FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | FINANCIAL INCLUSION, INFRASTRUCTURE & ACCESS The Market for Remittance Services in Southern Africa © 2018 The World Bank Group 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved. This volume is a product of the staff and external authors of the World Bank Group. The World Bank Group refers to the member institutions of the World Bank Group: The World Bank (International Bank for Reconstruction and Development); International Finance Corporation (IFC); and Multilateral Investment Guarantee Agency (MIGA), which are separate and distinct legal entities each organized under its respective Articles of Agreement. We encourage use for educational and non-commercial purposes. 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Photo Credits: IFC/World Bank Photo Libraries, and Shutterstock FINANCE, FINANCE, COMPETITIVENESS COMPETITIVENESS & INNOVATION & INNOVATION INSIGHT INSIGHT | FINANCIAL | FINANCIAL STABILITY INCLUSION, & INTEGRITY INFRASTRUCTURE & ACCESS TABLE OF CONTENTS ABBREVIATIONS AND ACRONYMS III ACKNOWLEDGMENTS V EXECUTIVE SUMMARY VII INTRODUCTION 1 OVERVIEW OF MIGRATION AND REMITTANCES IN THE SADC REGION 3 KEY ISSUES AND CHALLENGES IN THE SADC REMITTANCES MARKET 7 High Cost of Remittances 7 Legal and Regulatory Barriers 10 Limited Competition in the Remittances Market 16 Bottlenecks in the Payment System Infrastructure 19 Other Issues and Challenges 27 POLICY RECOMMENDATIONS 29 Recommended Actions for Regulators and Policy Makers 29 Recommended Actions for Remittance Service Providers 31 REFERENCES 33 LIST OF BOXES Box 1. The CPMI-World Bank General Principles for International Remittance Services 2 Box 2. Regulatory Restrictions on Independent MTOs in Selected SADC Countries 11 Box 3. Innovative MTOs Entering the Remittance Landscape in the SADC Region 16 Box 4. Financial Inclusion Landscape in SADC 22 Box 5. Connecting Domestic ACHs across Borders: The United States and Other Countries 27 Box 6. The De-Risking Phenomenon 28 LIST OF FIGURES Figure 1. Volume of Inbound and Outbound Remittance Flows in Selected SADC Countries, 2015 5 Figure 2. Proportion of Remittances Inflows by Origin of Remittances in Selected SADC Countries, 2015 5 Figure 3 Dependence on Remittances by SADC Countries, 2015 6 Figure 4 Costs to Send Remittances to SADC versus Other Regions, Q1:2018 7 Figure 5. Average Cost of Sending US$200 from South Africa to Selected SADC Countries, Q1:2018 8 THE MARKET FOR REMITTANCE SERVICES IN SOUTHERN AFRICA I Figure 6. Comparison of Remittance Costs from South Africa via MTOs and Banks 9 Figure 7. Average Cost of Sending Remittances from South Africa to SADC Countries, Q1:2011–Q1:2018 17 Figure 8. Comparison of Account Ownership in Selected SADC Countries 22 Figure 9. Comparison of Distribution of Access Points in Selected SADC Countries, 2015 24 Figure 10. Proposed Regional Payment Solution for Cross-Border Remittances in SADC 26 LIST OF MAP Map 1. Southern African Development Community (SADC) Countries 3 LIST OF TABLES Table 1. Recommendations to Improve the Market for Remittance Services in SADC IX Table 2. SADC Migrant Population in South Africa, 2017 4 Table 3. Overview of RSPs Permitted to Offer Remittance Services in Selected SADC Countries 10 Table 4. Licensing Categories for Independent MTOs and Other Non-Bank RSPs in Selected SADC Countries 12 Table 5. Restrictions on Cross-Border Remittances in Selected SADC Countries 14 Table 6. Automated Payment Systems in Selected SADC Countries 20 Table 7. Penetration of e-payment Instruments in Selected SADC Countries 22 Table 8. Overview of RSPs Permitted to Offer Remittance Services in Selected SADC Countries 25 TABLE OF CONTENTS II FINANCE, COMPETITIVENESS FINANCE, COMPETITIVENESS & INNOVATION & INNOVATION INSIGHT | FINANCIAL INSIGHT INCLUSION, INFRASTRUCTURE | LONG-TERM FINANCE & ACCESS ABBREVIATIONS AND ACRONYMS ACH Automated Clearing House AD Authorized Dealer ADLA Authorized Dealer with Limited Authority AML anti-money laundering ATM automated teller machine BIS Bank for International Settlements CCBG SADC Committee of Central Bank Governors CDD customer due diligence CFT Combating the Financing of Terrorism CPMI Committee on Payments and Market Infrastructures CPSS Committee on Payment and Settlement Systems EFT electronic funds transfer FICA Financial Intelligence Centre Act FDI foreign direct investment FSB Financial Stability Board GDP gross domestic product GPs CPMI-World Bank General Principles for International Remittances Services IMF International Monetary Fund KYC Know Your Customer MNO mobile network operator MTO money transfer operator POS point of sale PSDG World Bank Payment Systems Development Group PSMB Payment Scheme Management Body RCH regional clearing house RPW remittance prices worldwide RSP remittance service provider RTGS real time gross settlement SADC Southern African Development Community SIRESS SADC Integrated Regional Settlement System SWIFT Society for Worldwide Interbank Financial Telecommunication US$ United States dollar THE MARKET FOR REMITTANCE SERVICES IN SOUTHERN AFRICA III SECTION TITLE IV FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | FINANCIAL INCLUSION, INFRASTRUCTURE & ACCESS ACKNOWLEDGMENTS T his report has been prepared by the Payment Systems Development Group at the World Bank, Finance and Markets Global Practice. Technical guidance and leadership were provided by Marco Nicolì. The lead author was Nomsa Kachingwe, with substantial contribution from Emily Kaput. Inputs were provided by Gunhild Berg, Carlo Corazza, Isaku Endo, Seymour Fortescue, Uzma Khalil, and Alice Zanza. The team would like to thank the peer reviewers, Massimo Cirasino and Marek Hanusch, for their insightful comments on the report, and Paul Noumba for overall guidance. The team extends thanks to the colleagues who have countries that participated in the remittance market contributed to the country assessments throughout assessments. The team would like to express its the years: Nana Yaa Boakye Adjei, Carlo Corazza, gratitude to each of them. Isaku Endo, Alana Fook, Seymour Fortescue, Nomsa Kachingwe, Marco Nicolì, and Alice Zanza. The team wishes to thank the UK Department for International Development for the support provided This report would not have been possible without for this publication. the inputs and cooperation of representatives from the SADC regulatory authorities, government Lastly, we thank Nancy Morrison for editing this agencies, and private sector institutions in the publication and Aichin Lim Jones for design and production services. THE MARKET FOR REMITTANCE SERVICES IN SOUTHERN AFRICA V ACRONYMS AND ABBREVIATIONS VI FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | FINANCIAL INCLUSION, INFRASTRUCTURE & ACCESS EXECUTIVE SUMMARY R emittances are an important source of income for households in the Southern African Development Community (SADC), as well as a crucial source of foreign exchange for countries in the region. In 2016, an estimated US$575 billion in remittances was received worldwide, of which US$2.5 billion was received by households in SADC countries.1 These remittance inflows account for a sizeable proportion of GDP and, after foreign direct investment (FDI), are the largest source of foreign currency for countries the region.2 Remittances therefore have the potential to contribute to economic development and poverty reduction in SADC—by enabling low-income households to meet day-to-day consumption needs, invest in better health care and education, and grow their businesses and communities. Despite the relatively large inflows of remittances aimed at providing guidance on developing safe to SADC, the cost of sending money to and within and efficient remittance services. In 2009, the G-8 the region is significantly higher than other established the “5x5 objective,” to reduce the cost regions in the world. The average cost of sending of remittances by 5 percentage points within 5 US$200 to SADC countries was 12.64 percent in years. In 2015, the United Nations (UN) adopted the Q1:2018, compared to the global average cost of Sustainable Development Goals (SDGs); SDG 10.c 7.13 percent.3 Sending money from South Africa aims to reduce to less than 3 percent the transaction to other SADC countries is even more expensive, costs of migrant remittances and eliminate remittance averaging 17.08 percent in Q1:2018.4 Relative to the corridors with costs higher than 5 percent. low incomes of migrant workers, such high costs can be prohibitive. Consequently, remittances within At the regional level, the SADC Committee of SADC are often channeled through unregulated or Central Bank Governors (CCBG) has led several informal channels, such as transport companies, initiatives aimed at enhancing the regional hawala operators, or carried in hand by friends and payment system infrastructure, also with a family. While unregulated channels may be more focus on reducing the cost of remittances within convenient and affordable, they do present risks to the region. In 2009, the CCBG established the both consumers and the financial system. SADC Payment System Integration Project with the objectives to: To address the high cost of remittances globally, the World Bank has been involved in a number of • Harmonize the legal and regulatory framework initiatives aimed at improving the efficiency and to facilitate regional clearing and settlement safety of the market for remittances. In 2007, the arrangements Committee on Payments and Market Infrastructures • Implement an integrated regional cross-border (CPMI) of the Bank for International Settlements payment settlement infrastructure (BIS) and the World Bank published the General • Implement an integrated regional cross-border, Principles for International Remittance Services, post-trade clearing infrastructure 1 Annual estimates from World Bank Annual Remittances Data (updated as of April 2017), http://www.worldbank.org/en/ topic/migrationremittancesdiasporaissues/brief/migration-remittances-data. 2 World Bank (2011). 3 World Bank, Remittances Prices Worldwide (RPW), 2018. 4 World Bank, Remittances Prices Worldwide (RPW), 2018. THE MARKET FOR REMITTANCE SERVICES IN SOUTHERN AFRICA VII • Establish a cooperative oversight arrangement flows toward regulated channels, the volume of based on the harmonized regulatory framework remittances flowing through regulated channels in for regional cross-border payment and settlement the region remains limited, with implications for among member countries. achieving economies of scale. To date, notable achievements have been made Supply-side constraints, such as legal and in the development and modernization of the regulatory restrictions, limited competition, regional payment and settlement systems. and bottlenecks in the payment system, are These include the launch of the SADC Interbank key challenges facing the remittances market Regional Settlement System (SIRESS) in 2013, in SADC. The legal and regulatory requirements the development of a model law for national in some countries have created barriers to entry payment systems, and the ongoing implementation for money transfer operators (MTOs) and other of a Regional Clearing House (RCH) to promote innovative remittance service providers (RSPs), efficient, low-cost cross-border retail payments, as well as raised barriers to access for consumers, including mobile money and remittances. particularly where onerous Know-Your-Customer (KYC) requirements are imposed. In addition, Based on the General Principles for International the presence of exclusivity conditions in some Remittance Services, the World Bank has countries, and the lack of fair and equitable access undertaken assessments of the market for to the payments system infrastructure for MTOs remittances in nine SADC countries. Between and non-bank RSPs, have limited competition. 