Many institutions and organizations are heading towards cashless payments, this is an inevitable turn considering Kenya is looking to develop in all aspects including economically.
For such kinds of payments to succeed, the security of cashless transactions needs to be improved to encourage more people to use these methods.
The Central Bank of Kenya has come up with Kenya National Payments Vision and Strategy 2021-2025 to regulate this area more effectively. The paper is open for public participation until the 31st of January 2021. Fintechs have given sentiments that a robust, competitive and secure payment ecosystem has the potential to contribute to macro economic growth, power Kenya’s transition to a digital economy and facilitate inclusive finance for all.
Even though Kenya Electronic Payment and Settlement System(KEPPS) established in 2005 and the NPS Act of 2011 have brought about major improvements in Kenya’s payment system, there is no harm in furthering the development of these systems so as to open Kenya to the world. The Covid-19 Pandemic made it clear that the payments environment needed realignment and resilience.
The Next 5 Years
The Kenya National Payments vision and strategy paper has set out the following aims for the next five years:
- To facilitate payments systems that meet the diverse needs of users and support the country’s development agenda.
- To ensure payments systems are secure through influencing industry and global
- Standards, and adopting safe technologies.
- To power an ecosystem based on collaboration leading to launch of premier and
- Globally competitive innovations.
- To implement a supportive policy and regulatory framework that is firmly enforced across all existing and emerging players.
Key principles and values of NPS include:
- Trust – a system which guarantees that payments will be made and received in a timely and reliable manner.
- Security – a resilient system that safeguards all payments and channels in an increasingly digital world.
- Usefulness – a system that meets the payment needs of individuals, businesses and government in a cost-effective manner.
- Choice – availability of feasible options resulting from collaboration among different service providers.
- Innovation – an ecosystem that produces value-adding solutions which also compete at the global stage.
The NPS paper was borne through technical work by the CBK through an interdepartmental project team comprising the following departments: banking and payments, legal, bank supervision, financial markets, currency and research. The team conducted research
activities, industry engagements, global scan and best practice review.
CBK also partnered with FSD Kenya (and its research partner, Bankable Frontiers Associations Global) to undertake a global review payment vision and strategy documents from other countries. The countries reviewed include South Africa, India, United Kingdom, Canada, Singapore and Nigeria.
The foundational element for the payment system rules is the legal and regulatory framework that is outlined in the NPS Act of 2011 and the NPS regulation of 2014. The Kenya RTGS system(KEPPS) also has its own rules.
CBK will undertake dialogue with industry to ensure the NPS policy, legal and regulatory framework remains adaptive, relevant and responsive. In the wake of Covid 19, the country and the world at large has realized that systems need to be digitized as it is the future of almost all industries/sectors, national payment systems are no exception. Creating regulatory frameworks in this direction is a positive step in ensuring that Kenya evolves and promotes its economic standing.
Furthermore, participants providing similar services should be subject to the same regulation that is transparent and appropriate for the risk being introduced in the payment system by each participant.
Rapid advances in technology, innovation and global interconnectedness will transform domestic, regional and global payment systems. This can be facilitated by banks, while technology and end users may change, the need for sound regulatory and governance
frameworks to underpin payment systems have not.
Regulations must also be aligned with the public policy objectives. Achieving this will help boost confidence in the NPS as well as support objectives related to the prevention of financial crime and the promotion of competition, consumer protection and financial inclusion.
A consistent regulatory and oversight for all payment services is necessary to ensure a level playing field between banks and other licensed banking institutions as well as to ensure fraud monitoring so as to help achieve the objectives set out in the strategic plan towards transforming national payment systems.
The NPS strategy paper sets out payment participants as Central Bank of Kenya to start with, settlement participants including institutions that discharge payment obligations between 2 parties these are domestic settlements (KEPPS), cross border settlements (East African Payment System(EAPS)), regional payment system(REPPS) for COMESA payments and SWIFT for other international participants.
Payment participants also include clearing participants such as banks and non bank institutions PSPs such as commercial banks and SACCOS, industry associations and consumers such as the government, financial institutions, businesses and individuals.
