Creating a costless electronic payments system for the developing world

Given the level of inventiveness and the number of new products coming on-

stream in the area of new payment technology, particularly in payments involving

mobile phones, it may be tempting to think that the move away from cash

towards electronic payments is inevitable. But the developing world faces

different challenges and has different opportunities provided by the smaller

installed base of legacy technologies and rapidly expanding mobile phone usage.

Some merchants, especially small enterprises in remote locations who may

operate in a mobile environment or in open-air markets etc., do not have reliable

electricity supply and telephone landlines with which to operate traditional Point

of Sale (POS) terminals – and are unwilling to pay substantial fees charged upfront

and ongoing.

Those who receive funds often get paid in cash, or even when they do get paid

electronically, immediately go to the ATM or the mobile phone agent to change

the funds into cash.

The recent move by one African country to charge 10% tax on all transfers of

funds made via mobile phone is surely in the wrong direction, encouraging people

to revert to sending cash as a cheaper alternative.

Banks, card associations, new technology providers and mobile phone operators

all expect to make profits from the transactions. And given the relatively low

spending habits of the average citizens who are receiving government benefits or

receiving transfers from family members, there is little incentive for them to

contribute marketing spend to fund any part of the process.

RTpay is a non-profit group with considerable experience in payment processing,

including the development of central clearing, payroll and money transfer

software which can be provided at no cost to governments. The aim is to develop

a payments system that enables those citizens who do not have bank accounts

and/or the availability of commercial debit cards to have access to a payment

capability from a Government Central Accounts System (GCAS). This account

could be managed via a stored value card or via a mobile phone payments

application or both.

A critical benefit of this system would be that it would be operated at no cost to

either side of a payment transaction; there would be no transaction fees or

charges for merchants or individuals, effectively making every electronic

transaction simpler and more attractive than cash payments. Furthermore,

incentive schemes would be designed to sit alongside the electronic payments to

provide even more reasons for consumers and businesses to move away from

cash and towards e-payments.

The main features of such a centrally managed clearing system could be:

For internal transfers between family members, SMS or voice-based mobile

phone transactions can be used to switch funds from one account to

another.

For transfers from outside the country, for example from USA, a local

clearing by Automated Clearing House (ACH) can be established for next

day settlement in USA and immediate conversion and settlement in the

local currency to the recipient’s account. (Note: all such transfers would be

analyzed in real time for anti-money laundering and fraud.)

The GCAS can operate an online payroll service enabling employers to

simply transfer a single lump sum representing gross earnings for all of its

employees to the GCAS, with a significant saving in time and administrative

costs. All due taxes can then be calculated for each individual employee,

taking into account allowed deductions, discounts and subsidies, before the

net amount of salary is settled directly to the GCAS account of the

employee.

For individuals with multiple employments, funds received by GCAS are

allocated to the same account, so that the correct adjustments can be

made in relation to all sources of income.

Where direct benefits such as pensions, unemployment support, child

support etc. are due, these can also be paid in the same manner into the

same GCAS account.

Small businesses would have their own account at GCAS, separate from

that of their owners, for receiving and paying funds. To encourage better

financial inclusion, simple accounting and record-keeping functionality will

be incorporated into the account structure.

Any merchant that sells to the public will require a method of accepting

electronic payments. This may be via mobile phone communication or by

card reader – or probably both. The cost-effective way of doing this is to

use a card reader attachment that can be connected to a mobile phone to

convert it into a simple card reader, such as those supplied at relatively low

cost by companies such as Square and iZettle.

As part of the system both the purchaser and the merchant would be

encouraged to use their financial account at the GCAS. However, as part of

the structure, the merchant would also be able to accept commercial

branded credit and debit cards from customers who have bank accounts on

payment of the normal fees.

All payments using a GCAS local stored value card would be free to the

merchant, so there would be no reason for them not to accept such

payment. This is an important aspect of the zero cost option; it is not only

simpler but cheaper for a merchant to be paid electronically than to

accept cash, as well as providing simpler built-in administration and book-

keeping functions.

The customer never has any costs if they stay electronic; indeed, under a

program proposed and designed by RTpay there would be bonuses for

keeping funds on account and incentives associated with each transaction

performed.

One option available to governments is to further encourage use of the e-

payments system by adding a tax charge on any conversion to cash. A levy

of, say, 10% would help to encourage citizens to stay electronic.

