15 February 2017 – Cape Town

Briefing to the Portfolio Committee on Social Development

Tim Masela

Head: National Payment System Department, SARB

The SARB’S role, position and readiness

in the implementation of SASSA’s institutionalisation of social grant payment

system

Table of Contents

• Introduction

• Mandate of the SARB and role w.r.t the NPS

• The national payment system (NPS)

• Social grants within the NPS and the role of the SARB

• Consideration for the future of the social grant payment system

• NPS infrastructure readiness to support SASSA plans

• Conclusion

Introduction

• The Portfolio Committee on Social Development invited the SARB on 2 February

2017 to brief the Committee on the Bank’s role, position and readiness in the

implementation of SASSA’s institutionalisation of the social grant payment

system.

• Highlight financial, technical, policy and legal implications or any other

information that can assist the Committee to gain insight into this matter

Mandate of the SARB and role wrt the NPS

• The SARB is the designated central bank of South Africa, (S 223)

• Its primary object to protect the value of the currency in the interest of balanced

and sustainable economic growth (S 224)

• Other powers and functions include ‘those customarily exercised and performed

by central banks…’ (S 225)

• The SARB Act mandates it to ‘establish, conduct, monitor and regulate and

supervise payment, clearing, or settlement systems’ S 10(c)

• To execute this mandate, the SARB established the National Payment System

Department (NPSD) which operates in terms of the National Payment System

Act (S 2)

Mandate of the SARB and role wrt the NPS

• The SARB in its role as overseer and regulator of the NPS, promote the safety

and efficiency of the NPS and always act in the interest of the NPS as a whole

and not that of any individual or grouping of stakeholders

• In support of this objective, the NPS subscribes to the fundamental principle

of interoperability as it enhances the efficiency objective of the NPS

Interoperability is the ability of systems offered by different participants to

interlink and work in effective partnership and without interruption

• The SARB provides payment settlement services to the South African payment

settlement participants and is also responsible for compliance by participants in

the national payment system to the NPS regulatory framework.

• The SARB does not determine or develop products and services nor does it set prices

Mandate of the SARB and role wrt the NPS

• The SARB is attending the meeting of the portfolio committee as overseer and

regulator of the NPS and hence regulatory practices regarding confidentiality has

to be observed

• The responsibility of organising and developing the social benefits payment

system rests with SASSA supported by the Department of Social Development

(DSD), not the SARB

• The SARB in its capacity as regulator and overseer of the NPS has had

numerous engagements with SASSA relating to stabilisation of their current

payment system as well as with both SASSA and DSD relating to options they

may consider relating to their transitional and future plans for social benefit

payments

• The SARB is not in a position to express an opinion whether SASSA will be in a

position to mitigate risks relating to the current transition or take over of the

system as expected by stakeholders including this committee

The national payment system (NPS)

• The NPS is a system that encompasses the total payment process, including

• all the systems, mechanisms, institutions, legal agreements and applicable

legislation,

• from the moment one person, using a payment instrument to pay another

person or a business by issuing a payment instruction,

• culminating with the final interbank settlement of the transaction in the

books of the central bank.

• A national payment system is crucial for the sound functioning of the economy

and supports financial markets and financial development.

The national payment system (NPS)

Corporate/ Infrastructure/

Retailer Cardholder/Payer/

Beneficiary

Issuing bank Acquiring bank

Switch

South African Multiple Option Settlement (SAMOS) system

Average monthly values settled : R11,2 trillion

Average monthly number of transactions: 660 613

• Cards

• Debit orders

• ATMs

• Electronic payments

The NPS - payment system networks

CLS NETWORK

CLEARING

NETWORK

SETTLEMENT

NETWORK

PAYMENT

NETWORK

Central

bank

Central

bank

CLS

Bank

SARB

Settlement

bank

PCH

MARKETS

CLEARING NETWORK

STRATE

PCH

PCH

Broker

SIRESS

REGIONAL

NETWORK

Non-

clearing

bank

BANKSERV

SARB

REGIONAL

PAYMENT NETWORK

Retailer

ATM

CUSTOMER

NETWORK

Clearing

bank

CUSTOMER

NETWORK

MARKETS

CUSTOMER NETWORK

Social grants within the NPS

SERVICE PROVIDERS

CPS

SOCIAL GRANT BENEFICIARIES

GRINDROD

BANK

BIOMETRICS DATBASE

ACQUIRING/SPONSORIN

G BANKS

(1…N)

INTERBANK

SWITCH

GOODS/SERVICES

POS RETAILERS

CHIP, PROPRIETARY

UEPS BIOMETRIC ENABLED

CARD

NEW BENEFICIARY

Contracted as “open account”