2011 and 2017, the Payment Systems Development Finally, bottlenecks in the national and regional Group (PSDG) of the World Bank conducted payment systems infrastructure, including lack remittance market assessments in Lesotho, of interoperability of payment networks and Madagascar, Malawi, Mozambique, Namibia, instruments and inadequate coverage of remittance South Africa, Tanzania, Zambia, and Zimbabwe. service access points in rural and remote areas, Drawing on these assessments, this report provides continue to constrain the efficient provision of an overview of the key issues and challenges in the remittance services to consumers. market for remittances in SADC. Notwithstanding these challenges, several new This report highlights that in addition to the high and innovative MTOs are emerging in a few cost of remittance services, several constraints remittance corridors in SADC. Leveraging new continue to impede efforts to improve the market technologies, MTOs have begun offering innovative for remittances in SADC. On the demand side, low mobile and online-based remittance services, levels of financial inclusion, coupled with limited placing competitive pressure on incumbent MTOs, consumer awareness of regulated remittance services particularly in the South Africa–Zimbabwe and and a lack of identification (ID) documentation, South Africa–Lesotho remittance corridors. Scaling has resulted in limited usage of regulated channels up these new services, encouraging widespread for remittances. FinMark Trust (2015) estimates consumer uptake, and promoting an enabling that 25 percent of adults in SADC reported using environment for innovation will be crucial to further regulated remittance services, while 8 percent reducing the cost of remittances in the region. reporting using informal channels such as friends and family. Research conducted by the World Bank This report proposes actions that should be (2011) further suggests that close to 80 percent of considered by both public authorities and migrants in South Africa sent money home—largely RSPs to achieve sustained reduction in the cost to other African countries—via informal channels. of remittances and to improve the quality of While in recent years the emergence of new digital remittance services in SADC. Table ES1 provides remittance services has begun to shift remittance a summary of the key recommendations that, if EXECUTIVE SUMMARY VIII implemented, could have significant impact on Management Body (PSMB), are well-positioned to the market for remittances in SADC. The SADC play a leading role in guiding the implementation CCBG and other relevant bodies, including the of these recommendations, as well as other ongoing SADC Banking Association Payment Scheme initiatives in the region. Table 1. Recommendations to Improve the Market for Remittance Services in SADC Component Recommended Action Responsible Entities Legal and Apply the regulatory framework for remittance services in Public authorities (national and regulatory a proportionate manner to reduce the compliance burden SADC levels). framework for RSPs, and to ensure that a level playing field is created for all types of RSPs. Oversight and Build staff capacity within oversight and supervisory Public authorities (national and supervision authorities. SADC levels). Undertake peer-to-peer learning among relevant regulatory authorities to share best practices on supervision of RSPs. Consumer Define the framework for financial consumer protection Public authorities (national and protection and dispute resolution. SADC levels). Clarify consumer protection responsibilities of RSPs. Provide guidance to improve transparency of pricing for remittance services. Financial Continue efforts to encourage awareness and uptake Public authorities (national inclusion of transactional accounts and electronic payment and SADC levels).Remittance and financial instruments linked to remittance services. service providers. awareness Payment Continue efforts to enhance SIRESS and integrate Public authorities (national systems automated clearing houses (ACHs) in the region. and SADC levels).Remittance infrastructure Develop incentives to encourage expansion of access service providers. points to rural and remote areas.Facilitate interoperability in national and regional payment system. Competition Restrict or ban exclusivity conditions. Public authorities (national Ensure fair and equitable access to the payment system and SADC levels).Remittance and market infrastructure for RSPs. service providers. Data and Improve the quality of data and statistics on remittance Public authorities (national research trends in the region. and SADC levels).Remittance Undertake research on usage of unregulated and service providers. informal remittances services. Coordination Create a forum for dialogue and coordination of Public authorities (national initiatives between RSPs and public authorities within and SADC levels).Remittance SADC. service providers. THE MARKET FOR REMITTANCE SERVICES IN SOUTHERN AFRICA IX SECTION TITLE X FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | FINANCIAL INCLUSION, INFRASTRUCTURE & ACCESS INTRODUCTION R emittances have the potential to make a significant contribution to poverty reduction and economic development in SADC. World Bank (2011) research shows that remittances raise incomes, and enable households to increase consumption as well as invest in better quality health care and education. Household surveys conducted as part of the Africa Migration Project in 2009 also find that remittance inflows in Africa, in particular, tend to support investments in land, housing, and agricultural equipment.4 Recent research by Hanush and Vaaler (2015) further shows that remittances can boost new businesses, especially in countries where access to capital is constrained. Remittances therefore have the potential to play an important role in alleviating poverty and supporting economic development in the region. Remittance flows to households in SADC countries from South Africa to other SADC countries was 17.08 amounted to US$2.5 billion in 2016, out of a total percent in Q1:2018, with costs ranging from 13.47 US$575 billion received worldwide.6 Considering percent in the South Africa–Lesotho corridor to 20.49 unrecorded remittance flows—through both percent in the South Africa–Angola corridor. regulated and unregulated channels—the true volume of remittance flows to SADC countries is Recognizing the importance of remittances for likely to be considerably higher than indicated by socioeconomic development, global policy makers official estimates. For several countries in SADC, the and development partners have undertaken several bulk of remittances originate from other countries initiatives to reduce global remittance costs. In 2007, within the region, most notably South Africa. the Bank for International Settlements’ Committee Official estimates indicate that approximately on Payment and Settlement Systems (CPSS)— 29 percent of migrants residing in South Africa now the Committee on Payments and Market are from other SADC countries,7 suggesting that Infrastructures (CPMI)—and the World Bank South Africa is an important “source country” for published the General Principles for International remittances in the region. Remittance Services to provide guidance on developing safe and efficient remittance services Despite the relatively large flows of remittances to and (see Box 1). In 2009, the G-8 established the “5x5 within SADC, the costs of sending money to SADC objective,” an initiative aimed at reducing the countries are among the highest in the world. The global average cost of remittances by 5 percentage average cost of sending US$200 to SADC countries was points within 5 years. The objective was confirmed estimated to be 12.64 percent, compared to the global by the G-20 in 2014, and a new objective to reduce average cost of 7.13 percent in Q1:2018.8 Sending the cost of remittances to 3 percent was adopted in money from South Africa to other SADC countries is the 2030 United Nations Sustainable Development even more expensive: the average cost to send US$200 Goals (SDG 10.c). 5 World Bank (2011). 6 Annual estimates from World Bank Annual Remittances Data (updated as of April 2017), http://www.worldbank.org/en/ topic/migrationremittancesdiasporaissues/brief/migration-remittances-data. 7 This figure is likely an underestimation, as a large number of migrants residing in South Africa may be undocumented or may choose not to reveal their migrant status. FinMark Trust (2015) estimates that there could feasibly be up to 4 million migrants in South Africa, of which upwards of 55 percent are from SADC countries. 8 This is calculated as the average cost to send US$ 200, as reported by the World Bank Remittances Prices Worldwide database. THE MARKET FOR REMITTANCE SERVICES IN SOUTHERN AFRICA 1 Box 1. The CPMI-World Bank General Principles for International Remittance Services General Principle 1: Transparency and Consumer Protection The market for remittance services should be transparent and have adequate consumer protection. General Principle 2: Payment System Infrastructure Improvements to payment system infrastructure that have the potential to increase the efficiency of remittance services should be encouraged. General Principle 3: Legal and Regulatory Environment Remittance services should be supported by a sound, predictable, non-discriminatory and proportionate legal and regulatory framework in relevant jurisdictions. General Principle 4: Market Structure and Competition Competitive market conditions, including appropriate access to domestic payments infrastructures, should be fostered in the remittance industry. General Principle 5: Governance and Risk Management Remittance services should be supported by appropriate governance and risk management practices. Roles of Remittance Service Providers and Public Authorities A. The role of remittance service providers. Remittance service providers should participate actively in the implementation of the General Principles. B. The role of public authorities. Public authorities should evaluate what action to take to achieve the public policy objectives through implementation of the General Principles. Source: CPMI-World Bank (2007). At the regional level, the SADC Committee of payments, including mobile money and remittances. Central Bank Governors (CCBG) was established to promote cooperation among central banks in Drawing on World Bank assessments of remittance the region, as well as to coordinate initiatives markets in several SADC countries, this report aimed at improving the regional financial system, provides an overview of the key issues and including for remittances. The CCBG leads various challenges facing the remittances market in the initiatives driven by subcommittees in the areas of region. Since 2011, the World Bank has undertaken banking supervision, financial markets, and payment remittance market assessments, based on the CPMI- systems, among others. Under the payment systems World Bank General Principles for International subcommittee, the SADC Payment Systems Project Remittance Services, in nine SADC countries: was launched in 1995 in recognition of the importance Lesotho, Madagascar, Malawi, Mozambique, of payment systems in supporting economic activity Namibia, South Africa, Tanzania, Zambia, and and development. Notable achievements of the Zimbabwe. This report highlights the key issues SADC Payment Systems Project have included the and challenges facing the remittances market in launch of the SADC Interbank Regional Settlement SADC, focusing on the payment system aspects System (SIRESS) in 2013; the establishment of of remittances, and drawing on the findings of the a SADC Banking Association Payment Scheme World Bank assessments in the nine countries. Management Body (PSMB)—under the SADC High-level recommendations on actions that can Banking Association—comprising representatives be taken to reduce the cost and improve the market of all banks that are participating in SIRESS; the for remittances are also proposed. The report begins development of a model law for national payment with an overview of remittances in SADC in the next systems; the establishment of a regional payment section. The key issues and challenges are discussed systems oversight body, as well as the ongoing in the third section. The fourth section concludes implementation of a Regional Clearing House (RCH) with high-level recommendations for both public to promote efficient, low-cost, cross-border retail authorities and remittance service providers (RSPs). INTRODUCTION 2 FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | FINANCIAL INCLUSION, INFRASTRUCTURE & ACCESS OVERVIEW OF MIGRATION AND REMITTANCES IN THE SADC REGION S ADC was established in 1992 with a focus on strengthening regional integration and cooperation for socioeconomic development in Southern Africa. The regional community is comprised of 15 Southern African member countries: Angola, Botswana, Democratic Republic of the Congo (DRC), Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia, and Zimbabwe (see Map 1). Map 1. Southern African Development Community (SADC) Countries Note: At the time of compiling this report, Comoros was not a SADC member and for this reason it has not been covered in the analysis. The SADC region has a long history of migration, comprising close to 50 percent of total migrants in with many SADC migrants choosing to settle South Africa. Zimbabwe has the highest number in South Africa. Migration to and from SADC of migrants living in South Africa, followed by countries is driven by a number of factors, ranging Mozambique, Lesotho, and Namibia. SADC from a lack of economic opportunities to political countries with the least number of migrants residing instability in home countries. As indicated in Table in South Africa include the Democratic Republic 2, South Africa hosts a sizeable number of migrants of Congo, Tanzania, Mauritius, Seychelles, and from other SADC countries, with SADC migrants Madagascar. THE MARKET FOR REMITTANCE SERVICES IN SOUTHERN AFRICA 3 Table 2. SADC Migrant Population in South Africa, 2017 Percent of Total Migrant Country of Origin Number of Migrants Population in South Africa Zimbabwe 649,385 16% Mozambique 381,386 9% Lesotho 312,537 8% Namibia 174,043 4% Malawi 102,327 3% Zambia 92,075 2% Swaziland 87,362 2% Botswana 69,160 2% Angola 65,716 2% Congo, Democratic Republic 50,340 1% Tanzania 15,823 0% Mauritius 14,043 0% Seychelles 1,098 0% Madagascar 707 0% Total 2,016,002 49.94% Source: United Nations, Department of Economics and Social Affairs, Population Division (2017). South Africa and Tanzania have the largest largest outbound remittances market in SADC is outbound remittance markets, in terms of the Tanzania, although the volume of remittance outflows volume of remittance outflows in 2015. According from Tanzania accounted for less than 25 percent to the 2015 World Bank Bilateral Remittances Matrix,9 of remittance outflows from South Africa. Except remittance outflows from South Africa amounted for South Africa and Tanzania, most of countries in to US$2.4 billion, making it the largest outbound SADC are net receivers of remittances. Lesotho, remittances market in SADC (Figure 1). The second- Madagascar, and Mozambique are the largest net recipients of remittances within SADC.10 9 The Bilateral Remittances Matrix reports official remittance flows by sending and receiving country. Estimates are from the World Bank Bilateral Remittances Matrix as of 2015 (updated in 2016). http://www.worldbank.org/en/topic/migra- tionremittancesdiasporaissues/brief/migration-remittances-data 10 Official data for Zimbabwe are not available for 2015, but internal estimates indicate that the country received close to US$1 billion in remittances in 2015, making Zimbabwe one of the largest remittance recipients in SADC. OVERVIEW OF MIGRATION AND