Big EFT and debit order change from South African banks

South African banks will implement a major electronic funds transfer (EFT) payment change in September, impacting direct payments and debit orders in the Common Monetary Area (CMA).

Payments Association of South Africa CEO Ghita Erling told Kaya Biz that the change followed regulators’ decision to discontinue processing EFT payments and collections within the CMA.

The CMA comprises South Africa and its three neighbours, Namibia, Lesotho, and Eswatini. Erling explained that the CMA currently uses a 1 to 1 currency.

This means that each unit of the individual country’s currency is worth exactly one unit of the common currency. Since the value is equal, no conversion is necessary.

“Because it’s structured that way, and the rand is legal tender in each of those countries, even though they all have their own currency,” she said.

“We’ve been able to treat payments between South Africa and the rest of the common monetary area as if they were domestic payments.”

She explained that this change will have two impacts: debit orders and EFT payments.

“First, if you are a debit order collector, you may no longer do that cross border. I would argue that’s entirely appropriate.”

South Africa has invested time and effort into building processes and conducting due diligence to remove rogue debit order collectors from the system. “If something goes wrong in South Africa, it’s easy for you to recover your money.”

However, since cross-border payments involve different regimes, limiting debit orders to “in-country” is sensible. “It won’t impact you as the debit order payer,” Erling said.

There will be some impact on the collectors of debit orders. 

Suppose a Namibian is using a South African insurance company, for example. In that case, that insurer will have to collect their money into a Namibian account, as opposed to a South African account.

The second impact is that South African account holders can no longer make EFT payments to account holders in other CMA countries.

They will also not be allowed to receive EFT payments from other CMA countries unless they are initiated on a global banking channel.

“The payment is still possible. But you’re going to do it in a different place in your online banking because there’s more information that is required to flow with the payment and more checks that need to be done.”

While each bank may implement it differently, this information will likely be things like the address of the party being paid. 

Even though this change will likely result in additional costs for banks, it will not be a result of the payment system. “It’s in the compliance checks,” she said. 

“The moment that a human being has to get involved in processing the payment to check some or other detail, that’s when the costs start to add up.”

The first set of changes is set for 9 September 2024. This is the final day of processing domestic EFT, including credit payments and EFT debit collections, to and from Lesotho and Eswatini.

However, there will be a couple of days after the fact to allow backend processes to close down existing parts of the system.

South African banks initially wanted these changes to be implemented even earlier. The final day of processing domestic EFT payments and EFT debit collections to and from Namibia was set for 15 April 2024.

However, the Bank of Namibia extended the effective date to 30 September 2024. As such, regulators have decided to extend this deadline.

Reasons for the change

These changes are taking place within the context of the broader Financial Action Task Force (FATF) requirements and are meant to help prevent money laundering and fraud.

Since 2023, the global financial crime watchdog has greylisted South Africa for not fully complying with international standards regarding the prevention of money laundering, terrorist financing, and proliferation financing.

Erling said that when the payer and payee have a South African bank account, they act under the same regulatory framework. 

“If somebody has to do an anti-money laundering investigation on one of the two of us, then the authorities can simply approach the local bank and ask for the information that they need,” she said.

“It’s very different when you’re paying cross-border because you’re not necessarily under the same framework. It’s harder to request information.”

For that reason, FATF requires cross-border payments to be processed very differently than domestic payments. 

The new system is generally set up on the basis that anybody involved in money transfers has to adhere to the same set of rules and standards. This includes payments made through fintech. 

The only way to easily circumvent these rules would be with cash, which has different controls and is much harder to track. 

Debit order system abuses

Erling explained that they have seen abuse on both sides of the debit order system. 

On the collectors’ side, this may amount to collecting when the party who agreed to the sale didn’t fully understand what they were agreeing to. 

On the other hand, there could be abuse when a payer disputes a perfectly valid collection from their account. 

As the cost of living crisis continues, debit order abuses from consumers are increasing. 

“There’s no question that the number of failed and disputed debit orders increases as the economic cycle becomes more challenging,” she said.  

“That does cause considerable concern for the collectors and users of the debit order system.”

Erling said that they are also seeing a trend of consumers putting stops on debit orders. 

She urged consumers to be careful when they give out their bank account details and to be very sure that they want to sign a particular agreement before doing so. 

“We generally encourage consumers to engage with the service provider who’s collecting from their account and to make an arrangement with them rather than to use the banking system to simply dispute a valid collection that has happened against their bank account.” 

“It’s very important that we enhance that level of open communication.”