Payment file

Current Design

SASSA

NT

Debit order file

EASYPAY

ATM

Cash delivered to pay point

(30%)

Cash via PIN

(65%)

Micro-lenders, insurance

providers, airtime providers

Fingerprints/voice

CLOSED LOOP

SAGEM Cash via

biometric (5%)

SARB and the SASSA grant payment system

• The SARB was not involved in the planning and implementation of the current

SASSA grant payment system that was launched in 2012

• The launch of the system in 2012 placed strain on the NPS infrastructure and

its stakeholders which resulted in operational difficulties and instability within

the environment. This was due to, inter alia:

The payment of social grants channelled into one payment date (1st of the month) led

to a transaction spike for NPS participants where there was also lack of

communication and coordination resulting in increased stress on systems (of

retailers) and automated-teller-machines (ATMs) due to;

lack of sufficient cash was available to pay-out on peak days and

lack of sufficient human and technical resources to handle the number of grant

recipients on these peak days.

CPS entered into agreement with Grindrod Bank (a relatively small bank with no

branch network and limited infrastructure) to issue the social grant bank cards, thus

contributing to operational difficulties in the NPS

SARB and the SASSA grant payment system…

• SARB established a Coordinating Working Group to address and assist to

manage the negative impact on the broader NPS and the social benefit

recipients in particular in order to manage the risk introduced into the NPS

• The coordinating group was led by SARB NPSD and included officials from the

SARB Banking Supervision Department, the South African Social Security

Agency, the Department of Social Development, the National Treasury (NT)

and the Payments Association of South Africa.

• The current system was stabilised and has been stable since 2012.

• The SARB issued an exemption from the NPS regulatory framework to

Grindrod Bank to allow the use of a biometric customer verification mechanism

pending finalisation of a national biometric standard.

SASSA value chain – as is

1. Application and beneficiary registration

(SASSA domain)

2. Beneficiary validation (POL) (SASSA domain)

3. Grant payment: Release of funds

(SASSA domain)

4. Payments and collections from beneficiary’s Account

(SASSA and Interbank domain)

5. De-registration process

(SASSA domain)

Grant Application:

- verification of ID

- assessment of

application (SASSA)

Registration:

- Capture beneficiary

details and biometrics

(SASSA and Net1)

Grant Card Issued:

- Opening of Grindrod

Bank Account

- Grindrod Bank,

MasterCard endorsed,

Debit Card Issued with

PIN and/or Net1

Biometric capability

(Net1).

Update of Grant

Database (Net1/SASSA)

Proof of Life:

- Physical verification

of fingerprint

- Remote voice

authentication

against SASSA

database

Grant Cash-out /

Purchases:

- POS / ATM

(Interbank)

- CPS (Closed Loop)

Collections

- Net1 “Payroll”

- Grindrod Debit

Orders

Grant Reviews:

- Review validity/

continued eligibility of

grant beneficiary.

(SASSA with

assistance of Dept. of

Home Affairs)

Cancellation of

Grants:

- SASSA

Release of Funds:

National Treasury

SASSA (Nedbank)

Net1

Grindrod Bank

Beneficiary Accounts

Small portion of other

Bank Accounts.

SASSA value chain – recommended to be

1. Application and beneficiary registration

(SASSA domain)

2. Beneficiary validation (POL) (SASSA domain)

3. Grant payment: Release of funds

(SASSA domain)

4. Payments and collections from beneficiary’s Account

(SASSA and Interbank domain)

5. De-registration process

(SASSA domain)

Grant Application:

- verification of ID

- assessment of

application (SASSA)

Registration:

- Capture beneficiary

details and biometrics

(SASSA)

Grant Card Issued:

- Opening of bank

account (beneficiary

selected account/SASSA

defined basic account)

- Scheme endorsed debit

card issued with PIN and

industry biometric

standard

Update of Grant

Database (SASSA)

Proof of Life:

- Physical verification

of fingerprint

- Remote voice

authentication

against SASSA

database

Grant Cash-out /

Purchases:

- POS / ATM

(Interbank)

SASSA Cash pay-

outs

- SASSA established

contracts to reach the

far-flung rural areas

Grant Reviews:

- Review validity/

continued eligibility of

grant beneficiary.

(SASSA with

assistance of Dept. of

Home Affairs)

Cancellation of

Grants:

- SASSA

Release of Funds:

National Treasury

SASSA (Nedbank)

Beneficiary selected

account/SASSA

defined basic account

Consideration for the future of the social grant

payment system

• The SARB subscribes to the principle of interoperability and advocates for

mitigation of concentration risk.