REMITTANCES IN THE SADC REGION 4 Figure 1. Volume of Inbound and Outbound Remittance Flows in Selected SADC Countries, 2015 2500 2449 Remittances Volumes, US$ Million 2000 1500 1000 821 584 500 365 386 426 195 170 8 8 37 44 54 18 57 1 0 Namibia Malawi Zambia Mozambique Lesotho Tanzania Madagascar South Africa Inbound Remittances Outbound Remittances Source: World Bank (2016) Bilateral Remittances Estimates for 2015. Note: Data are included for SADC countries where a World Bank assessment was performed. Data for Zimbabwe were not available, although the Reserve Bank of Zimbabwe estimates indicate that in 2015 remittance inflows amounted to US$939 million. For several SADC countries, a substantial proportion remittance inflows to Lesotho, Malawi, Mozambique, of remittance inflows are from other SADC countries, and Zambia originated from within SADC. For particularly South Africa. As indicated in Figure 2, Lesotho, nearly 97 percent of remittance inflows official estimates of intra-SADC remittance flows originated in South Africa, while for Mozambique, are considerable.11 In 2015, more than 50 percent of this figure stood at 59 percent. Figure 2. Proportion of Remittances Inflows by Origin of Remittances in Selected SADC Countries, 2015 100 90 80 70 60 In Percent 50 40 30 20 10 0 Namibia Lesotho Mozambique Malawi Zambia Tanzania Madagascar Non-SADC Countries Other SADC Countries South Africa Source: World Bank (2016) Bilateral Remittances Estimates for 2015. Note: Data are included for SADC countries where a World Bank assessment was performed. Data for Zimbabwe were not available at the time of conducting the assessment. Official estimates of remittance flows to and within SADC are likely understated due to the scale of undocumented migration 11 within the region, as well as the prevalent use of unregulated remittance channels and weak official data in several countries. THE MARKET FOR REMITTANCE SERVICES IN SOUTHERN AFRICA 5 Among SADC countries, Lesotho, Zimbabwe third highest dependence on remittances, with and Madagascar have the highest dependence on remittance inflows accounting for 4.39 percent of the remittances. In 2015, remittance inflows made up country’s GDP. Figure 3 displays the distribution of 16.05 percent and 14.19 percent of GDP in Lesotho remittance dependencies of SADC countries in 2015. and Zimbabwe, respectively. Madagascar has the Figure 3 Dependence on Remittances by SADC Countries, 2015 In Percent Lesotho 16.05 Zimbabwe 14.19 Madagascar 4.39 Mozambique 1.32 Seychelles 1.28 Tanzania 0.85 Malawi 0.53 Swaziland 0.45 South Africa 0.26 Zambia 0.22 Botswana 0.21 Namibia 0.08 Congo, Dem. Rep. 0.01 Mauritius 0.01 Angola 0.01 Source: World Bank World Development Indicators, 2016. Note: Calculated as the volume of personal remittances received (in current U.S. dollars) in 2015 [from World Bank staff estimates based on IMF balance of payments data, http://data.worldbank.org/indicator/BX.TRF.PWKR.CD.DT] divided by the GDP (in current U.S. dollars) in 2015 [from World Bank national accounts data, OECD National Accounts, http://data. worldbank.org/indicator/ NY.GDP.MKTP.CD]. OVERVIEW OF MIGRATION AND REMITTANCES IN THE SADC REGION 6 FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | FINANCIAL INCLUSION, INFRASTRUCTURE & ACCESS KEY ISSUES AND CHALLENGES IN THE SADC REMITTANCES MARKET High Cost of Remittances T he cost of sending remittances to countries in SADC is significantly higher than other regions in the world. The cost of sending a remittance is typically composed of a transfer fee (charged in the originating currency) and a foreign exchange rate margin.12 According to the World Bank Remittances Prices Worldwide (RPW) database,13 the total average cost of sending US$200 to SADC countries in Q1:2018 was 12.64 percent, compared to the global average cost of 7.13 percent. Figure 4 illustrates that despite the overall decline in the cost of remittances, the cost of sending remittances to the SADC region remains considerably higher than other regions in the world. Figure 4 Costs to Send Remittances to SADC versus Other Regions, Q1:2018 17 16 15 14 13 In Percent 12 11 10 9 8 7 6 5 Q3 009 Q1 009 Q1 008 Q3 010 Q1 010 Q3 011 Q1 1 Q3 012 Q1 2 Q2 013 Q3 013 Q4 3 Q1 013 Q2 014 Q3 4 Q4 014 Q1 014 Q2 5 Q3 015 Q4 5 Q1 015 Q3 016 Q4 016 Q1 6 Q4 017 Q1 017 Q2 016 Q3 017 Q2 017 8 201 201 201 201 201 201 201 201 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 EAP ECA ECA (excl. Russia) LAC MNA SA SSA SADC Global Source: World Bank, Remittances Prices Worldwide (RPW), 2018. Note: Percentages based on the cost of sending US$200. EAP = East Asia and Pacific; ECA = Europe and Central Asia; LAC = Latin America and the Caribbean; MNA = Middle East and North Africa; SA = South Asia; SSA = Sub-Saharan Africa. worldbank.org/indicator/ NY.GDP.MKTP.CD]. 12 Other charges may be applied after the remittance transaction and can include charges paid by the recipient if remittances are delivered directly into a bank account, or into a mobile wallet where charges may be applied for the withdrawal of cash at a mobile money agent. The RPW captures only the transfer fee and foreign exchange margin. 13 Available at http://remittanceprices.worldbank.org. THE MARKET FOR REMITTANCE SERVICES IN SOUTHERN AFRICA 7 The remittance corridors between South Africa and trend has been consistent over time. Specifically, other SADC countries, in particular, are estimated to MTOs charged a total average cost of 13.19 percent be among the most expensive in the world. The total in Q1:2018, compared to 23.20 percent for banks. average cost to send US$200 from South Africa to Between Q1:2016 and Q1:2018, the difference other SADC countries was 17.08 percent in Q1:2018, between bank and MTO costs has consistently been compared to the average cost of 8.98 percent when greater than approximately 5 percentage points and Figure 5. Average Cost of Sending US$200 from South Africa to Selected SADC Countries, Q1:2018 25 20.49 20 19.53 18.89 17.99 17.75 16.71 16.60 15 SSA 14.62 13.47% Reginal In Percent 11.17 Average 9.80 9.44 9.67 10 6.90 5 Global Average 7.13 0 Angola Zambia Botswana Mozambique Tanzania Swaziland Malawi Zimbabwe Lesotho From South Africa From Rest of World Source: World Bank, Remittances Prices Worldwide (RPW), 2018. Note: Countries included are those with data collected by RPW for the South Africa corridor. Of these countries, Mozambique, Tanzania, Zambia, and Zimbabwe have data on remittances prices for corridors other than South Africa, allowing a comparison with remittance prices from “rest of the world.” SSA = Sub-Saharan Africa. sending the same amount from other countries (not was more than 10 percentage points in Q1:2018. including South Africa). As shown in Figure 5, the Nevertheless, sending remittances through MTOs cost to send US$200 from South Africa to selected from South Africa to other SADC countries is SADC countries ranged from 13.47 percent in the relatively expensive, especially when compared to South Africa–Lesotho corridor, to 20.49 percent in other corridors: the international MTO average cost the South Africa–Angola corridor. for sending US$200 was 8.16 percent in Q1:2018, and the average MTO cost among G-20 countries Remittance costs vary across different types of was 9.23 percent.14 While banks may be little used RSPs, and banks are the costliest channel for for low-value remittances in SADC, addressing the sending remittances from South Africa to other drivers of the cost for bank remittances is essential to SADC countries. Figure 6 illustrates that the costs reducing the overall cost of remittances, especially of sending remittances from South Africa to other in countries where banks are one of few institutions SADC countries is significantly lower through money permitted to offer remittance services. transfer operators (MTOs) than through banks. This World Bank, Remittance Prices Worldwide. RPW does not yet include data on the Shoprite South Africa–Lesotho corridor. 14 KEY ISSUES AND CHALLENGES IN THE SADC REMITTANCES MARKET 8 Figure 6. Comparison of Remittance Costs from South Africa via MTOs and Banks 25 23.20 20.96 21.44 20.82 20.17 20.42 20.29 20.52 20.61 20 15.61 15 14.00 14.19 13.58 13.17 13.73 13.18 13.71 13.19 In Percent 10 5 0 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Bank Money Transfer Operator Source: World Bank Remittance Prices Worldwide, 2018. Note: MTO = money transfer operator. The high cost of sending remittances to and emergence of new digital MTOs serving the SADC within SADC is influenced by several demand- market in recent years has begun to shift remittance and supply-side factors. On the demand side, low flows toward regulated channels, although the flow levels of financial inclusion, jointly with limited of remittances flowing through regulated channels financial education and consumer awareness, have in the region remains limited. Further stimulating contributed to low usage of regulated remittance demand and achieving scale for regulated remittance services, limiting the ability of RSPs to reach services will be crucial to reducing the cost of economies of scale. Finmark Trust (2015) research remittances in the SADC region. indicates that remittance services are used by 33 percent of adults in SADC. Of these adults, 5 percent On the supply side, several regulatory and use bank channels, 20 percent use other formal infrastructure bottlenecks continue to constrain the channels (such as MTOs), and 8 percent reported growth and efficiency of the regulated remittances using unregulated channels including friends and market. As will be discussed further in the third family and other informal channels. Previous section, the legal and regulatory barriers in some research conducted between 2004 and 2005 showed markets in SADC are fairly onerous, impairing that remittances “carried by hand” accounted for the efficiency and development of the remittances roughly 50 percent of remittances in Southern market in the region. For instance, in some countries, Africa.15 In 2009, household surveys conducted as requirements that MTOs partner with a bank or other part of the Africa Migration Project further indicated licensed financial institution to offer remittance that close to 80 percent of migrants in South Africa services act as barriers to entry for new, low-cost used informal channels to send remittances home— RSPs. The imposition of excessive foreign exchange largely to other African countries.16 Nevertheless, the reporting requirements, as well as Customer Due 15 The prevalence of informal channels is not unique to the SADC region. Informal remittance services, such as hawala and hundi, are popular in the Middle East and South Asia, while informal remittance flows in Eastern Europe and Central Asia are also significant. See IMF (2009) and World Bank (2005). 16 World Bank (2011). THE MARKET FOR REMITTANCE SERVICES IN SOUTHERN AFRICA 9 Diligence (CDD) requirements for Anti-Money clarity and consistency in the regulation of remittance Laundering/Countering Financing of Terrorism services. A non-discriminatory framework is one (AML/CFT) purposes that are not proportionate to the in which the legal and regulatory requirements are risks, raise compliance costs for RSPs. Other supply- equally applied to different types of RSPs providing side challenges include limited competition in some equivalent services, and a proportionate framework is countries and deficiencies in the payment system one that is not overly restrictive relative to the number infrastructure, including limited geographic reach of and value of remittances.17 Based on the World Bank remittance and payment service access points in rural remittance assessments conducted in the selected areas, and bottlenecks in the national and regional SADC countries, the main legal and regulatory clearing and settlement systems. Addressing these barriers impacting the remittances market were and other challenges will be essential to achieving found to be: licensing requirements for RSPs, and in sustained cost reduction and improving the quality particular for MTOs; foreign exchange controls and of remittance services in SADC. reporting requirements, and AML/CFT compliance requirements. These are discussed in turn next. Legal and Regulatory Barriers Licensing Requirements The legal and regulatory framework for remittance services has considerable influence on the cost, In a number of SADC countries, the licensing availability, and accessibility of remittance services, framework places restrictions on the ability of MTOs as well as on the structure of the remittances market. to offer remittance services independently of banks According to the General Principles for International or other licensed financial institutions. The licensing Remittances Services (GP 3), remittance services and regulatory requirements for MTOs and other should be supported by a sound, predictable, non- RSPs vary across SADC countries. discriminatory and proportionate legal and regulatory framework (see Box 1). A sound framework Table 3 provides a snapshot of the types of RSPs that are minimizes the risks to both consumers and RSPs, permitted to provide remittance services in the region. while a predictable framework ensures that there is Table 3. Overview of RSPs Permitted to Offer Remittance Services in Selected SADC Countries Commercial MTOs MTOs (with Licensed Other Non-bank Country Banks (Independent) Institution) RSPs* Lesotho √ √ √ √ Madagascar √ × √ × Malawi √ √ √ √ Mozambique √ × √ × Namibia √ × √ √ South Africa √ √ √ √ Tanzania √ × √ × Zambia √ √ √ √ Zimbabwe √ √ √ √ Source: World Bank remittance assessments. Note: MTOs = money transfer operations; RSPs = remittance service providers. * Other non-bank RSPs include bureaux de change, payment service providers, mobile network operators, and other non-bank financial institutions that are permitted to offer remittance services within the legal and regulatory environment of the respective country. CPMI-World Bank General Principles for International Remittances, 2007. http://www.bis.org/cpmi/publ/d76.pdf. 17 KEY ISSUES AND CHALLENGES IN THE SADC REMITTANCES MARKET 10 Commercial banks are typically permitted to provide previously required to partner with a licensed Authorized remittance services as part of the banking services Dealer (AD) of foreign exchange, or an Authorized prescribed under the relevant banking law and regulations. Dealer with Limited Authority (ADLA) such as a On the other hand, in five of the nine countries surveyed bureau de change. In 2014, the South African Reserve as part of the World Bank remittance assessments, MTOs Bank (SARB) introduced a new category of ADLAs and other non-bank financial institutions are required to (“Category 3”) to allow MTOs to operate independently partner with a bank or other licensed financial institution of ADs and ADLAs.18 Zimbabwe introduced a similar to offer remittance services (see Box 2). category of ADLAs, enabling internationally and locally incorporated MTOs to offer remittance services In recent years, regulations to enable MTOs to operate independently of banks or other financial institutions; independently of banks and other licensed financial while the licensing frameworks in Lesotho, Malawi, and institutions have been introduced in Lesotho, Malawi, Zambia enable MTOs to operate independently either as South Africa, Zambia, and Zimbabwe. In South Africa, licensed payment system businesses or licensed financial to offer cross-border remittance services, MTOs were institutions (see Table 4). Box 2. Regulatory Restrictions on Independent MTOs in Selected SADC Countries In Tanzania, Bank of Tanzania (BOT)* regulationa and practices require MTOs to operate in partnership with a bank or other licensed financial institution, including bureaux de change, and in the premises of a financial institution.