2017 Payments Landscape ReportSouth Africa

IntroductionWelcome to the first Sage Pay Payments Landscape Report South Africa, which looks into trends in the flow of cash between businesses and consumers, emerging payment methods and industry innovation in South Africa. After publishing our payments report in the UK for six years, we are delighted to be launching it in South Africa for the first time, aiming to provide an insightful portrait of the industry online, offline, and on mobile.

Every customer who runs a business tells us that managing their money takes up a huge amount of their time – time they could be spending running their business.

At Sage Pay South Africa, our aim is to facilitate the movement of money throughout the transaction lifecycle, saving our customers time and money, and eliminating errors. The automation and integration of their software and payment streams is where we’ve found we can really add value.

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of Sage customers

cite not getting paid on time as very or fairly frustrating

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32%

Both businesses and consumers are beginning to experiment with new payment methods, especially when it comes to online transactions. In particular, those in their 20s now find it natural to make payments online and via mobile; in 2015, 1% of retail sales were made online in South Africa, according to World Wide Worx. We are, no doubt, behind the global trend, but online sales are definitely picking up.

What we’ve found is that as much as businesses want to provide multiple payment methods to consumers, they are finding it difficult to integrate new technology due to cost.

A large portion of the South African population still do not have a bank account, which results in a lot of unbanked cash and a low volume of credit card transactions. Meanwhile, mobile technology has only just started to appear. The cost for businesses to invest heavily in new payment technologies, such as NFC, is therefore still too high, based on card adoption rates in the country. It’s not reluctance on the part of business, as much as businesses remaining in step with consumer behaviour. However, consumer attitudes are changing fast and businesses need to keep up.

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Security continues to be a top priority for both businesses and consumers in South Africa when it comes to payments; e-commerce has not been adopted as quickly as it could have been, largely due to fears about fraud.

Although the adoption of EMV compliant, pin-based technology has been popular, emerging technology like biometrics has been embraced by major banks because it provides a greater degree of security, and it is safe to assume that this technology will soon move into the retail industry too.

It’s an exciting time for payments in South Africa. With the right technology in place to manage the movement of money, and a fully integrated transaction lifecycle, businesses are set to improve their cash flow and their bottom line. Meanwhile, offering the best possible service to customers when it comes to payments will guarantee they future-proof their business in our rapidly-changing payments landscape.

Charles Pittaway MD Sage Pay South Africa

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Fraud prevention can still be stepped up by businesses

At a glance, here’s what matters in 2017

Security remains the number one issue for consumers

Not paying your suppliers on time could affect sales and brand reputation

Plastic payments such as debit and credit cards are still the most frequently carried payment methods for consumers

Providing a range of payment options is now expected of businesses

Shopping in store is still preferable to buying online for consumers

Mobile and social payments still raise security concerns

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MethodologyTo ensure a broad view of the payments industry, we surveyed 1,033 South Africa consumers to understand their views on making payments.

The interviews were conducted online by Morar in September 2016 using an email invitation and an online survey. Quotas were set to ensure reliable and accurate representation of the total populations aged 18 and older.

Results of any sample are subject to sampling variation.

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01. On the cusp of change— and the consumer is king

Consumers are driving innovation and mobile payments are on the rise. People want the choice to pay their way and businesses must match up to expectations.

02. The payments landscape

03. Consumer preferences

05. The importance of choice

07. Online security

09. Innovation in the context of regulation

11. Sage says

12. Cash flow confidence is crucial for businesses and the economy as a whole

Accelerating payments is a priority for businesses. Most still use banks as a finance source, shying away from alternative finance amid security fears.

14. Alternative funding for businesses

16. Sage says

17. Security, the key to confidence in payments

Making transactions securely remains a priority for businesses that use payments systems and the people who buy from them. With ways to pay expanding, preventing fraud will continue to be a major focus.

20. Fraud is a serious business

21. Sage says

22. Conclusion

23. What’s next for payments?

24. About Sage Pay

Contents

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Chapter 1

On the cusp of change— and the customer is king

The payments landscapeWorldwide, Africa remains one of the areas with the least number of adults with a bank account. Yet South Africa has the most technologically advanced and accessible banking system on the continent, offering great potential for those operating in the payments space.

Almost a quarter (23%) of South Africans were unbanked in 2015, down from 25% in 2014, according to the TNS Consumer Finance Finscope 2015 survey. This has slowed the adoption of online payment options among consumers, however alternative payment methods are on the rise.

Mobile phone usage in South Africa is high, with nine in 10 people owning a mobile phone – and a third of those are smartphones, according to figures from the Pew Research Center. However, only 13% of smartphone owners use internet banking and almost a third (31%) use cellphone banking, according to the TNS Consumer Finance Finscope 2015 survey.