• The SARB thus supports an open service approach for the future design and

distribution of social grant pay-outs.

• This approach will entail the following:

To allow a beneficiary to select an account at a bank of his/her choice and a suite of

products and services, including the associated costs; or

A basic account (with features defined by SASSA) offered by any bank participating

in the payment of social grants. Product features may include a number of free

withdrawals, purchases and debit order requirements (if allowed) and the adding of

a biometric authentication capability.

SASSA could negotiate the costs of these basic accounts to assist beneficiaries.

A co-branded product with SASSA and the applicable banks could be considered.

This open co-branded offering would limit the need for a “winner takes all” tender approach

and promote competitiveness amongst banking providers of products/services resulting in

utilisation of existing payment system infrastructure and probably lower costs.

Consideration for the future of the social grant

payment system…

• SARB recognises that with any option chosen by SASSA, there may be a

portion that may require a tender relating to coverage of remote rural areas

which banks have not sufficiently served from an acquiring infrastructure

perspective (presence of ATMs and point of sale (POS) devices).

In discussions with SASSA, a possibility for the South African Post Office (SAPO) to

provide services in those locations should be considered

SARB would however like to note that whereas Postbank is currently

designated in clearing, it would need to build appropriate capacity (human

resources and infrastructure) to deliver this service and payment services to

SASSA beneficiaries generally

However, further efforts should continue to find solutions to make services available

in those underserved areas.

Consideration for the future of the social grant

payment system…

• The open architecture approach supported by SARB is based on the principle

of interoperability and avoidance of concentration risk, while leveraging the

existing acquiring and issuing infrastructure of the NPS.

• An open architecture would potentially result in the following benefits:

• Increased beneficiary choice as the beneficiary may choose the bank that will meet

their service needs

• Accommodate SASSA specific requirements for special features on a designed

account that will be offered to the benefit recipients

• SASSA would avoid reissuance of the tender on an ongoing basis

• Probable lowering of costs

Additional option available to SASSA

• SASSA could elect to take over the overall payment process of social benefits

and apply to be designated by the SARB as a designated payment clearing

participant. This would entail SASSA operating as a bank and hosting

beneficiary accounts

• This will result in SASSA taking responsibility of almost all aspects of the

payment value chain and would entail;

• SASSA will be required to seek the approval of the Registrar of Banks as it may be

deemed to be conducting the business of a bank, and be regulated by the Registrar

of Banks;

• Seek designation as a designated payment clearing participant from SARB;

• Acquire a banking solution and build all required core and supporting capacity;

• Issue payment instruments to beneficiaries;

• Become a member of VISA/MasterCard;

• Enter the payment clearing system; and

• Be sponsored in payment settlement by a settlement bank.

Additional option available to SASSA

• Drawbacks of this option are:

• Duplication of existing infrastructure (need for capacity to be built by SASSA)

• Diminishing efficiencies derived from economies of scale

• Introduction of concentration risk

• The SARB does not support arrangements where non banks duplicate existing

infrastructures as these work against the efficiency objectives of the NPS

Transitional arrangements

• The SARB will support a transitional option chosen by SASSA that will ensure

continued payment of social benefits without any interruption beyond March

2017, within the legal framework

• The SARB however believes that finalisation and implementation of the future

architecture of the social benefits payment system should be undertaken

without further delay

Summary

• SASSA’s role - SASSA should ideally cover its core competence (assessing

beneficiaries, registering beneficiaries, de-registering beneficiaries)

• Prevent duplication - SASSA should endeavour to make use of existing

payment system infrastructure

• Prevent operational and reputational risks - SASSA should ideally not host

accounts on their own. From the previous experience in 2012, operational

issues and bottlenecks should be avoided. Current regulatory principles e.g.

interoperability should be maintained.

• Ensure competitiveness - An open architecture should enable competitive

product offerings to beneficiaries .

• Sense of urgency - The SARB remains open to choices exercised by SASSA.

However these choices have to be made urgently.

Conclusion

• The SARB, as the regulator of the payment system, may offer regulatory

guidance to SASSA, where required

• The NPS infrastructure is neutral and ready to support the current social grants

payment arrangements and will also accommodate all proposed options that

are within the regulatory framework, when such decisions are finalised with all

affected stakeholders.

• The SARB however expects SASSA to exercise its choice with due regard to

compliance to the regulatory framework of the NPS and preferably adhering to

the principle of interoperability

• SARB believes that SASSA should identify its core role in the social benefits

payment value chain and leverage off existing infrastructure where

appropriate.

Thank You