** As a result of these requirements, MTOs have created a network of agents and sub-agents in partnership with commercial banks, non-bank financial institutions (including the Tanzania Posts Corporation and community banks in rural areas), and some microfinance institution (such as FINCA and PRIDE). Most financial institutions have already established agent or sub-agent agreements with an MTO. However, this regulation represents a constraint to the entry of new MTOs, as well as to the development of a wider network of remittance disbursing and collecting agents. MTOs cannot expand their network to other types of locations (such as proprietary agencies, grocery stores, gas station, and merchants); thus, the number and coverage of locations remain limited, especially in rural and remote areas where most of the Tanzanian population resides. In Madagascar, the Foreign Exchange Code similarly mandates that cross-border remittances between residents and nonresidents of Madagascar can only be made by authorized intermediaries, which include commercial banks and the Paositra Malagasy (Madagascar Postal Service). As a result, MTO services are available at some banks and 58 post offices, with the result that cross-border remittances can be accessed at approximately 300 locations—a number that is inadequate for the size of the country. In Mozambique, the regulatory framework recognizes banks as the main providers of payment services, and as such only banks are permitted to perform cross-border remittance services either as proprietary services or in partnership with MTOs. However, banking agents are permitted to process inward remittance transactions on behalf of banks. Similarly, in Namibia, MTOs may offer remittance services only in partnership with Authorized Dealers (ADs) of foreign exchange—typically banks—or with Authorized Dealers with Limited Authority (ADLAs), such as a bureau de change. Source: World Bank Assessment Reports.. * National Payment Systems Act 2015, http://www.bot.go.tz/PaymentSystem/GN-THE%20PAYMENT%20SYSTEMS%20 LICENSING%20AND%20APPROVAL%20REGULATIONS%202015.pdf. ** In 2016, the Tanzanian authorities introduced a class of bureaux de change allowed to offer cross-border remittances, although no entities have applied for the license as yet. The Category 3 license also does not require MTOs to establish a physical location to offer cross-border remittance ser- 18 vices, although in applying for the license, they are required to justify how the business will operate – for example, via a call center, field agents, or other third-party agents. THE MARKET FOR REMITTANCE SERVICES IN SOUTHERN AFRICA 11 Table 4. Licensing Categories for Independent MTOs and Other Non-Bank RSPs in Selected SADC Countries Country Licensing Category Permitted Activities Lesotho Tier IV Financial Institution: Foreign exchange Financial services as prescribed, including bureaus, MTOs, and credit-only microfinance international remittance services either in institutions. partnership or proprietary services. Malawi Money Transfer Agents as specified in the Business entities limited to receiving and Guidelines for Licensing & Operating Money sending monetary instruments for immediate Transfer Agents (MTA) under the Exchange delivery (spot transactions) under an Control Act 1989. agreement with credible international money transfer service provider duly licensed in the country of incorporation. South Africa ADLA Category 3: Independent MTOs. Money remittance services only, and not exceeding R5,000 per transaction per day and R25,000 per month. Zambia Designated Payment Systems Business: Money transmission services (domestic and Payment service providers, international or international), independently or in partnership locally incorporated MTOs, MNOs. with an external MTO. Zimbabwe ADLA Tier 1: Locally incorporated MTO with Inbound and outbound remittances.Buy international MTO as a partner. and sell foreign exchange on a spot basis. US$100,000 collateral deposit paid to the RBZ. ADLA Tier 2: Locally incorporated MTO Buy and sell foreign exchange on a spot basis. partnering with international MTOs or using Local MTOs using their own systems and own system to facilitate inbound remittances. not partnering with an international MTO – US$50,000 collateral deposit paid to the RBZ is required. Source: World Bank Remittance Assessment Reports; relevant laws and regulations. Note: ADLA = Authorized Dealer with Limited Authority; MNO = mobile network operator; MTO = money transfer operator; RBZ = Reserve Bank of Zimbabwe. A number of new and innovative MTOs have operator (MNO) Econet is currently partnering with emerged in the SADC countries where the regulatory several MTOs, including World Remit, Western framework allows for MTOs to operate independently. Union, and MoneyGram; and other innovative The remittances market in the SADC region has services are offered by Mukuru, Hello Paisa, and largely been dominated by well-established MTOs, Mama Money, among others. In Lesotho, both local such as Western Union and MoneyGram. However, MNOs have partnered with MTOs to offer cross- after several countries introduced regulations to border mobile money remittances. In Zambia, one allow for independent MTOs, new online- and MNO has developed a proprietary cross-border mobile-based MTOs have emerged. In South Africa, mobile money remittance service available in several four MTOs have since been licensed as ADLA African countries. Similarly, in Malawi, Airtel Category 3 institutions: Exchange4Free, Hello Paisa, offers its proprietary service, and other independent Mama Money, and South-East Exchange Company. MTOs including Hello Paisa and Mukuru have Similarly, in Zimbabwe, the local mobile network built extensive agent networks to offer remittances KEY ISSUES AND CHALLENGES IN THE SADC REMITTANCES MARKET 12 services in the country. In contrast, in the countries remittances sent and received. In addition to where MTOs are required to partner with licensed obtaining information on foreign exchange financial institutions such as banks (as described in outflows, regulatory authorities rely on foreign Box 2), the remittances market remains dominated exchange reporting for information on financial by two or three incumbent MTOs. flows for balance of payments purposes, as well as for monitoring compliance with AML/ There is scope for the regulatory environment in CFT requirements. However, these reporting SADC countries to further promote the adoption requirements and other restrictions are often not of innovative technologies for remittance services. proportionate to the value of remittances sent and In the past, most e-money or electronic payment received. For example: services, including mobile money and electronic remittance services, were regulated in an ad hoc • Malawi: Residents can remit up to US$1,000 manner—resulting in uncertainty and inconsistency per transaction, and there is no limit on inward in the legal framework for electronic payments remittances. There are measures in place to deal and remittance services. In recent years, several with violations of this limit; however, if the SADC countries have introduced electronic money violation constitutes externalization of foreign (e-money) regulations or guidelines that could currency, the consequences can be far reaching. pave the way for more innovative remittance services. Lesotho, Mozambique, Namibia, South • Mozambique: Senders are required to provide Africa, Tanzania, and Zambia have issued e-money information on the reasons for sending the funds, regulations; while, Malawi and Madagascar are the relationship between the parties, the source in the process of finalizing them. In Zimbabwe, of income, evidence of tax paid by the sender, the National Payment Systems Act provides for and other evidence to justify the transaction. the recognition, regulation, and oversight of all Furthermore, authorized banks are required electronic payments; guidelines in support of to seek authorization for transactions above retail payment systems and instruments (including US$5,000. e-money) were recently issued in 2017. However, a few restrictions on e-money remain: for example, • Namibia: For every transaction, regardless of the in South Africa, only banks are permitted to issue amount, customers are required to provide very e-money, while non-bank financial institutions must specific and detailed documentation, including partner with a bank to offer e-money services. In the ID of the receiver abroad when sending Namibia and Mozambique, e-money transfers are money from Namibia, proof of the stated reason limited to domestic remittances, limiting providers for sending money (for example, school’s invoice from leveraging e-money and other technologies when paying for school fees), proof of legal for international remittance services. residency in Namibia, and proof of source of income. Every transaction must then be reported by the RSP to the Exchange Control Division of Foreign Exchange Controls the Bank of Namibia. Foreign exchange controls, and particularly restrictions on foreign exchange outflows, are in • South Africa: ADs and ADLAs are required to place in several SADC countries. Table 5 provides report foreign exchange transactions (inflows a summary of the foreign exchange restrictions and outflows) daily, regardless of the size of the relevant to remittances in selected SADC countries. transaction. MTOs are also required to collect detailed information on the sender and receiver of The foreign exchange reporting requirements remittances, including the full name, nationality, imposed on MTOs are generally burdensome and identity number of the sender, as well as the and disproportionate to the average value of full name and address of the receiver. THE MARKET FOR REMITTANCE SERVICES IN SOUTHERN AFRICA 13 Table 5. Restrictions on Cross-Border Remittances in Selected SADC Countries Country Foreign Exchange Regulation Restrictions on Cross-border Remittances Lesotho Exchange Control Act (amended • Free flow of funds within the CMA 1990) • No limit on inflows from non-CMA countries Exchange Control Regulations • Single discretionary allowance of R1 million per adult and 1989 R200,000 per child per calendar year for purposes of travel, study allowance, gifts, donations, and maintenance Malawi Exchange Control Act and • No limit on inflows Regulations 1989 • Limit of US$1,000 per transaction for outflows Mozambique Foreign Exchange Law 11/2009 • No limits on inflows • Approval needed from the Bank of Mozambique for outflows over US$5,000 Namibia Currencies and Exchanges Act • Free flow of funds within the CMA (amended 2011) • No limit on inflows from non-CMA countries Exchange Control Regulations • Single discretionary allowance of R1 million per adult and (amended 2011) R200,000 per child per calendar year for purposes of travel, study allowance, gifts, donations, and maintenance South Africa Exchange Control Regulations, • Free flow of funds within the CMA* 1961(amended 2012) • No limit on inflows from non-CMA countries • Single discretionary allowance of R1 million per adult and R200,000 per child per calendar year for purposes of travel, study allowance, gifts, donations, and maintenance Tanzania Foreign Exchange Act 1992 • No limit on inflows Foreign Exchange Regulations • Exchange reporting required for outflows above US$10,000 (amended 2008) Zambia The Banking and Financial • No limit on inflows Services (Foreign Exchange Risk • Outflows limited to K20,000 per transaction per day** Management and Exposure) Regulations, 1996 Zimbabwe Exchange Control Act • No limits on inflows • Outflows limited to US$500 per day, US$5,000 per month, and US$20,000 per year Source: World Bank Remittance Assessment Reports; relevant laws and regulations. Note: CMA = Common Monetary Area. * There are no foreign exchange restrictions between banks of the CMA member countries in respect of cross-border transactions among themselves, although reporting