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Tuesday, 10 March 2020 00:54 - - {{hitsCtrl.values.hits}}
By Uditha Jayasinghe
Why pick digitisation as the theme for 2020?
During the last few years, the Central Bank, LankaClear and banks have invested much in the digitising of their payment systems. But the merchants and customers are in the same place. In some instances even the banking staff is not using the systems that have been introduced by their own banks. We have appointed a National Payment Council (NPC) to identify the gaps between the products and the people, which is chaired by the Deputy Governor and some members of the commercial banks have been invited to join. This council is the highest decision making body for payment systems in the country because the regulator for any payment system is the Central Bank, which has been given this power under the Payment and Settlement Systems Act No28 of 2005 and the Monetary Law Act. NPC appointed a committee to identify the gaps in products and difficulties faced in popularising these products. One recommendation of the committee was a digital week, which eventually became a digital year because a week or a month is not enough to create a big change for the country.
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| Central Bank Payments and Settlements Department Director Dharmasri Kumaratunge |
What were the big challenges that were identified by the committee and how do you hope to address them?
In most cases customers know the products they are using but bank managers or staff is less aware or they don’t know the price structure of the product. In fact I identified this through my own experience in interacting with staff so I thought during the first two months it is important to educate the bank employees. So January and February has been about digitally empowering employees. Comprehensive presentations and other material have been circulated among employees containing all the information about products offered by their banks.
The biggest problem is that banks have to be aware of their own products. Some banks have two or three apps but bank employees are unaware. It is essential that employees know about these products and then awareness can be transferred to others
Another major issue is that even though many people have high-end smart phones when it comes to making payments very few use them. This is why sometimes at supermarkets there are long queues because they are paying phone, water and electricity bills. This was fine in the old days but with the development of online payment systems there should be more interest in using them.
What products have you identified that bank employees must be aware of?
The biggest problem is that banks have to aware of their own products. For example many banks have mobile-based payment apps, Sampath Bank has the WePay app, NTB FriMi, Commercial Bank Flash, and HNB has SOLO. Some banks have two or three apps but bank employees are unaware. It is essential that employees know about these products and then awareness can be transferred to others. This is what we are mainly expecting from employees. They need to download these apps and use them so they can identify the difficulties customers face.
From March onwards banks have to educate merchants. Each month banks have to absorb new merchants as customers. If they have a product such as a QR Code they can go to new merchants and encourage them to come onboard. From April onwards focus will be on customer awareness and customer onboarding. These may not necessarily be new customers but it is more about introducing existing customers to digital or online systems.
Shared Know-Your-Customer (KYCs) is important. With this documents of one bank can be shared with others. KYC can be shared using block chain technology, which would be a first for Sri Lanka. We already started this process last year and received 36 applications to set up the system Free-of-Charge for a trial run
Given that Sri Lanka has a rapidly aging population, do you feel there is an additional challenge in getting people onboard digital platforms?
Smart phone penetration in Sri Lanka is almost 40%, which is progressive for a developing country, and this will increase in the future. Therefore, when applications exist and they are easy to use, the people must be encouraged to adapt this technology. We cannot wait until penetration is higher, we have to start somewhere.
Research has shown that in the past few years due to digitisation bank employment has dropped by 2% and this is likely to continue given the leaps made by technology. In such a scenario how do you see the banking industry evolving in Sri Lanka?
That is a good question. My opinion is that the existing network of branches is enough for the country because in addition to the commercial banks there are also a number of non-bank financial institutions. There are also over 4,700 ATMs and over 3000 branches in total. The world in moving towards virtual banking and there will be a reduction in conventional banking. In some countries they have stopped expanding their bank branches and everything is done digitally. Of course in Sri Lanka there are several bottlenecks such as the limited-availability of the e-NIC and of course online banking can limit financial inclusivity. However, we are working on solutions to promote financial inclusivity.
When it comes to ATM machines there have been concerns of security issues but what we need to do is issue EMV-Cards and have EMV enabled machines are used. International card associations and the Central Bank have been working with banks to implement this system and it will likely be completed before June. There is a cost incurred from the bank’s side as they have to change their systems but if they are losing money through fraudulent activity then upgrading their technology will also protect them from additional costs.
NBFIs are sometimes quicker to adapt technology. Banks have to innovate more and come to the market with newer products. The larger commercial banks are doing well but on the digitisation front there is more they can do
What is the solution for inclusivity?
Shared Know-Your-Customer (KYCs). As Sri Lanka does not as yet have an e-NIC there are issues in expanding the number of customers onto online platforms. At the moment there are good platforms being developed by banks but we still have to follow the KYC process, which still requires the customer visit a bank branch to open an account. This is mainly because we do not have a shared database that would come with the e-NIC. The solution we have identified is for the documents of one bank to be shared with others. Now the process is if a customer wants to open a fixed deposit he has to do all the paperwork separately at each bank. This is an inconvenience to the customer. KYC can be shared using block chain technology, which would be a first for Sri Lanka. We already started this process last year and received 36 applications, with some coming from foreign companies, but we insisted whoever takes it up has to do so free-of-charge. Now we are in the selection process. We will also select two to three stakeholders and if this platform is run for three to six months connecting all banks, then we can call for Request for Proposals to set up a permanent platform. The pilot running of block chain will be done by the Central Bank.
But what about privacy concerns?