The challenge ahead for those in the payments sector will be to develop the right technology to support how consumers and businesses in South Africa want to save, spend, trade and invest their money.

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01. 02. 03.

£Consumer preferencesTraditional payment methods, such as credit and debit cards, and cash, are still the most popular among South Africans, yet to be significantly challenged by mobile and contactless payments, which are gaining ground in markets like the UK and the US. Eighty-four per cent of those we surveyed in South Africa regularly use debit cards, 80% cash, and 48% credit cards. Meanwhile, EFT debit payments are regularly used by just over a third of those we surveyed. Only 10% say they regularly use mobile payments such as Apple Pay and only 3% say they use contactless technology.

South Africa's largest mobile phone operator Vodacom this year announced it would be scrapping its M-Pesa mobile money transfer system in the country, which allows people without bank accounts to deposit, withdraw and transfer money using their mobile phone. Although mobile usage is high, operators need to serve customers in the way that best suits them to ensure adequate uptake and continued usage.

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For now, consumers say they are most comfortable spending larger amounts of money via EFT debit and credit payments, and least comfortable using cash. The maximum value of goods consumers say they’d feel comfortable purchasing via EFT credit payments was R 7599.

Interestingly, older age groups demonstrate a greater willingness to move away from cash, with 59% of over 50s saying they either don’t deal in or have littler dealings in cash, according to research.1

Businesses are similarly wary of cash with over a third (34%) of organisations saying they have been the target of cash theft by a member of staff and 43% admitting to losing cash due to human error.2

2 Based on an online survey with 306 small and medium business leaders from across South Africa, conducted by Viga in October 2016.

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The importance of choiceSouth African consumers are also using a range of payment methods rather than sticking to just one and perceive South African businesses as slow to adopt new payment methods. Nearly half of those surveyed (49%) agree that South African businesses are lagging behind other countries when it comes to introducing new payment methods, and 38% think they are lagging behind what is possible when it comes to adopting new methods of payment.

What’s more, almost all of those surveyed (96%) see the value in businesses offering multiple payment methods and say it promotes a modern and progressive image. Fast and secure payment methods such as PayPal and in-app payments are most likely to make a business appear modern and progressive say consumers.

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“We offer cash payments, direct deposits and debit order payments,” explains Ryan Brown at Martin’s Funerals. “I don’t do debit orders via credit cards, as there is still caution in South Africa around monthly payments from credit cards.”

Nine out of ten consumers in South Africa say they are more likely to shop somewhere if they are given a choice in the way they can make purchases.

“Overall, it’s important for clients to have multiple ways to pay, but we are cautious to venture into new payment methods as if customers do not feel secure, we could potentially lose business,” says Silvana Pereira at Propworx. “Some clients still wish to pay us directly through our bank account, which we use Sage One software for.”

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Online securityWhile e-commerce has taken off in markets around the world in recent years, this trend has yet to gain the same traction in South Africa, where adoption is still low by global standards and security fears are significant.

“Online shopping platforms are very good” explains Ryan Brown at Martin’s Funerals. “The newer ones are where people are more cautious. Attitudes do change after people use them once or twice and see that there isn’t a problem.”

“Up to 20-30% of my sales are now made online, and customers are definitely more comfortable contacting us electronically,” adds Karyn Brocklebank at Cosmic Comics.

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Security is a significant concern for consumers in South Africa and this has impacted the adoption of online, mobile and social payments. Poor broadband coverage is another factor.

Seventy-two per cent of people we surveyed say they prefer purchasing items in store, with 42% looking online before making a purchase, but less than a third (29%) making a purchase online.

The majority of consumers say they do not trust social media platforms enough to pay for products with over half (52%) of those surveyed declaring they wouldn’t pay through any social media platform including Facebook, Twitter or Instagram.

“People’s main concern is consistency and reliability,” explains Silvana Pereira at Propworx. “If these are proven, then customers feel comfortable using that business. You have to maintain your reliability and listen to your customers. If they’re not happy with something new and technical, we will put it to one side and introduce it at a later date.”

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Innovation in the context of regulationWhile financial regulation in South Africa protects consumers and businesses from risk, it can also create barriers to innovation. However, despite this, there is a wealth of innovation in the payments sector helping to improve the convenience and cost of payments for both businesses and consumers.

South African Fintech Peach Payments announced plans in October 2016 to expand its business to Kenya and Nigeria. The three-year-old startup, which facilitates online and mobile payments in emerging markets, confirmed it’s processing more than R1-billion in transactions per year.

Meanwhile, PayU, South Africa’s largest online payment provider, has introduced a payment feature called PayU Xpress, which allows customers to pay for their online purchase with just a single click. With more and more South Africans embracing online shopping, it’s becoming increasingly important for e-commerce businesses to provide customers with convenient payment methods at checkout.