requirements still apply. The application of exchange control within the CMA is governed by the Multilateral Monetary Agreement. Investments and transfers of funds in rand from/to South Africa to/from other CMA countries do not require the approval of the Financial Surveillance Department. ** As per the Circular on Revised Transaction and Balance Limits for Money Transmission and E-money Services. KEY ISSUES AND CHALLENGES IN THE SADC REMITTANCES MARKET 14 While these requirements are rightly aimed at payment service providers (PSPs) offer remittance monitoring foreign currency flows and maintaining services through “light-KYC” transactional accounts the integrity of the financial system, the costs of and cards, allowing for stored value functionality in compliance are likely passed on to consumers. This addition to low-cost remittances. These products take contributes to the high costs of regulated remittance advantage of the almost universal ID penetration in services, further incentivizing the use of more the country and are a positive step toward financial “convenient” but unregulated, or even illegal and inclusion and the use of regulated channels for costlier, channels for remittances.19 remittances. In other SADC countries, however, tiered KYC requirements have not been extended to remittances services: for example, in Tanzania and AML/CFT Compliance Requirements Lesotho, tiered KYC guidelines have been issued AML/CFT requirements, particularly Know-Your- for domestic money transfer services, but not for Customer (KYC) documentation requirements, have international money transfers. long been a significant barrier to access for remittance services. Consumers of remittance services have As the bulk of remittances received in SADC countries typically been required to provide various forms originate from South Africa, the AML/CFT regime in of documentation, including formal identification the country has a considerable bearing on access to and documents; proof of residential address; proof usage of regulated remittance services in the region. In of a valid work or residence permit; and in some recognition of the access barriers imposed by KYC cases, proof of source of funds. In addition, RSPs requirements, the Minister of Finance of South Africa have sometimes been subject to onerous identity issued a Financial Intelligence Centre Act (FICA) verification and record-keeping requirements. exemption for low-value cross-border remittances in However, as it is estimated that a sizeable proportion July 2015.20 The exemption eliminates the proof of of migrants in the SADC region are undocumented residence requirement for transactions below a daily or lack full KYC documentation, such requirements limit of R3,000 and a monthly limit of R10,000. act as a further access barrier to regulated remittance For transactions above R3,000, foreign migrant services—especially where proof of a valid work or workers must provide proof of residence and proof of residence permit may be required. earnings in addition to a foreign passport. However, and importantly, South Africa’s Immigration Act of In recognition of these barriers, some SADC 2002 still requires financial institutions, including countries have introduced tiered KYC requirements, RSPs, to check the citizenship or immigration status or exemptions from certain AML/CFT regulations, of foreign nationals before entering into commercial particularly for low-value remittance services. For transactions. This requirement is at odds with the example, in 2016 the Bank of Zambia introduced FICA exemption, and creates a perception among tiered KYC guidelines for money transmission undocumented workers that they may be exposed to services. The guidelines allow individuals making the immigration authorities should they use regulated domestic or international money transfers of up to service providers to send remittances abroad. The K10,000 (equivalent to US$1,000) to provide only implications of violating the Immigration Act, together formal ID and no other additional documentation. For with the different interpretations of the wording by transactions and balances above K10,000 and up to banks, have generally led to some banks in South K20,000, full KYC procedures should be followed. Africa requiring immigrants to present proof of their Separate requirements are also provided for small- legal immigration status before undertaking financial scale farmers, corporate entities, and agents. In transactions—thus maintaining the documentation Zimbabwe, tiered KYC requirements introduced for barrier to access, despite the FICA exemption for low- transactional accounts have seen some banks and value remittances. In Zimbabwe, the cost of using unregulated channels to carry cash can be as high as 30 percent of the amount carried. 19 Financial Intelligence Centre (2015) 20 THE MARKET FOR REMITTANCE SERVICES IN SOUTHERN AFRICA 15 Limited Competition in the Although the remittances market in SADC has Remittances Market been dominated by a small number of international MTOs, innovative, low-cost services are emerging Competitive market conditions are essential to in several SADC countries (Box 3). Western Union reducing the costs and improving the quality of and MoneyGram are estimated to have the bulk of remittance services. According to the General market share in the SADC region, although in some Principles for International Remittances (GP 4), remittance corridors, new players are beginning a competitive remittance market is one in which to place competitive pressure on these and other monopolistic practices are limited, exclusivity incumbent RSPs. For example, in the South Africa– conditions are absent, and RSPs have fair and Zimbabwe corridor, Mukuru is estimated to be equitable access to market and payment system holding approximately 20 percent of the remittance infrastructure, whether direct or indirect. While in flows.21 Box 3 provides a snapshot of the new MTO some corridors the demand for remittance services services emerging in the SADC region. may be insufficient to support multiple RSPs, the market should remain contestable—without Recent regulatory interventions in South Africa unreasonable barriers to entry—such that the benefits appear to be correlated with an increase in the number of competition are felt by consumers. Within SADC, of MTOs operating in SADC, although the impact recent regulatory interventions in South Africa and on remittance costs is inconclusive. As discussed, other countries have begun to improve competition several regulatory interventions have been introduced in the remittances market. However, in some in South Africa since 2011, including the removal of markets, exclusivity conditions remain and MTOs foreign ownership requirements for MTOs in 2011; have limited access to the domestic and regional the introduction of the ADLA Category 3 license for payment systems infrastructure. independent MTOs in 2013; and the introduction Box 3. Innovative MTOs Entering the Remittance Landscape in the SADC Region In the last few years, a number of new and innovative remittance services have emerged in the SADC region. These include remittances services that can be initiated online or via mobile phone, and that allow transfers directly into bank accounts or e-wallets, including mobile money accounts. For example, Mukuru has recently partnered with several mobile money operators in several SADC countries to allow for the receipt of remittances directly into mobile wallets. For instance, in Lesotho, Mukuru has partnered with Vodacom Lesotho to offer inward remittances from South Africa into Mpesa wallets; and in Mozambique. Mukuru has partnered with MCel to offer remittances from South Africa into Mkesh mobile wallets. Mukuru also allows cash-to-cash remittances and has partnered with several retail agents in South Africa, including supermarkets and clothing retailers, to capture cash remittances. In Zambia, Mukuru has partnered with Zoona (a popular domestic MTO) for cash disbursement of remittances via Zoona agents. Mukuru also offers remittance services via Econet’s Ecocash service in Zimbabwe. World Remit provides similar services, albeit linked to bank accounts or cards in the sending countries, with options to receive funds via cash from an agent, or via a mobile wallet. Other new online-based MTOs serving the remittance market in SADC include Mama Money, Hello Paisa, and exchangeforfree.com, which have also begun offering inward remittance services to some SADC countries from South Africa and other countries, including the United States and the United Kingdom. These new services are relatively cheaper than “traditional” remittance services because they have fewer overhead costs and can rely on a range of retail agents for cash disbursements in receiving countries. World Bank, Zimbabwe Remittances Assessment Report (2017). 5 KEY ISSUES AND CHALLENGES IN THE SADC REMITTANCES MARKET 16 The South African supermarket chain, Shoprite, has also begun offering inward cross-border remittances from South Africa to Lesotho, and to Mozambique via its store network in the three countries. As the supermarket chain has a presence in several SADC countries, including Angola, Botswana, Democratic Republic of Congo (DRC), Madagascar, Malawi, Namibia, and Zambia, there is potential for the Shoprite service to expand beyond the South Africa–Lesotho and South Africa–Mozambique corridors. Shoprite also acts as an agent for other MTOs, including Mukuru and Hello Paisa. Another retail store, OK Zimbabwe Limited, offers remittances from South Africa to Zimbabwe through two services: the OK-Kawena card, a prepaid card in which remittances can be received and used only for in-store purchases; and the FNB Zimbabwe Money transfer, in partnership with FNB South Africa, which enables individuals in South Africa to send money via their bank account or mobile wallet to an OK store in Zimbabwe. Source: World Bank Remittance Assessment Reports. of the FICA exemption for low-value remittances The removal of restrictions on foreign ownership of in 2015. Figure 7 shows the trend in average costs MTOs allowed new competitors to enter the market, of sending remittances from South Africa to other although the reduction in remittance costs was not SADC countries from Q1:2011 to Q1:2018. The sustained. Immediately following this intervention, highlighted bars correspond to the three regulatory Mukuru began operating in South Africa. However, interventions described above. despite the downward trend experienced in 2011, Figure 7. Average Cost of Sending Remittances from South Africa to SADC Countries, Q1:2011–Q1:2018 30 25 20 In Percent 15 10 5 0 Q3 11 Q4 1 Q2 11 Q1 11 Q3 12 Q4 2 Q2 2 Q1 12 Q3 13 Q4 3 Q2 3 Q1 13 Q3 14 Q4 14 Q2 14 Q1 4 Q3 15 Q4 15 Q2 15 Q1 5 Q3 16 Q4 16 Q2 16 Q1 6 Q3 17 Q4 7 Q2 17 Q1 17 8 201 201 201 201 201 201 201 201 201 201 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Q1 Removal ofForeign Ownership Restrictions of AD/ADLA and Independent MTOs ADLA Category 3 License for Independent MTOs FICA Exemption Total Average Cost of All RSP Types Bank Money Transfer Operator Source: World Bank, Remittances Prices Worldwide, 2018. Note: AD = Authorized Dealer; ADLA = Authorized Dealer with Limited Authority; FICA = Financial Intelligence Centre Act; RSP = remittances service provider. THE MARKET FOR REMITTANCE SERVICES IN SOUTHERN AFRICA 17 average MTO remittance costs increased soon communications technologies (ICT) market, and the after this intervention, peaking at 17.98 percent in relatively high costs of skilled labor. However, high Q2:2013 and declining to 13.19 percent in Q1:2018. remittance costs are also a reflection of bottlenecks in the receiving countries. For example, while In contrast, the introduction of the ADLA Category MTOs may be able to offer remittance services 3 license appears to have been accompanied by an independently in South Africa, requirements for overall, yet slight reduction in the average cost of MTOs to partner with banks in some receiving remittances offered through MTOs. While there countries, coupled with payment system and other were no immediate newcomers into the market infrastructure challenges, may limit the reach of following the introduction of the new licensing MTO agent networks and raise the costs of delivering category, since 2015 four new MTOs have services to consumers in receiving countries. received licenses to operate as independent MTOs. Furthermore, between Q1: 2015 and Q1:2016, the Other barriers to competition in SADC include number of services offered through MTOs nearly exclusivity conditions in some markets, as well as doubled. In all, the number of MTOs operating limited access to relevant payment systems and in South Africa increased from 3 to 6 following market infrastructure for MTOs in others. Exclusivity this intervention. As can be seen in Figure 7, the arrangements imposed by international MTOs on average cost of remittances through MTOs has since their agents have been observed in some SADC maintained an overall downward trend. On the other countries, including Namibia and Madagascar. In hand, the decline in the average cost for banks from Namibia, for example, international MTOs with Q1:2013 was not sustained, with costs rising again whom ADLAs intended to partner required them to in Q3:2015. This may be a result of some banks sign an agreement prohibiting them from offering discontinuing their remittance services in the face of their proprietary money transfer product alongside competition from MTOs. that of the international MTO. The ADLA, bound by the exclusivity clause, would be left with two Despite these interventions, the total average options: discontinue the product it offers through its cost to send remittances from South Africa to own system—and at a significantly lower price to other SADC countries remains high. Before these the customer; or split the