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Reform of the South African National Payment System (1994 to 1998)
The National Payment System lies at the core of a country's financial infrastructure, enabling the transfer of money between transacting entities. The reform of a National Payment System requires a holistic approach that considers all pertinent components and issues that come into play when an electronic transfer takes place, including final settlement in central bank funds, clearing of payments between the banks, payment instruments, financial instruments that secure interbank positions, governance, oversight, etc. The reform of the South African National Payment System, initiated in 1993 and concluded in 1998, serves as an excellent example of the approach and actions required for a successful transformation.

THE APPROACH
The approach adopted was founded on strategic management principles. The salient aspects of the approach are the following:

High level of stakeholder involvement
As the national payment system is a national asset, a high level of stakeholder involvement is essential. The main stakeholders are primarily the central bank and the banks. There is also a wider stakeholder community that might not need to be intimately involved but do need to be kept informed on strategies, developments, etc.

In the South African case, banks were requested to nominate people with the necessary backgrounds and experience to represent the banking industry in the initiative and a core team was formed that would work with the central bank to firstly develop a strategy and thereafter work with the central bank to implement the strategy. The core team consisted of two representatives from each of the four major banks and two people representing the smaller banks. In addition, a number of central bank business experts were also co-opted into the team bringing the number to twelve members. This was found to be a workable number for effective collaboration.

Strategic focus
The approach was orientated towards the future and guided by a shared vision of what would be ideal for the country. On a high level the approach entailed the following:
Achieving a strategic mindset
A focus on the future is a fundamental characteristic of the strategic approach, differentiating it from the incremental approach that uses the current scenario as departure point.

The strategic mindset comprises of -
  • Vision of a future payment scenario
    The first and most critical task that had to be achieved was to get a shared vision of the future. In order to focus on the future a 10-year timeframe was used. In other words the whole initiative was focused on what the participants would see as being the ideal scenario ten years on.
  • Rationale for the national payment system (mission)
    The primary reason for the existence of a national payment system was explored and a common understanding was achieved on the role of the payment system within the economy.
  • Goals
    Subservient to the primary reason for the national payment system, the high level goals of the system were explored.

Determining the non-negotiables
Once a shared strategic mindset was achieved the focus shifted to the ground rules for the new national payment system.

These consisted of the following:
  • Fundamental principles
    Principles were formulated upon which the new system would be designed and governed. These principles covered areas of importance to the central bank as well as issues that the commercial banks felt strongly about. Once these principles had been agreed they were cast in stone and would no longer be debatable. This had the advantage that the discussions could go forward on "the how" rather than continuing to rework fundamental issues that had already been agreed.
  • Key success factors
    The more important results that had to be achieved were clarified and agreed. The key success factors would be used to assess the reformed national payment system once the project was completed.

Determining the strategies
Once the non-negotiables and the vision were agreed the team could start with the discussion on what needed to be done in order to realise the vision. In other words what strategies / actions had to be followed in order to move from the present to the envisaged future scenario.

Roles and responsibilities
The roles and responsibilities of the stakeholders in the future payment system were examined and agreed by the team. This included the roles and responsibilities of the central bank, banks, industry associations and services providers.

High-level implementation plan
The final items debated and agreed were the implementation plan and time estimates for all identified strategies and actions.

Collaboration

Effective collaboration was achieved as follows:
  • Facilitated interactive face-to-face workshops
    Most of the work was done in inter-active workshops that were facilitated by the central bank as a neutral and objective party.
  • Across discipline and institution
    Every effort was made to ensure that the representation at the workshops provided involvement of people from various disciplines and experience, as well as institutional perspectives from large, medium and small banks.
  • Computer-supported facilitation
    In order to focus attention and to optimise productivity all ideas and issues raised were documented in full view of all participants. Using this approach ensured that everybody was working off the same source document and that the process kept moving forward.
  • On-screen editing
    Once the process moved from idea generation and debate, to developing the final framework and strategy document, the facilitation approach switched to on-screen, full-view editing. This meant that the final strategy document was effectively co-authored by the strategy formulation team. In reality every word, sentence and paragraph examined and agreed by the team. This resulted in a document of high quality that guided the transformation of the South African payment system.

Creating a meeting of minds (consensus building)
At the outset it was the stated objective that the central bank and the banking industry should share and co-own the vision and strategy aimed at creating a world class payment system dispensation for South Africa that not only served business and high-end customers, but also encouraged the introduction of appropriate payment services to the broad public and unbanked community. This meant that every effort would be made to find consensus on each aspect of the national payment system framework and strategy.
This objective was achieved and the Framework and Strategy document was signed off jointly by the Governor, of the central bank, and the chairman of the Bankers Association, on behalf of the banking industry.

RESULTS ACHIEVED
  • A strategic framework for national payment system reform
    Read more...
  • Conceptualisation, design, development, implementation and operation of state-of-the-art Real-Time Gross Settlement system
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  • Promulgation of a National Payment Systems Act to give legal effect to the new settlement system practices and organisational arrangements
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  • Establishment of a self-regulatory industry body to manage national payment system
    Read more...

THE OUTCOME
The main economic benefits achieved by the modernisation of the South African National Payment system are summarised below:

Systemic risk mitigated through the implementation of a Real-Time Gross Settlement (RTGS) system
The system had the desired effect, namely, to reduce the end-of-day settlement exposures of the participant banks to manageable levels. This was achieved by the banks settling a large proportion of the higher value interbank transfers through the RTGS system, during the course of the day. The remainder, that is retail clearing houses and the delayed settlement of the financial markets (in cases where delayed settlement is preferred by the market) was settled at the end of the day, also through the RTGS system.

Electronic financial markets supported
The successful introduction of the new National Payment System had a positive impact on the evolution of the financial markets in South Africa. The Real-time Gross Settlement system enabled the equity market to provide Simultaneous, Final and Irrevocable Delivery-versus-Payment to the market participants through the STRATE market infrastructure
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South African currency accepted in Continuous Linking Settlement (CLS) system
The fact that the features of the system, and the legal framework supporting the South African RTGS system, complied with global best practice, enabled the South African currency to be accepted in 2004 to become only the 11th currency settled within the multi-currency cash settlement system operated by CLS Bank. Through the CLS system the South African Rand now settles daily on a payment versus payment basis in central bank funds with any of the other currencies settled within the system
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Sound and effective National Payment System governance model used
A key deliverable of the National Payment System modernisation initiative was the governance model, supported by the necessary legal framework. The new National Payment Systems Act of 1998, the introduction of the self regulated Payments Association of South Africa (PASA) and the enhancements to the South African Reserve Bank Act, created a strong framework for the management and continued improvement of the payment system as well as the financial infrastructure in general.

Sound financial infrastructure supporting economic activity
The introduction of a real-time payment and settlement environment in South Africa has enabled and encouraged the introduction of payment instruments and services that provide immediate or delayed finality to payers and beneficiaries. The infrastructure supports the emerging payment mechanisms and electronic trading in its broadest sense, thereby making a substantial contribution to the creation of an electronically enabled economy.
 
 
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