Plastic money framework needs strengthening

Persistance Gwanyanya
ELECTRONIC transactions have been on a growth trajectory in Zimbabwe. Since dollarisation in 2009, the value of annual electronic transactions increased by 726 percent to US$58,6 billion largely reflecting the fact we are coming from a cash-based economy.

The high demand for cash, coupled with dwindling supply of the same, has seen the cash challenges intensify, especially in the first half of the year. This prompted the Reserve Bank of Zimbabwe (RBZ) to intervene with measures aimed at rationalising the demand for cash. The supply side of cash is expected to remain depressed due to the structural make up of the economy, which is largely unbalanced.There are high levels of consumption and imports at a time when there a low levels of production and exports.These factors taken together suggest that the liquidity and cash conditions in Zimbabwe will remain tight as long as dollarisation continue. Chances of Zimbabwe de-dollarising soon are remote as suggested by empirical evidence.This means that the trajectory towards electronic money will be unstoppable. The graph (right) depicts a growing trend in electronic money comprising mobile money, Point of Sale (POS), rtgs, internal and internet based bank transfers.

Faced with growth in plastic money, there is need to strengthen its regulatory framework so as to allow for users to fully capitalise on advantages offered by plastic money, whilst also minimising the associated risks. As a country evolving from a cash-based economy, the regulatory framework for cashless transactions is still underdeveloped. Ideally, a framework to deal with cashless transactions should have been developed at or immediately after dollarisation to reflect the new economic order. This framework should spell out issues to do with infrastructure sharing, interoperability and dealing with associated risk. The related legal frameworks may also need to be amended to reflect the dominance of plastic money in the economy. The National Payment System Act, which regulates electronic payments, should be revisited so as to take care of increase in issues relating to plastic money. Other statutes that may need to be revisited relate to consumer protection, post and telecommunications, including bank use promotion and anti-money laundering issues.

Infrastructure sharing

Infrastructure sharing will result in significant reduction in costs associated with provision of electronic money. Instead of banks operating individual POS machines, it makes economic sense for them to share these gadgets. Electronic transactions will be faster, convenient and less costly if infrastructure is shared. If banks pool together their resources, they may be able to invest in more efficient infrastructure, which support electronic payments with concomitant effects of reducing the transactional costs.As the regulator of all banks, RBZ should champion this and the quicker this is done the better.A number of banks that were lagging in developing electronic money systems are seized with the need to catch up with the market and will be saved if RBZ moves in quickly with infrastructure sharing.

Interoperability

This is an important feature of electronic money, which enables different systems supporting it to interface at minimum risk. For example, mobile money operators and companies that offer visa card products may need to provide their products on banking platforms which exposes both parties risk. There are 28 participants in the national payment system in the different payment categories – rtgs, electronic funds transfer, mobile money, cheque clearing, internet, local and international card platforms – which may need to interface with bank payment platforms.This might make such transactions risky.As such, RBZ should ensure that a proper regulatory framework is put in place to minimise this risk without impacting on experimentation, innovation and implementation of new products that normally characterise the world of technology.

Enhanced risk management frameworks

Rapid change in information technology exposes electronic money to a number of risks. Operational, reputational and legal risks are the major risks associated with plastic money. Operational risk arises from the potential for loss due to significant deficiencies in system reliability or integrity, together with customer misuse and inadequately designed or implemented electronic money systems.Plastic money is associated with increased incidences of fraud, counterfeit and forgery.Economic criminals have become more sophisticated and can easily beat the system. Millions of dollars are swindled from electronic money transfers in the world. Money launders find it easy to disguise the proceeds of their ill-gotten wealth through plastic money. Electronic transactions involving cross border transactions will be more risky in Zimbabwe due to shortage of foreign currency. The revelation that Zimbabwe lost about US$2billion in illicit financial flows in 2015 is worrying. There is high risk that perpetrators may be taking advantage of the electronic money to externalise money. Mobile money transfer agencies are innovating into international payments space and one wonders whether the RBZ has capacity to regulate these payments given the exchange control regulations in place.Currently, the money that can be carried outside the country is pegged at US$1000 per trip.All what this means is that supervisory authorities and banking organisations should be proactive and develop methods for identifying, assessing, managing and controlling the risks associated with electronic money.

Know Your Customer (KYS) challenges

Electronic banking will allow banks to expand their markets in the unbanked population mainly in the informal sector. This may require relaxation of some identification requirements in account opening and transactions which may increase the risk of money laundering. Given the growth of anti money laundering activities in the world it is imperative that the regulatory authorities develop capabilities in managing this risk as electronic payments dominate.The need to for authorities to be proactive to the fastly changing world of innovation and finance cannot be overemphasized. T A look at some of the causes of global financial crises may reveal this.

We should not be caught off guard.

Persistence Gwanyanya is an economist and banker. He is also a member of the Zimbabwe Economics Society. He writes in his personal capacity. For feedback you can use my email address [email protected] or WhatsApp me on +263 773 030 691.