Changes to cross-border payment system
Anatomy and operations
New regulations regarding cross-border payments in the Common Monetary Area (CMA) will be implemented in September this year and could help Namibia to be removed from the Financial Action Task Force's notorious grey list. Independent economist Josef Kefas Sheehama examines the issue.
Despite often causing nervousness, it is crucial to remember that compliance, security and safety are paramount in a world plagued by highly sophisticated financial crime.
What is PSD-9?
In 2022, the Bank of Namibia (BoN) released PSD-9.
The new regulation was supposed to become effective this month. However, the BoN’s latest directive has extended the implementation date for cross-border payments under PSD-9 until September this year.
This directive specifies how electronic fund transfer (EFT) transactions are to be conducted within the National Payment System, aiming to ensure their cost-effectiveness, efficiency, safety and security. PSD-9 regulations govern both cross-border (regional and international) and domestic (debit and credit) electronic fund transfer activities.
Moreover, PSD-9 aims to regulate how banking institutions within the Common Monetary Area (CMA) process EFT transactions, both domestically and internationally. The CMA consists of Namibia, South Africa, Lesotho and Eswatini.
The regulation mandates that EFT transfers from Namibia to other nations be handled and reported as cross-border transactions, forbidding the processing of Namibian EFT transactions as domestic transactions in other jurisdictions.
Therefore, these payments shall be treated as international transactions in accordance with the BoN’s determination regarding the processing of EFT transactions in the National Payment System under PSD-9.
EFTs
In addition to addressing issues concerning transaction visibility and transparency, PSD-9 aims to tackle problems related to the classification and reporting of low-value Namibian EFT transactions across borders, particularly within the CMA.
Currently, domestic EFT transactions in South Africa are categorised as low-value transactions within the CMA.
However, the way banking institutions in the CMA handle and process these transactions raises regulatory concerns, despite their economical and convenient nature for both individuals and corporations.
Consequently, the change will result in cross-border payments and collections no longer being facilitated through domestic services and internal electronic funds transfer (EFT) channels provided by banks.
These changes will impact all banks, customers and companies engaged in cross-border payments and collections, aiming to enhance the effectiveness and security of such financial transactions.
Therefore, the Global Payment Society for Worldwide Interbank Financial Telecommunications (Swift) must be utilised to initiate all cross-border payments to individuals or businesses within the CMA.
Turnaround times
As a result, businesses and individuals should anticipate longer payment turnaround times.
This is because, in order to meet regulatory reporting requirements for the balance of payments (BoP), the beneficiary will also need to provide additional disclosures regarding the payment’s purpose and beneficiary to their bank before the funds are released into their account. This adjustment aligns with national and regional modernisation expectations while ensuring compliance with regulatory standards.
Cross-border payments can incur high costs, consume time and involve risks.
Utilising Swift rails within the regional cross-border real-time gross settlement (RTGS) system in the Southern African Development Community (SADC) may result in delays.
While at the domestic level, infrastructure and governance structures enable the private sector to efficiently provide payment and financial services, at the international level, lack of coordination leads to inadequate provision and inefficient arrangements for cross-border transactions.
The absence of common settlement, rules and governance necessitates counterparties in different jurisdictions to rely on costly trusted relationships in today’s payments landscape.
Security
Despite extensive efforts and safety measures, security remains Swift’s foremost concern, as fraudsters persist in employing highly sophisticated techniques to defraud banks and individuals of their funds.
Cross-border payments are inherently time-consuming due to various checks, controls and multiple layers involved. Incomplete remittance information and anti-money laundering and fraud checks are among the primary reasons for delays.
Institutions employ different processes to mitigate risks, and cross-border payments must adhere to regulatory requirements in the originating, destination and any intermediary jurisdictions. Each country has its own systems and regulatory authorities to safeguard consumers, personal data and prevent fraud and illegal activities.
Moreover, banks face stringent regulatory and compliance requirements for anti-money laundering (AML) and Know Your Customer (KYC), potentially increasing setup costs despite the volume of cross-border payments not justifying the incurred compliance expenses.