Each time the bank wants to access details of the customer they have to get customer consent. This is what happens in other countries as well. In addition to the present legislation there is also a Data Protection Bill that has been drafted, with the involvement of the Central Bank and ICTA, which has to go to Cabinet to get approval. In some countries such as India they have a limit for the KYC, so for example KYC can be accessed only for transactions up to Rs. 20,000 or lower. We could have a similar system to ensure security and customer control by setting limits on data access. The platform will have such systems in place.
From March banks have to educate merchants. Each month banks have to absorb new merchants as customers. If they have a product such as a QR Code they can go to new merchants and encourage them to come onboard
Is it possible to integrate accounts and other products from different banks?
We can move to an open API, which is the next project we are moving to. It will be started this year and may be completed in two years. Open API will assist to manage different financial products across different banks. For example if a customer has five bank accounts they have to log into five different platforms to check their balances but with Open API only one login is required and all the bank details can be viewed. This would include loans and other financial products. This is already available globally. The European Union has it already, and Korea, Singapore and Malaysia are on the way to developing this as well. If we start this within the next two-three years all banks can join. Even when we started the Common Fund Transfer switch it took about three years to get all the banks on it. In some ways non-bank financial institutions are keener to adapt digital instruments than conventional commercial banks.
You mentioned that Non-Banking Financial Institutions (NBFIs) are sometimes quicker to adapt technology. Why is this the case?
NBFIs also engage in savings accounts and other products and some of them have received approval to issue debit and credit cards. When this is done they have developed mobile apps for these products. In some ways they are far ahead of banks because they need to be more competitive to attract customers away from commercial banks. Telecommunication companies have also developed apps to transfer money, these are doing well and they also provide competition to banks. Banks have to innovate more and come to the market with newer products. The larger commercial banks are doing well but on the digitisation front there is more they can do.
The younger generation does not want to use any card, they prefer to use a mobile phone. So in the future cards will likely be phased out
With all these new digital payment systems will credit and debit cards become a thing of the past?
More than 80% of Sri Lanka’s population has a bank account but many do not register to do digital banking. It is estimated there are 23 million debit cards and 1.7 million credit cards. I think there should be more credit cards in the market. The younger generation does not want to use any card, they prefer to use a mobile phone. So in the future cards will likely be phased out. In Korea the Government has strongly encouraged the use of credit cards, even providing more flexible payment timelines. When there is deeper penetration of credit cards it is easier to bring customers onto digital platforms and encourage use of QR codes and link them to payment apps. QR codes were introduced to banks in October 2018 and in my personal opinion banks are not coming onboard as fast as they should. They are behind schedule but we are hoping to get all the major banks on board in the first half of this year.
One common criticism from merchants is that they have to pay 2% extra to use cards. Is this also an issue? Are banks pricing this facility too high?
This is an issue and this is why we are introducing the Lanka QR code, which is a code that will reduce the Merchant Discount Rate (MDR). Sometimes the MDR is 1.5% to 3.5% in Sri Lanka, this is a very large margin for some merchants and they also have to pay a monthly rental. One issue is in Sri Lanka these machines are very costly, more costly than other countries. In Sri Lanka it’s normally Rs. 50,000-70,000 but in India it could be Rs. 20,000-30,000. One reason the price is so high is because of the taxes, at one point in the early days the combined tax rate was as much as 20%, but now it is about 8%. So this is not accessible to the tea shop owner or the vegetable vendor. Sometimes the cost is higher than the transaction. It is illegal for the merchant to ask the customer to pay the cost. So this is a major problem. To onboard more vendors onto the financial system we have proposed a 1% MDR cost for the Lanka QR code since it was introduced in October 2018. This year it has been reduced to 0.5% for each transaction. In addition Government institutions will not charge MDR so payments done with Ceylon Electricity Board or Water Board will be free of MDR. Under the Lanka QR Code Petrol stations will also be free of MDR.
To onboard more vendors onto the financial system we have proposed a 1% MDR cost for the Lanka QR code since it was introduced in October 2018. This year it has been reduced to 0.5% for each transaction. In addition Government institutions will not charge MDR so payments done with CEB or Water Board will be free of MDR
How can digitisation help the unbanked?
I think the Lanka QR Code is the best way to achieve this because it is the most cost-effective. We can control the costs charged and reduce it so that smaller vendors can get on this platform. The Korean Government improved digital transactions significantly by bringing down the cost rate to 0% and the Government paying the MDR. This encouraged people to use the credit card, link it to apps or to use QR codes directly without any card. Under the Lanka QR code the merchants don’t need to have a smart phone they just need a basic phone to get SMS updates of transactions so that reduces their cost even further.
There have been concerns raised by the industry and other stakeholders regarding fintech regulations. Some have opined that the Central Bank needs to move faster with regulatory mechanisms. Do you think this has been adequately addressed and what is the way forward?
I think the tables have turned now and the Central Bank is pushing banks. The National Payment Council has built a roadmap for the next three years. We are currently following the plans laid out for 2020-2022. All stakeholders are working on this plan and there is an effort to set up a separate committee to monitor all these tasks. The Central Bank’s roadmap has been circulated to all bank CEOs and we have requested for them to share their digital roadmap as well so these two can be tallied. Each bank can nominate a member to the committee and it will be that person’s responsibility to ensure the bank follows our roadmap as well. We need more banks to adopt the Lanka QR code. If at least ten banks get on board then it will develop widely around the country. It is only then the system will have interoperability and can be scaled up. Each bank has been given individual tasks to educate employees, onboard customers and increase merchants. We are also rolling out wide ranging awareness campaigns and hope to continue working with all stakeholders.
Pic by Shehan Gunasekera