existing network and offer interventions, there were far fewer services offered their proprietary service at some locations, and those through banks and MTOs alike, and even fewer low- of the international MTO at others. Even where cost services offered. The increase in the number regulatory authorities have prohibited exclusivity, of low-cost MTO services should be viewed as a many agents tend not to provide the services of small victory in the quest for further cost reduction more than one MTO. This has, of course, had a in the South African market, especially as services negative impact on competition as well as on the, provided by new players, such as Shoprite, offer already very limited, remittances delivery network out-bound remittances services from South Africa in the region. at significantly lower costs than banks. However, average costs remain at least 10 percent more than In addition, limited access to the national and the amount sent through MTO channels, and the regional payment systems infrastructure for MTOs competition between MTOs does not appear to be and other non-bank RSPs adds to inefficiencies in the sufficient to combat the upward trend in the costs of provision of remittance services. Fair and equitable remittances offered through banks. access to payment system infrastructure, whether direct or indirect, would enhance the efficiency The “stickiness” of remittance costs, particularly of clearing and settlement for remittance services through banks, is in part due to high structural offered outside of the banking network. In all SADC costs in the banking system in South Africa—such countries, only commercial banks have direct access as monopolistic pricing in the information and to the clearing and settlement systems,22 including KEY ISSUES AND CHALLENGES IN THE SADC REMITTANCES MARKET 18 the automated clearing house (ACH) and real Bottlenecks in the Payment System time gross settlement (RTGS) systems. Non-bank Infrastructure financial institutions, including MTOs, can access these payment systems indirectly by going through The efficiency and quality of remittance services a “sponsor” bank. are enhanced where there is greater standardization, automation, and increased interoperability in both the While the sponsorship model for non-bank access national and regional payment system infrastructure. to the payment systems infrastructure aims to In addition to increased automation, standardization, minimize risks posed to the payment system, and interoperability, wide geographic coverage of allowing MTOs access to the ACH or national payment service access points, including automated switch23 for clearing purposes would enable MTOs teller machines (ATMs), point-of-sale (POS) to more efficiently serve their customers. In Zambia, devices, bank branches, and agents of RSPs, are for example, non-bank entities reported delays also essential to ensuring that consumers have in the processing of their transactions by sponsor convenient access to regulated remittance services. banks, resulting in inefficiencies for consumers with Furthermore, where there are large volumes of accounts at non-bank financial institutions. The remittance flows between jurisdictions—as is the fact that banks and non-banks may offer the same case in SADC—improvements to the regional services, in competition, can place non-bank entities payment infrastructure, such regional clearing and at a disadvantage. Similarly, in Namibia, ADLAs settlement systems, have the potential to further are the main providers of remittance services, and reduce the costs and increase the efficiency of depend on commercial banks to facilitate their daily remittance services. Based on the World Bank operations; yet most commercial banks also operate remittance assessments conducted in the selected their own exchange bureau and remittance services, SADC countries, the main bottlenecks identified and thus are potential competitors of ADLAs. in the payment systems infrastructure include lack of interoperability within and across payment As remittance services begin to evolve toward online networks; low uptake of electronic payment and mobile platforms, anti-competitive behavior has instruments, and high dependence of cash-based also been observed by providers of such platforms remittance services; and limited use of the regional that also offer proprietary remittance services. For clearing and settlement systems. These issues are instance, in Zimbabwe, it has been found that MNOs discussed next. charge prohibitive fees to MTOs seeking to use U.S. dollar platforms to offer mobile-based remittances. Lack of Interoperability In Zambia, MNOs do not provide access to their mobile platforms for MTOs, and they are in direct Considerable progress has been made toward competition in both the domestic and international establishing automated payment systems in money transfer market. Such behavior impedes several SADC countries. Recent payment system innovation in the market and limits competition, initiatives in a number of SADC countries have led resulting in higher prices and lower service quality to the automation of national payment systems, for consumers. including real time gross settlement systems (RTGS) 22 In South Africa, the National Payments Systems Act allows for designation of non-banks as clearing and settlement enti- ties with their settlement handled on the South African Multiple Option Settlement System (SAMOS) by a direct partici- pant bank. Nevertheless, no visible non-bank indirect participants have been designated. 23 A national switch refers to a switch that enables the interoperability of all cards, automated teller machines (ATMs), and point-of-sale (POS) transactions in the country, provided all payment service providers are connected to the switch. In some countries, multiple switches may be established to provide switching services for various groups of payment net- works, but these do not always enable full interoperability as would a national switch. THE MARKET FOR REMITTANCE SERVICES IN SOUTHERN AFRICA 19 Table 6. Automated Payment Systems in Selected SADC Countries Clearing and Settlement Systems Payment Switches Other Service Country RTGS ACH National Providersa Lesotho Lesotho Wire (LSW) Lesotho Automated None Clearing House (LACH) Madagascar Real-Time Gross Cheque Clearing None ViaPlus Settlement System House, Automated Clearing House Malawi RTGS, a component Automated Clearing Natswitch of the Automated House (ACH), Transfer System a component of (ATS) known as MITASS the Malawi Inter- Bank Transfer and Settlement System (MITASS) Mozambique Metical em Tempo Electronic Clearing Interbank Society of Rede Ponto 24 Real (MTR) System (CEL) Mozambique (SIMO) Namibia Namibia Inter-Bank Namclear Namswitch (operated Settlement System Namswitch by Namclear) (NISS) South Africa South African BankservAfrica SASWITCH (operated Multiple Option by BankservAfrica) Settlement (SAMOS) Systemb Tanzania Tanzania Interbank Bank of Tanzania None UMOJA Switch Settlement System Electronic Clearing (TISS) House (BOTECH) Zambia Zambia Interbank Zambia Electronic In progress (to be ZamLink (Z) Settlement System Clearing House operated by ZECH) eSwitch; Financial (ZIPPS) (ZECH) Transaction Services; Calltrol/ PABS; Payserv; Cellulant Zimbabwe Zimbabwe Electronic Zimswitch ACH Zimswitch Transfer and Settlement System (ZETSS) Source: World Bank Remittances Assessments; relevant central bank websites. * Visa/MasterCard card transactions are switched abroad on the relevant switching networks. * In South Africa, SAMOS is used for clearing and settling large value payments, as well as settlement of retail electronic debits and credits on either a real-time line (RTL) or a continuous processing line (CPL), which provides for delayed gross settlement. KEY ISSUES AND CHALLENGES IN THE SADC REMITTANCES MARKET 20 for large value payments, Automated Clearing Houses interoperability. In Zambia, the local stakeholders (ACH) for electronic retail payment instruments, such are developing a national financial switch that is as cheques and electronic debits and credits. Some hoped to enable interoperability between ATM, countries have also introduced national switches to POS, and e-money transactions. enable broader interoperability of cards, ATMs, and POS payment networks (see Table 6). Despite these developments for domestic money transfers, interoperability for international remittances Despite progress toward automation, the lack of does not exist. While several of the MNOs operating interoperability between payment networks and in SADC developed cross-border mobile money payment instruments presents a constraint to the services—for example, Airtel and MTN—these growth of innovative e-payment services, including services are offered only within their mobile networks remittances. Of the countries covered by the World and to countries in which the MNO is present. Bank assessments, South Africa and Namibia have the most advanced payments systems infrastructure, with a relatively high level of interoperability across payment Limited Usage of Electronic Payment networks. In the other SADC countries, however, Services there is limited interoperability of ATMs and cards, Notwithstanding efforts to promote electronic particularly between international card networks (such payments, cash remains the dominant retail as Visa and MasterCard) and local proprietary card payment instrument in all SADC countries. The networks. In Zambia, for example, ZamLink—a local use of e-payment instruments is particularly low switching company—provides switching services for in SADC countries—even in South Africa, where propriety cards issued by 4 out of 21 banks, while the card penetration is high, and the payment system is remaining banks are connected to the Visa/MasterCard relatively sophisticated (see Table 7). network. In Tanzania, UMOJA Switch provides interoperability for ATMs and POS for 16 banks that Cash transactions account for the bulk of payments are not connected to the Visa network. in all SADC countries, despite the considerable growth in mobile money accounts. With the Interoperability of payment instruments and exception of Namibia and Zimbabwe, less than 50 networks for remittances services is even more percent of registered mobile money accounts in the limited. For domestic money transfers, bilateral selected SADC countries were recorded as active in arrangements and schemes between MNOs, 2015. The high preference for cash in other SADC and between MNOs and banks, are in place in countries is in part a reflection of the low levels of some SADC countries. For example, in Lesotho, financial inclusion (see Box 4). bilateral agreements have been developed for account-to-account transfers between MNOs and A key constraint to the uptake of electronic some banks. In Tanzania, a scheme for payment- and account-based payment services, including to-payment interoperability for mobile money has remittances, is the limited geographic coverage of been established, and four MNOs have opted in via payment service access points. Payment service bilateral Application Programming Interface (API) access points in SADC countries are largely connections. In Zimbabwe, ZimSwitch provides concentrated in urban areas. As a result, communities a shared mobile banking platform that allows in rural and remote areas have limited options to consumers to send and receive money locally from access regulated remittance services as well as other a variety of account types—such as from mobile formal financial services, with negative implications wallets to bank accounts, and vice versa. However, for rural consumers. Figure 9 shows the distribution not all payment providers in Zimbabwe are of commercial bank branches and ATMs in selected connected to ZimSwitch, as providers with large SADC countries. market share do not see the commercial value of THE MARKET FOR REMITTANCE SERVICES IN SOUTHERN AFRICA 21 Table 7. Penetration of e-payment Instruments in Selected SADC Countries 2017 2018 Credit Registered Mobile Active Mobile Active Mobile Debit Card(% Card(% Age Money Accounts, Money Accounts, Money Country Age 15+) 15+) per 1,000 Adults per 1,000 Adults Accounts (%) Lesotho 20.4 3.4 779.6 154.5 20 Madagascar 3.2 1.0 176.9 38.5 22 Malawi 11.2 1.3 239.7 75.8 32 Namibia 65.1 15.4 567.3 414.9 73 South Africa 34.1 8.9 173.8 9.1 5 Tanzania 13.3 0.5 1,837.5 648.6 35 Zambia 19.6 4.2 560.8 28.5 5 Zimbabwe 21.9 1.3 913.0 514.6 56 Source: World Bank Global Findex (2017) for debit and credit card figures; IMF Financial Access Survey (2015) for mobile money account figures; Reserve Bank of Malawi for Malawi mobile money account figures. Box 4. Financial Inclusion Landscape in SADC The level of financial inclusion varies significantly across SADC countries. In 2017 for instance, 81 percent and 70 percent of adults in Namibia and South Africa, respectively, had a transaction account (including a mobile account), compared to 34 percent in Malawi and 18 percent in Madagascar (see Figure B4.1).a In almost all SADC countries, the use of informal financial services is widespread. According to the FinMark Trust (2015), 39 percent of adults in SADC use informal financial services (in addition to some formal financial services), while 12 percent of adults use only informal financial services.b Figure 8. Comparison of Account Ownership in Selected SADC Countries Account Ownership (% Adults, Age 15+) Namibia 81 South Africa 69 Zimbabwe 55 Botswana 51 Tanzania 47 Zambia 46 Lesotho 46 Malawi 34 Madagascar 18 KEY ISSUES AND CHALLENGES IN THE SADC REMITTANCES MARKET 22 Furthermore, the FinScope Survey shows that for the SADC region, few adults use regulated remittance services. The survey found that overall, 33 percent of adults use remittance services, compared to over 40 percent for other financial services (credit, savings, insurance, and transactional accounts). Twenty percent