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There is clearly consumer appetite for innovation. A MasterCard study has found that 95% of South Africans use their smartphone more than any other device. It also found that 73% of those surveyed were ready to pay with their mobile phone, while First National Bank (FNB) unveiled the latest version of its app in October 2016, which has a range of new features, including the ability to make contactless payments.

However, security remains a top priority. More than half of South Africans said they would prefer to authenticate themselves with a fingerprint rather than a PIN when paying with a bank card, according to the MasterCard study. Although a low ratio claimed to use biometric authentication, more than two thirds consider these methods to be a safe way to make purchases.

In fact, in July, 2016, The Payments Association of South Africa (PASA), in collaboration with Visa and MasterCard, announced that a new standard for biometric payments had been approved by regulators. These biometric solutions could include fingerprint, palm, voice, iris or facial verification, and may even phase out chip and pin cards if they are perceived to be more secure and convenient.

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SAGE SAYS• Technology adoption, risk, convenience, cost and mobility, all drive consumer behaviour. It’s important for businesses to

understand these trends and their customers’ requirements.

• Select a service provider that is cost effective, has reasonable monthly fixed costs and competitive transaction fees. Find out if these payments services are interoperable with your existing business systems as the time-saving and accurate data transfer benefits are substantial.

• The fastest-growing payment methods in South Africa are cashless payments, so they are an important consideration for any online or offline business. Cashless payment systems can be implemented remotely or at a point-of-sale system using a website, SMS, USSD, direct mobile billing, or QR codes linked to mobile wallets and NFC readers.

• E-commerce businesses should be aware that an increasing number of consumers are accessing the web through their mobile device. If your website doesn’t look good on mobile, consumers aren’t going to stay long. Optimising websites for mobile is vital if you plan to engage in m-commerce or e-commerce.

• Security is the primary concern for consumers when it comes to mobile payments. Reassuring them that m-commerce is as safe as e-commerce, and providing multiple payment options for those who might be uncertain is therefore important. It’s also essential to ensure that your payments service provider meets all the required industry security and processing standards.

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Chapter 2

Cash flow confidence is crucial for businesses and the economy

Accelerating payments is a priority for small and medium businesses. Most still use banks as a finance source, shying away from alternative finance amid security fears.

Consumer confidence in payments may be growing as technology gets slicker and safer. However, there remains a legacy attitude when it comes to businesses managing payments in and payments out. Often, businesses do not have clear sight of this flow of money, which, in turn, can slow down payments to suppliers.

“I have noticed that if you can’t pay within a month then mostly people will not use you,” says Ryan Brown at Martin’s Funerals. “Some people wait up to 90 days to pay, which is definitely a no go for many suppliers. The smaller companies do not have the resources to handle this; it’s the reason why a lot of smaller companies are failing, in my opinion.”

However, delays in the payments cycle can directly affect both sales and brand reputation. Consumers like to know that companies they spend money with do business ethically and that includes paying their suppliers on time. The majority (89%) of consumers we surveyed say they would be more likely to interact with a business if the suppliers are paid on time and half (50%) say they would stop using a business if it regularly withheld payment from its suppliers.

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Alternative funding for businessesClosely linked to having a view of payments going in and out is the way a business is financed. The 2016 Budget Review from the South African National Treasury lays out the financial inclusion strategy for South Africa, which is pushing for small businesses to get better access to credit.

It states: “although the use of financial services is increasing, there remains a need to focus on the small business sector. Only 30 per cent of registered small businesses have access to finance. To improve this situation, government plans to introduce a shared business credit infrastructure for small businesses”.

Traditional banks are still the main provider of funding for those that need it, with alternative methods such as crowdfunding unpopular due to safety concerns. “Our banks are very good”, says Brown. “I would certainly look into alternative forms of funding. However, South Africa is usually quite suspicious when it comes to unusual forms of funding or payments.”

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“The process of applying for funding has been made a lot easier now everything can be done online,” adds Ryan Brown at Martin’s Funerals. “Unfortunately, in South Africa, you still need to do certain things on paper from an admin perspective, to avoid fraud.”

However, it’s not always easy to get access to funding. “It can be difficult”, says Silvana Pereira at Propworx. “We pursued a number of options but our bank FNB was the only one prepared to take a chance on us.”

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SAGE SAYS• Cash flow is important for all businesses, especially

start-ups. To achieve the fine balance between accounts receivable and payable, use strategies including: boosting sales with creative incentives by offering discounts, bulk orders, hosting a customer appreciation event or offering referral incentives; establish a set of standards for determining who is eligible for credit and enforce them; encourage customers to pay faster by offering them a range of convenient payment options.

• Banks traditionally still provide the majority of finance to businesses, but alternative funding options are gaining traction. A number of specialist or vertical market financing businesses have been established and the scope for business to approach alternatives to banks is increasing. These include services like invoice discounting, collaterised trade and leverage finance.