The central GCAS account for each citizen could also provide additional

value for governments by recording social information, with incentives for

regular health checks and immunizations, further education and other

activities.

Where a government chooses to offer product-specific discounts or

benefits to some subset of citizens, for example, discounts on food or

essential goods for mothers of new babies, this can be applied within the

GCAS-managed transaction as an invisible subsidy - the merchant would

receive the full value for the goods without being aware that a government

subsidy was included and that therefore the customer’s GCAS account had

been debited by less than the full purchase price.

Collection of VAT and other indirect taxes from merchants can be

implemented either as a direct payment or as a real-time reporting

function.

The efficiency, fairness and fraud-resistance of the collection of payroll

taxes can be significantly improved, while lowering the administrative

demands on employers.

Financial assistance payments of a number of types, whether to individuals

or to small companies, can be settled through the GCAS clearing structure.

Implementation of a zero cost basis system, such as that described here, would

require an initial relatively modest capital investment, which could be provided

either by the government itself or by an outside agency. However, the increase in

tax revenue due to greater visibility of merchants’ income from electronic reports,

and the greater efficiency in the collection of payroll taxes, together with ongoing

administrative savings for both government and merchants, would more than

compensate for capital investment and ongoing running costs.

Rather than the ‘shotgun’ method of charging a levy on all money transfers over

mobile phones, which discourages use of electronic transactions, applying this

charge only if the recipient converts to cash is an effective way to encourage e-

payments. But this policy requires that all merchants and service providers have

the ability to accept such payments – and can do so at no cost to them.

In summary, a central government-backed payment system with no costs for

either the recipient or the merchant can greatly help the development of

commerce in the developing world. Commercial banks and international card

associations will still have an important role for the more wealthy, but

governments have the capability to create a free facility to encourage the use of

electronic transactions for those who do not have sufficient funds to justify bank

accounts.

The costs

With no bank or card association fees, the costs can be kept to a minimum:

1. Clearing software will be provided free of charge by RTpay.

2. Debit cards (or software apps for mobile phones) are not expensive – and

could be financed by commercial entities in return for advertising and/or

data mining.

3. Call center support can be managed by the government, with technical

assistance from RTpay.

4. Mobile-phone based debit and credit card readers are low cost items, as

are applications for mobile phones.

5. There remain a number of questions for governments to address as part

of their licensing terms for financial institutions and other providers

associated with such a scheme; for example, would mobile phone

companies expect to charge fees on GCAS transactions? Would banks

require compensation, even though there may be virtually no usage of

their networks?

6. Incentive programs for cardholders to use e-payments would add costs,

but these may be covered by commercial sponsorship and advertising, as

with the cards themselves.

7. Management of the data servers is also a cost item that can be viewed as

open for financing, based upon the value to commercial entities of some

elements of the data.

8. In some territories, such as Nigeria, Russia and India, governments have

introduced National Identity Cards that incorporate chip-based

technology that enables the card to act as a stored value card as well as an

identifier for tax and benefits purposes; the production and issue of these

cards is funded by allocating remaining space on the chip to third-party

service providers, enabling them also to be used as transport cards,

insurance cards and healthcare records, among other things.

There remains a question as to whether those with existing bank accounts would

wish to also use a government-based card as an additional payment method. If

these individuals and businesses would prefer to receive funds exclusively into

their bank account – and to use their bank-based payments card – they may be

required to pay the appropriate merchant’s fee for their purchases, so the small

merchant is still provided with e-payment services at zero cost.

Income improvement for governments, employers, businesses and citizens

For governments, significant reductions in tax fraud and reduced administrative

overheads in tax collection and government-to-citizen payments and subsidies

provide capacity-building benefits to payments in increased revenues and

reduced costs. But the advantage of being able to deliver targeted support to

citizens and businesses is also a valuable bonus.

For employers, there is considerable cost and time saving from no longer having

to manage payroll deductions and calculations. All that would be needed under

the GCAS system is one single payment for the gross wages of all staff on each

payment.

For businesses big and small, having a method of accepting payments that avoids

all costs – and is simpler account and cheaper to handle than using cash - is a

major benefit.

For citizens, obtaining what is essentially a government-backed bank account –

with no fees – is part of the development of a credit history and fiscal

responsibility. Perhaps more important for many will be knowing they are getting

their full, correct wages and benefits – and, if the RTpay proposals for incentives

are adopted, the citizens can earn interest and bonuses.