of adults in SADC reported using non-bank channels for remittance services, while 8 percent used unregulated channels included informal services and friends/family.c Barriers to financial inclusion in SADC countries are wide-ranging and include: insufficient or irregular income, long distances to bank branches and other access points, high cost of financial services, lack of required documentation (for example, for Know-Your-Customer requirements), as well as low levels of financial awareness and literacy, and in some cases a lack of trust of formal financial institutions.d These factors also act as barriers to the use of regulated remittance services in the region. Source: World Bank Global Findex (2017). a. World Bank Global Findex 2014. https://globalfindex.worldbank.org/#data_sec_focus. b. FinMark Trust (2015). c. FinMark Trust (2015). d. Demirgüç-Kunt and Klapper (2012). The distribution of commercial banks and Limited Use of Regional Payment System ATMs in the selected SADC has remained Infrastructure limited, as shown in Figure 10. The distribution of commercial bank branches in SADC is mixed, The SADC Interbank Regional Settlement System with Zimbabwe and South Africa having the (SIRESS) was established in 2013 to facilitate highest number of branches per 1,000km2 and per more efficient cross-border, large-value transactions 100,000 adults. Malawi is on par with South Africa within the SADC region. SIRESS was developed to and Zimbabwe for bank branches per 1,000 km2, enable regional transactions among banks within the but bank branch distribution is significantly lower SADC region to be settled on a gross basis and in real per 100,000 people. Similarly, Namibia is on par time. It is hosted and operated by the South African with South Africa and Zimbabwe for bank branches Reserve Bank (SARB). Current participant countries per 100,000 adults, although the geographic include Angola, Botswana, Malawi, Mauritius, distribution of branches is low. With the exception Mozambique, Namibia, Seychelles, South Africa, of Namibia and South Africa, the distribution of Swaziland, Tanzania, Zambia, and Zimbabwe. It is ATMs in SADC countries has remained quite low. important to note that not all banks in the participant countries are participants on SIRESS (see Table 8). The emergence of mobile money services has, however, been accompanied by rapid growth in Although SIRESS has the potential to help reduce the the number of mobile money agents, which could costs of remittances, it is little used by commercial potentially act as access points for cross-border banks and MTOs for settlement of cross-border remittances. However, it is important to stress that, transactions. RSPs continue to rely on correspondent as is the case with mobile money accounts, a sizeable banking relationships and SWIFT (Society for proportion of mobile money agents are inactive and Worldwide Interbank Financial Telecommunication) therefore may not be effective in supporting the for cross-border remittances within the region.24 capturing and disbursement of remittances. The key challenges impeding the use of SIRESS for low-value cross-border remittances have been 24 A pilot is underway to test the use of SIRESS for low-value remittance services. THE MARKET FOR REMITTANCE SERVICES IN SOUTHERN AFRICA 23 Figure 9. Comparison of Distribution of Access Points in Selected SADC Countries, 2015 ATMs per 1,000km2 25 20 15 10 5 0 South Africa Lesotho Malawi Mozambique Tanzania Zimbabwe Zambia Namibia Madagascar ATMs per 100,000 Adults 80 60 40 20 0 South Africa Namibia Lesotho Zambia Mozambique Zimbabwe Tanzania Malawi Madagascar Commercial Bank Branches per 1,000 km2 4 3 2 1 0 Zimbabwe South Africa Malawi Tanzania Mozambique Zambia Madagascar Namibia Lesotho Commercial Bank Branches per 100,000 Adults 16 12 8 4 0 Zimbabwe Namibia South Africa Zambia Mozambique Malawi Tanzania Madagascar Source: IMF Financial Access Survey, 2015. Note: Data are included for SADC countries where a World Bank assessment was performed. Data for bank branch distribution in Lesotho are not available for 2015. KEY ISSUES AND CHALLENGES IN THE SADC REMITTANCES MARKET 24 Table 8. Overview of RSPs Permitted to Offer Remittance Services in Selected SADC Countries Number of Participant Total Number of Participant Country Participant Central Bank Commercial Banks Commercial Banks Angola × 1 23 Botswana × 1 10 Lesotho √ 4 4 Malawi √ 11 12 Mauritius × 4 23 Mozambique × 5 19 Namibia √ 6 10 Seychelles √ 0 9 South Africa √ 9 16 Swaziland √ 4 4 Tanzania × 6 41 Zambia √ 10 19 Zimbabwe × 13 13 Source: SADC Banking Association; all central bank websites (July 2016). Note: SADC = Southern Africa Development Community; SIRESS = SADC Integrated Regional Settlement System. noted to include the high cost of settling low- implementation of a regional clearing house (RCH) value transactions, and the lack of multi-currency to link the domestic automated clearing houses settlement in the system (transactions are processed (ACHs) of SADC countries. Given the large flow in South African rand). Furthermore, the commercial of remittances and other retail payments between banks in the Common Monetary Area (CMA)25— SADC countries, linking the relevant retail payments some of which are participants on SIRESS—are infrastructure more directly—rather than relying on currently able to transfer funds within their bank large-value settlement systems—is likely to have networks at a lower cost than available via SIRESS. more impact on reducing the cost of remittances in This creates little incentive to shift these transactions the region. BankservAfrica was appointed by the to SIRESS. Furthermore, as the use of SIRESS for SADC PSMB as the first Regional Clearing and cross-border remittances would require both the Settlement Operator (RSCO). It has been piloting the sender and receiver to have a bank account, the low integration of the ACHs in Zimbabwe and Zambia levels of account penetration in the region further into the SADC regional clearing house environment, limit the use of SIRESS for remittances. mainly for the processing of card and electronic funds transfer (EFT) transactions, but with the expectation In 2015, the SADC Banking Association Payment that remittance transactions may also be processed Scheme Management Body (PSMB) began the through the RCH in the future.26 The CMA is comprised of Lesotho, Namibia, South Africa, and Swaziland 25 BankservAfrica (2016). 26 THE MARKET FOR REMITTANCE SERVICES IN SOUTHERN AFRICA 25 Figure 10. Proposed Regional Payment Solution for Cross-Border Remittances in SADC SADC Mobile Network Operators SAD Remittance Operators 24 X 7 MNO 1 MNO 1 MNO 1 Real-Time Retail 1 Retail 2 Retail 3 Financial Clearing BankservAfrica Bank 1 Bank 2 Bank 3 SADC Mobil Payment Service Batch Settlement SADC Regional Banks BankservAfrica Processing Notifications SADC EFT CR Bank 1 Bank 2 Service BankservAfrica SADC Settlement Service SIRESS Bank 1 Bank 2 Bank 3 SADC Regional Banks Source: BankservAfrica (2016) Note: CR = credit; EFT = electronic funds transfer; MNO = mobile network operator; SADC = Southern Africa Development Community; SIRESS = SADC Integrated Regional Settlement System.. A mobile payment processing solution, which would enable more efficient settlement for non-bank cross- enable MNOs and MTOs to participate in the regional border payments.27 This would facilitate greater clearing house, is also being developed. As illustrated efficiency and interoperability within the SADC in Figure, BankservAfrica is also considering regional payments system. providing non-bank RSPs, including MTOs, with greater access to the regional payment system In other jurisdictions where the domestic ACHs infrastructure, further bringing down the costs and have been integrated, the cost of sending remittances increasing the efficiency of cross-border remittances has declined substantially. For example, the cost within the region. Specifically, the system will of remittances in the United States—Mexico enable mobile money operators, MTOs, and other corridor dropped below 5 percent largely as a result non-bank payment service providers to have access of the Directo a México service, which links the to the regional payment systems infrastructure for ACHs of the United States and Mexico for cross- cross-border clearing and settlement within SADC. border retail payments (see Box 5). The successful The Mobile Payment Service would conduct real- implementation of the SADC RCH project will, time processing and clearing of cross border retail therefore, have a considerable potential impact on payments, while the connection to SIRESS would the cost of remittances in the region. BankservAfrica (2016). 27 KEY ISSUES AND CHALLENGES IN THE SADC REMITTANCES MARKET 26 Box 5. Connecting Domestic ACHs across Borders: The United States and Other Countries The Federal Reserve Banks in the United States have undertaken a number of initiatives to offer low- cost cross-border automated clearing house (ACH) services by linking the U.S. ACH system to that of several other countries. These services currently are limited to outbound transactions from the United States. Incoming transactions are prohibited until the U.S. ACH system can screen for U.S. Anti-Money Laundering (AML)/Combating the Financing of Terrorism (CFT) requirements. In 2001, the Federal Reserve Banks, in partnership with a private sector bank in Canada, began offering a cross-border ACH service to Canada. The Canadian ACH service permits depository institutions in the United States to send ACH credit and debit transactions to depository institutions in Canada. In 2003, the Federal Reserve Banks began offering a trans-Atlantic ACH service to five countries in the Western Europe (Austria, Germany, the Netherlands, Switzerland, and the United Kingdom). The trans-Atlantic ACH service is limited to credit transactions only, with transactions originated in U.S. dollars in the United States and received in the domestic currency of the European country. In 2004, the Federal Reserve Banks and the Bank of Mexico began offering a cross-border ACH service from the United States to Mexico under the name Directo a México. It uses the exchange rate published daily by the Bank of Mexico (“the fix”). The Federal Reserve Banks charge depository institutions in the United States less than $1.00 per payment. The Bank of Mexico does not charge banks in Mexico for the service, but receives part of the fee charged by the Federal Reserve Banks. Although the vast majority of the payments are U.S. government payments to individuals in Mexico, the channel is available for use by depository institutions offering cross-border remittance services to Mexico. Source: CPMI-World Bank (2007). Other Issues and Challenges publicized to consumers. For example, in Zambia, it was noted that the main barriers consumers Other challenges contribute to the high cost faced to resolving conflict with financial service and limited reach of regulated remittance providers included the lack of awareness about services in SADC. These include gaps in which government entity should be contacted and consumer protection; capacity shortages for the perception that financial institutions are too oversight and supervision of rapidly evolving powerful.28 Without clear and robust consumer remittance services; and de-risking of RSPs and protection frameworks for remittance services, banks holding accounts of RSPs in the region. consumers may, therefore, feel disempowered to use regulated remittance services—perpetuating the Only a few SADC countries have consumer widespread use of unregulated and informal channels protection legislation dedicated to financial services, for remittances. although general consumer protection regulation exists. Furthermore, few countries have regulations Capacity gaps in the supervision and oversight of that specify the consumer protection responsibilities the remittance market may result in new risks in the and transparency and disclosure requirements for market going unchecked, and at the same time may remittance services. In addition, the mechanisms for impede innovation in the market. Several regulatory external complaints handling and dispute resolution authorities in the SADC region lack the staff capacity for remittances are generally unclear and are not well to provide adequate supervision and oversight of World Bank Zambia Financial Capability Survey, 2016. 