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Chapter 3

Security, the key to confidence in payments

Making transactions securely remains a huge priority for businesses that use payments systems and the people who buy from them. With ways to pay expanding, preventing fraud will continue to be a major focus.

When it comes to payments, consumers believe that security is the most important factor (58%), with cost (22%) and convenience (14%) further priorities, all ahead of speed (6%).

The majority of consumers agree that security of payments has improved in the last decade (80%) but even more (86%) remain concerned about the security of online transactions.

Most South African e-commerce merchants use 3D Secure as standard. 3D Secure aims to ensure that e-commerce transactions are authenticated by the issuing bank through said bank's chosen authentication method. All merchants that store, transmit or process cardholder data are required to adhere to the standards set by PCI DSS (Payment Card Industry Data Security Standard), which implements best security practices.

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In 2015, The Payments Association of South Africa (PASA) mandated that all South African e-commerce merchants must ensure the implementation of 3D Secure on their sites, with a uniform approach to non-compliance, followed by penalties being imposed from 1 May 2015.

Furthermore, while over half (50%) of consumers believe that online wallets and debit transactions are secure, mobile options such as Apple Pay, and contactless payment, are considered far less secure, with only 7%, 8% and 8% of consumers respectively rating them as ‘highly secure’.

Samsung announced its intention to launch its payments solution in South Africa in 2016, with the goal to start actively operating in the market by 2017. The company is working with South African regulators and banks to support the roll out.

“People are happy making online or app payments, as long as there are guarantees that it is safe,” says Ryan Brown at Martin’s Funerals. “Customer service is extremely important — people are quick to complain if something goes wrong and will put it all over social media.”

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Fraud is a serious businessWhile only 15% of those surveyed say they have been affected by online fraud in the last 12 months, 93% believe that payment providers can still improve their protection against fraud.

The South African Banking Risk Information Centre (SABRIC) reported that credit card fraud decreased by 28.6% from R353.3m in 2014 to R252.2m in 2015. However, gross fraud losses due to fraud perpetrated with SA-issued debit cards increased by 8.3%, from R237.4m in 2014 to R257.1m in 2015. Although progress is being made, more needs to be done to help consumers feel confident in making payments, no matter the channel.

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SAGE SAYS• Small and medium businesses are losing a total of R 71.6 billion each year to theft and human error

with cash. Investigate different payment methods carefully, to find the right one for your business.3

• There are a number of regulated bodies for different payment streams that have regulatory and supervisory responsibilities, to ensure the safety of money movement between transacting parties and efficient transfers. Rules for participants in these payment streams are constantly being implemented and adapted, to ensure their integrity. Make sure you keep up to date with developments.

• Businesses must stay abreast of current security and fraud risks applicable to their industry and the payment methods they use. There are numerous online resources available that cover risk prevention tips, on a wide range of topics, such as: card fraud and skimming, cheque fraud, identity theft, phishing, email hacking, online and mobile banking, and various deposit and refund scams.

• Business have access to services that can verify consumer and business identity and registration details, verify shareholders, signatories, bank details and creditworthiness. These should be used when potential exposure has been identified.

3 Calculation based on a percentage of the number of small, medium and micro enterprises in South Africa as of January 2016 and research by Viga.

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ConclusionIt’s a hugely exciting time for small and medium businesses, with a wealth of innovative technology streaming into the market and a collective desire to improve cash flow practices and financing, to the benefit of everyone in the supply chain. The growth of online and mobile transactions highlights the need for tighter security, and compliant, secure applications and support from payments providers. Listening to customers’ needs and expectations and giving them the choice they’re looking for will ensure that businesses thrive in this fast evolving payments landscape.

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What’s next for payments?What will the payments landscape look like in the coming months and years? Responding to consumer demand and preferences and keeping a close eye on emerging technologies and security measures will give businesses the best possible chance of future-proofing their brand.

Payment methodsConsumers believe that by 2020 contactless payments will have overtaken debit and credit transactions but not online wallets, which will be the most popular.

Thirty four per cent of business leaders believe cash will become extinct within the next 20 years.4

TechnologyEighty five per cent of consumers say they would be happy to use biometric technology in order to improve the security of payment transactions.

4 Based on an online survey with 306 small and medium business leaders from across South Africa, conducted by Viga in October 2016.

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ABOUT SAGE PAYSage Pay is a leading payments provider to small and medium sized businesses throughout South Africa. Sage Pay is part of the UK based Sage Group plc – partnering with more than 6 million small and medium sized businesses across 24 countries. Sage Pay is registered with the Payments Association of South Africa as a Systems Operator and Third Party Payments Provider. We are registered and regulated by the Financial Services Board. We process millions of secure payment transactions on behalf of our clients each month. Whatever your business size or needs we have a secure payment solution for you.

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