New foreign-exchange regulations to open up cross-border transactions and trade could backfire on the national treasury as other onerous financial regulations threaten to limit the goals of increasing competition.
In the medium-term budget policy statement, the treasury said it would allow money remitters such as MoneyGram and Western Union to operate as standalone entities without a South African banking partner. It also planned to remove ownership restrictions on international participation in foreign-currency exchange bureaus in a bid to drive competition and reduce costs.
The finer detail of how these cross-border regulations will work and be implemented is still to be revealed by the South African Reserve Bank. But in the broader sense, it does mean that money remitters like MoneyGram, which is now partnered with Standard Bank, and Western Union, supported by Absa, could cut costs for foreign migrant workers who use these services to remit money to their home countries.
However, the problem is that one of the main cost drivers of money remittances is the regulatory requirements. The money remitters would still have to be regulated, which means that customers still need to be vetted under the Financial Intelligence Centre Act (Fica) and all transfers registered with the South African Reserve Bank.
Currently, central bank rules require that anyone receiving foreign currency has to cash it in within 30 days. This prevents individuals from holding a balance in their PayPal account that they could use to make purchases, hence the requirement for a bank account.
PayPal does not offer cash-out facilities in South Africa and therefore still requires the services of a local bank to clear funds between a South African PayPal account and a bank account. Chris Savides, the general manager of FNB complementary services, which manages the partnership with PayPal, said PayPal did not have a local presence and it would have to register as a remitter of funds.
Mpesa, which partners with Nedbank, is also a payment system rather than a remitter. Ultimately, it is easier for an international player to partner with a local bank that already has systems in place. Savides said the company had no intention of registering at this stage and was happy to piggyback off FNB’s systems. “Not only do we facilitate the movement of funds and reporting, but we also handle Fica and other legal requirements. There are synergies for PayPal to operate with a local bank.”
One of the regulations that needs to be addressed to reduce costs is the Reserve Bank requirement for anyone receiving foreign currency to cash it in within 30 days. As South African rands are not a PayPal currency, PayPal balances are held in foreign currencies such as dollars or sterling.
A person who has received funds in their PayPal account may not use this money to purchase goods from overseas, but is forced to cash in the balance in South African rands and then convert back to a foreign currency to make a purchase. This increases the cost of transacting and creates the need for a linked bank account.
According to a PayPal account-holder, if he had to ask for a refund on a purchase, he could lose money if the volatile rand weakened. “I’ve had a PayPal account for about five years and have had money [United States dollars] refunded into it on a few occasions. The money is converted back to rands with some loss. Still, PayPal is better than having to fill in forms at the bank to get Reserve Bank approval to buy something that costs $1,” he said.
“The problem with PayPal currently is that it precludes South Africans from selling on online overseas sites, such as eBay, unless they have an FNB account. This prevents people from making a living by selling things online.”
Nedbank and Vodacom’s mobile money transfer service is a domestic payment platform, and not a cross-border money remittance platform like MoneyGram or Western Union or a payment platform like PayPal that moves currency across borders for e-commerce transactions on the web.
The Reserve Bank’s requirement for Vodacom to partner with a bank was because to foreign-exchange regulations, but because of rules regarding domestic deposit-taking (the Banks Act) and e-money regulations, neither of which was affected by any change in foreign-exchange regulations.
PayPal happy to ‘piggyback’
FNB’s PayPal offering will not be affected by the changes to the foreign-exchange regulations. PayPal is not a cash remittance company but a payment platform. A money remittance company provides a payment point where individuals pay over cash, which is transferred to a payment point in another country where the recipient can receive the equivalent cash in their own currency.
However, PayPal is an electronic platform and still requires the services of a local bank to clear funds between a South African PayPal account and a bank account. Although an individual can pay an overseas service provider through a PayPal account using any credit card or cheque card, in order to receive funds from abroad they need to have an FNB bank account.