28 THE MARKET FOR REMITTANCE SERVICES IN SOUTHERN AFRICA 27 RSPs, particularly MTOs and their agents. In addition, commercial banks are finding it increasingly difficult RSPs expressed concerns about the lengthy process to maintain corresponding banking relationships for obtaining approval and regulatory guidance for (the provision of banking services by one bank to new, technology-driven remittance services. Capacity another), particularly with regard to transactions gaps also hinder the collection and dissemination of initiated by individuals in U.S. dollars. In some data and statistics on the remittances market, resulting instances, local banks have terminated relationships in limited information not only for regulatory with MTOs to maintain their own correspondent purposes but also to guide RSPs on opportunities for banking relationships in the United States and new services and corridors. Europe. Some banks in Zambia also noted facing de-risking pressures from correspondent banks. As The de-risking phenomenon continues to impact remittance services depend largely on correspondent many stakeholders within the remittances value banking relationships, the de-risking phenomenon chain in SADC. In Zimbabwe, for example, will continue to affect both the cost and accessibility of remittance services (see Box 6). Box 6. The De-Risking Phenomenon According to the Financial Action Task Force (FATF), “de-risking” refers to the phenomenon of financial institutions terminating or restricting business relationships with clients or categories of clients to avoid, rather than manage, risk.a Drivers of the de-risking phenomenon have been noted to include concerns about Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) risks, profitability, prudential requirements, and reputational risk.b Institutions most affected by de-risking practices include remittances companies (or MTOs) often perceived as “inherently high risk,” as well as smaller local banks in jurisdictions with limited financial markets. De-risking practices can have considerable impact on consumers and the wider economy. For example, MTO account closures and restrictions on correspondent banking relationships put MTOs and local banks at risk of losing access to the global financial system. Such practices threaten to push “higher risk” transactions into less regulated or unregulated channels, further raising AML/CFT risks. In addition, without adequate access to the global financial system, MTOs and other remittance companies face higher operational and compliance costs, which are likely to be passed on to the consumer, and impede progress made toward reducing the cost of remittances globally. In recognition of these issues, several global and country-level initiatives have been undertaken to address the de-risking phenomenon. At the request of the G-20, the World Bank Group conducted two surveys on de-risking in 2015, in collaboration with the Financial Stability Board (FSB), Committee for Payments and Market Infrastructure (CPMI), and the G-20 Global Partnership for Financial Inclusion (GPFI). The first survey focused on the restriction or termination of correspondent banking relationships and the second on account closures of MTOs. Both surveys showed the de-risking is indeed happening, with smaller countries being particularly vulnerable to de-risking practices.c At the country level, the World Bank Group has undertaken country pilot studies, as well as provided technical support to national authorities to mitigate risks in the financial sector, without restricting access to financial services. An ongoing pilot study is underway in South Africa. a. FATF (2014). FATF clarifies risk-based approach: case-by-case, not wholesale de-risking. Available: http://www.fatf-gafi.org/ publications/fatfrecommendations/documents/rba-and-de-risking.html. b. Ibid., 2014. c. For further results, see http://www.worldbank.org/en/topic/financialmarketintegrity/publication/world-bank-group-surveys- probe-derisking-practices. KEY ISSUES AND CHALLENGES IN THE SADC REMITTANCES MARKET 28 FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | FINANCIAL INCLUSION, INFRASTRUCTURE & ACCESS POLICY RECOMMENDATIONS R emittances have the potential to play a significant role in the economic and social development of countries in SADC, as well as in reducing inequality within and among countries in the region. As such, national authorities, RSPs, and the SADC Secretariat, including the SADC Committee of Central Bank Governors (CCBG) and the Payment Scheme Management Body (PSMB), should work jointly to ensure that remittance services are efficient, safe, and accessible, and are leveraged to improve the welfare of households and communities in the region. The policy recommendations outlined next propose actions that can be taken at the national and regional level to improve the remittances market in SADC. The SADC Secretariat and relevant subcommittees are well positioned to play a coordinating role and should guide the implementation of these recommendations, as well as other ongoing initiatives in the region. Recommended Actions for Regulators consistency between the customer identification and Policy Makers requirements under FICA and the Immigration Act so that migrant workers are encouraged to use regulated Regulators should develop and apply the channels for remittance services—especially because regulatory framework for remittance services the bulk of remittances within SADC originate in a proportionate manner, ensuring that a level from South Africa. KYC and CDD requirements playing field is created for all types of RSPs and in receiving countries should also be applied in a that consumers are encouraged to use regulated proportionate manner to further encourage the use of remittance services. With regard to the licensing regulated services within the region. requirements, for MTOs, regulators should develop a licensing framework that enables MTOs Regulators should enhance capacity for the to operate independently of banks or other licensed supervision and oversight of RSPs, aiming at financial institutions, with appropriate safeguards balancing the risks and benefits of the growing and capacity requirements. Furthermore, foreign remittances market. As new and innovative business exchange reporting requirements with respect to models emerge, properly enforced regulations remittance transactions should be proportionate to should encourage innovation while minimizing risks the value of remittances involved. For example, to consumers and to the payment system. Regulators the frequency of reporting for remittance should also ensure that the relevant regulatory bodies transactions could be reduced for remittances and departments—for example, Payment Systems, under a particular threshold; and regulators could Supervision, and Foreign Exchange departments— encourage the use of electronic channels for are aware of their roles and responsibilities in the storing and submitting information on remittance regulation and supervision of the remittances market. customers and transactions. The CCGB and PSMB should play an active role in facilitating peer-to-peer learning and training on best Regulators should also consider progressively practices in supervision of remittance markets. introducing tiered KYC requirements, within a risk-based approach, to facilitate usage of regulated Regulators should define the framework for financial remittance services while reducing the compliance consumer protection and should make necessary burden for RSPs. In South Africa, specifically, efforts to increase consumer empowerment and regulators and relevant policy makers should ensure financial literacy, particularly for remittance THE MARKET FOR REMITTANCE SERVICES IN SOUTHERN AFRICA 29 services. There is a need for regulatory authorities region through the Regional Clearing House should to provide clear guidelines and requirements be continued, as such initiatives have had a positive on financial consumer protection, particularly impact in other jurisdictions (such as the United for remittance services. Specifically, there is a States–Mexico corridor). need for guidelines on the transparency and the disclosure of fees, and other relevant information Regulators should make efforts to facilitate relating to remittance services; as well as on the competition in the remittances market by ensuring responsibilities of RSPs in handling complaints and that exclusivity conditions are not imposed, as well resolving disputes. Regulators should also work as by encouraging fair and equitable access to the to streamline the mechanisms for complaints and market infrastructure MTOs. MTO agents should dispute resolution within the relevant agencies and be encouraged to partner with and offer the services ensure that these mechanisms are well publicized. of more than one MTO. In countries where this is Furthermore, given that the low levels of financial the case (such as Ghana and Morocco), the price inclusion and financial literacy in SADC represent a to consumers for sending money has declined, significant barrier to access for regulated remittance and consumers in both the sending and receiving services, a concerted effort should be made by country have benefitted from increased options for both regulators and financial service providers to remittance services. Likewise, non-discriminatory encourage uptake of regulated financial services and access to the payment systems infrastructure, to raise awareness of regulated remittance services. as well as mobile network platforms, for MTOs will increase the efficiency of money transfers Regulators should continue to work toward and result in better quality services available to achieving interoperability of payment infrastructure, consumers. RSPs should, therefore, be encouraged including card and e-money infrastructure, and to collaborate and coordinate efforts to improve the should encourage payment service providers to payment system infrastructure and provide fair and expand the network of service points to rural and equitable access to relevant market infrastructure remote areas. Interoperability of the national and for remittance services. regional payment systems infrastructure will have positive spillovers for cross-border remittances, as Regulators should work toward improving the quality customers will benefit from increased efficiency of data and statistics on remittance trends in the and greater payment options for remittance services. region, to provide insight into market opportunities However, such benefits will only be felt if there and facilitate evidence-based policy development for is a wide distribution of access points, including the remittances market. There is a need for countries ATMs, points of sale, and agents beyond urban in the region to considerably improve the collection, areas. Regulators and RSPs should, therefore, work compilation, and analysis of data on remittance together to consider cost-effective ways to expand flows. Regular publications of relevant statistics the distribution of access points for remittance should be made available to market participants and services to rural and remote areas. other public authorities. This will raise awareness of the potential of the market opportunity and enable Regulators should also address the constraints RSPs to develop services appropriate for consumers. limiting the use of SIRESS for cross-border In addition, studies should be undertaken on the scale remittances, as well as continue progress to integrate and trends in the unregulated remittances market to domestic ACHs in the region. SIRESS presents better understand the barriers to usage of regulated an opportunity to provide efficient settlement for channels, and the interventions needed to encourage cross-border remittances in SADC, and thus the a shift toward regulated remittance services. SADC CCBG and PSMB should work with national regulators to address the constraints inhibiting its Regulators should facilitate the testing of new use. In addition, efforts to link domestic ACHs in the technologies that have the potential to reduce the POLICY RECOMMENDATIONS 30 cost and improve the efficiency of cross-border example, through SMS (text messages)—should settlement for remittances within the region. also be encouraged. With rapid developments in financial technology (“fintech”), there is potential for new technologies Banks should more actively participate in such as blockchain or distributed ledger technology the remittances market in SADC by pursuing (DLT) to support faster and more secure cross- partnerships with MTOs and promoting low-cost border settlement for remittance services, especially remittance services linked to transaction accounts. where MTOs do not yet have access to the national Providing remittance services to customers could and payments system infrastructure. SADC regional bring in more foot traffic for banks and allow them to authorities should consider testing the use of such sell new banking products and services to customers technology within the SADC RCH environment to that currently are likely to be unbanked. Offering better improve the efficiency of remittance services remittance services through basic bank accounts in SADC. could also encourage the use of transaction accounts for remittances, providing a gateway to access for other financial services. Recommended Actions for Remittance Service Providers RSPs should be involved in the policy dialogue and RSPs should be more proactive in raising customers’ market development initiatives being undertaken awareness of regulated remittance services, at the regional level to improve the efficiency of especially for new and innovative channels. Given remittance services in SADC. RSPs should create that the lack of consumers’ awareness is a key forums to facilitate regular dialogue and collaboration barrier to the use of regulated remittance services, at both the national and regional level and should be RSPs have a responsibility to more widely promote actively involved in market development initiatives and market their services to migrant and diaspora aimed at improving the remittances market. This will communities in the sending countries, as well as to enable RSPs to address competition concerns and receiving communities in the receiving countries. infrastructure bottlenecks, as well as to contribute Providing ongoing financial education through to broader payment systems development initiatives regular communication with customers—for that have a positive impact on the remittances market. THE MARKET FOR REMITTANCE SERVICES IN SOUTHERN AFRICA 31 32 FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | FINANCIAL INCLUSION, INFRASTRUCTURE & ACCESS REFERENCES BankservAfrica. 2016. “Shareholding Ownership of the SADC.” https://www.bankservafrica. com/Portals/1/Documents/PSO/ConnectAfrica_Newsletter_June%202016%20-%20Final. pdf?ver=2016-06-27-120251-247 CPMI-World Bank (Committee on Payments and Market Infrastructure/Committee on Payment and Settlement Systems and World Bank). 2007. “General Principles for International Remittance Services.” http://www.bis.org/cpmi/publ/d76.pdf. Demirgüç-Kunt, Asli, and Leora Klapper. 2012. “Financial Inclusion in Africa: An Overview.” Policy Research Working Paper 6088, World Bank, Washington, DC. 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