concept lies the clear intent that the payment services must have a bank interface and be under direct regulatory oversight. This is in keeping with the tradition of calibrated liberalization, which has helped all sound economies weather some international financial storms.
This is a viable concept that may not only liberalize the payments market, but also strengthen the country’s focus towards financial inclusion and prosperity for the base of the pyramid.
As we prepare to see the ushering in of payments banks, we should note that this is a great opportunity to rectify the gaps in the current payments models by innovating digital-based solutions. As the masses wait to enjoy the competition that will come with the payment banks, the players in the financial industry will have to spin operations to remain relevant and maintain or grow their market share.
This writer, Michael Jjingo, is the General Manager Commercial Banking at Centenary Bank and a Fellow of Uganda Institute of Bankers.