The paper indicates that there has been a growth in RTGS transactions and this has increased steadily over the past decade as more payments shift to RTGS. This probably attributed to the efficiency of this system as users prefer same day transactions.
Mobile money transactions have shown the largest growth since the inception of this payment instrument which initially emerged as a means of sending money between individuals. Merchant payments were enabled in 2013. The lack of efficient data protection regulations despite the enactment of the Data Protection Act,2019 is pointed out. There is a likelihood of the unauthorized use of a customers’ data in digital payment therefore undermining trust. Strong safeguards and financial sector data protection regulations need to be developed. In house data protection officers who have demonstrated expertise, interest and experience will be the saviours in battling this challenge. We are also faced with the need of proposing in house data protection officers who have demonstrated expertise, interest, and experience will be the saviours in battling this challenge. We are also faced with the need of proposing amendments to the Data Protection Act of 2019, these experts will be better placed at identifying areas that need amendments to better national payment systems that will lead to the success of the entire strategy.
The paper has pointed out the lack of sufficient assurances that businesses are making payment to the right account. This problem can be solved by having financial institutions and other platforms send alerts through emails, automated messages and other avenues to users of any changes to accounts. Banks need to also be alerted in good time of any changes to be able to convey the same to the relevant users.
The adoption of common user experience standards has been introduced in the paper. This will make the use of various payment instruments easier to use. This will include standards and procedures on payments such as QR code payments, NFC payments, mobile push payments, domestic card payments and cardless withdrawals, to name a few. Additionally, this will include adopting the ISO20022 messaging standard for financial transactions, which is recognised as the global, common language of financial communication. This will not only enable international interoperability, but will additionally promote the richness of payment data creating a more
holistic approach to digital payments. This is a step in the right direction as it promotes globalization and competitiveness in the industry.
The paper highlights low levels of financial literacy that affect users’ and consumers’ ability to use digital payments. This issue has been further exacerbated by complex and non intuitive steps to effect payments, thereby inhibiting the use of digital payments services. Customers and users should be educated and given questionnaires to fill in just to ensure that they have understood what has been taught. Open days, where subjects that promote financial literacy are handled, may also be carried out, either physically or online and notices/advertisement of these open days put up widely, possibly on television, billboards, automated messages and other
methods to ensure that it travels wide so as people may attend.
Varying standards of operation and service delivery between different categories of providers (e.g. between banks and mobile PSPs) undermines trust. Different platforms should be allowed to have different standards, the cost of providing the services is not the same across platforms therefore all the platforms can’t have the same tariffs and services, such platforms should be consulted when setting such standards, those that offer the same kind of services can have guidelines on the same basic standards and an allowance for creating standards that they wish leaving it to the client/customer/user to decide on the platform that fits them best. However, a platform shouldn’t be free to provide poor services simply because it has used less resources to provide services.
Another highlight is that for each payment stream and channel, an interchange framework may be needed to enable the continued financing of the acceptance infrastructure and the issuance of the instrument. Various models will be considered defining interchange fees and a strategic interchange fee model. Stakeholders’ views will be incorporated to ensure that the outcome is not dominated by the interests of any one group or lead to anti-competitive practices. This will enable stakeholders to also have a take in their possible fate hence being able to protect their interests as well as focus on the financial well being of their particular clients depending on the different arrangements that they have with them.
Looking Into The Future
When thinking of this strategy, a lot of positive connotations come to mind. With the inception of the paradigm shift to a cashless economy in most developed economies there is definitely a need for any given economy to adopt automation of its payment systems. The collaboration of various players such as bank and mobile service providers among other will be the hotbed of success in this plight.
Challenges that may possibly face this strategy that CBK has to thoroughly consider include:
- Ensuring resources are always available to implement the proposed changes as well as any ongoing changes to facilitate a smooth transition.
- There is a need to have well trained people to man the systems, for the initial stages and training, countries that have gone ahead of us may have to offer training to assist in developing expertise.
- Users also need to be trained to facilitate positive reception and to achieve the objectives set out by CBK.
- It may develop in job losses as many avenues will turn cashless.