Consequently, maintaining network security remains a continuous challenge for Swift. Nevertheless, Swift persists as the leading provider of secure financial messaging services globally.
‘Grey list’
Furthermore, to align with the expectations of both national and regional modernisation, payment adjustments must adhere to regulatory requirements.
The international community has long recognised the necessity for improved cross-border payments.
With the assistance of PSD-9, Namibia stands to be removed from the grey list.
The Financial Action Task Force (FATF), the Paris-based global financial crime watchdog, in February this year included Namibia on its “grey list” of countries, requiring heightened monitoring for their ineffective measures against money laundering and terrorism financing.
The PSD-9 move primarily benefits Namibia’s economy, financial systems and the safety and security of its citizens.
Policymakers, regulators and law enforcement agencies must convince the international community of Namibia’s value while simultaneously enhancing our legal and compliance framework to maintain competitiveness on the global stage. These changes should prioritise safety and security while fostering economic growth, international trade, global development and financial inclusion.
AfCFTA
The African Continental Free Trade Agreement (AfCFTA) will significantly involve PSD-9 due to the continent’s expanding financial flows.
Cross-border transactions are increasingly essential, especially with the majority being commercial transfers accelerated by sub-regional payment systems like the SADC-RTGS.
However, for a new regulation to effectively function in CMA countries, it must consider global credibility and the ability to simplify, clarify and make transactions affordable.
Especially in the current global trade and economic landscape, CMA cross-border payment countries must demonstrate adaptability and flexibility.
In light of these challenging issues, there exists an opportunity for a solution where technological advancements are leveraged to benefit CMA countries, fostering the creativity needed to surmount these obstacles.
Therefore, to ensure universal understanding of CMA PSD-9 cross-border payments, the BoN should develop educational materials in all of Namibia’s indigenous languages. Excluding any group from these resources would render the new regulation ineffective and unable to achieve its objectives.
These materials should be distributed to regional council offices by the BoN.
What is PSD-9?
In 2022, the Bank of Namibia (BoN) released PSD-9.
The new regulation was supposed to become effective this month. However, the BoN’s latest directive has extended the implementation date for cross-border payments under PSD-9 until September this year.
This directive specifies how electronic fund transfer (EFT) transactions are to be conducted within the National Payment System, aiming to ensure their cost-effectiveness, efficiency, safety and security. PSD-9 regulations govern both cross-border (regional and international) and domestic (debit and credit) electronic fund transfer activities.
Moreover, PSD-9 aims to regulate how banking institutions within the Common Monetary Area (CMA) process EFT transactions, both domestically and internationally. The CMA consists of Namibia, South Africa, Lesotho and Eswatini.
The regulation mandates that EFT transfers from Namibia to other nations be handled and reported as cross-border transactions, forbidding the processing of Namibian EFT transactions as domestic transactions in other jurisdictions.
Therefore, these payments shall be treated as international transactions in accordance with the BoN’s determination regarding the processing of EFT transactions in the National Payment System under PSD-9.
EFTs
In addition to addressing issues concerning transaction visibility and transparency, PSD-9 aims to tackle problems related to the classification and reporting of low-value Namibian EFT transactions across borders, particularly within the CMA.
Currently, domestic EFT transactions in South Africa are categorised as low-value transactions within the CMA.
However, the way banking institutions in the CMA handle and process these transactions raises regulatory concerns, despite their economical and convenient nature for both individuals and corporations.
Consequently, the change will result in cross-border payments and collections no longer being facilitated through domestic services and internal electronic funds transfer (EFT) channels provided by banks.
These changes will impact all banks, customers and companies engaged in cross-border payments and collections, aiming to enhance the effectiveness and security of such financial transactions.
Therefore, the Global Payment Society for Worldwide Interbank Financial Telecommunications (Swift) must be utilised to initiate all cross-border payments to individuals or businesses within the CMA.
Turnaround times
As a result, businesses and individuals should anticipate longer payment turnaround times.
This is because, in order to meet regulatory reporting requirements for the balance of payments (BoP), the beneficiary will also need to provide additional disclosures regarding the payment’s purpose and beneficiary to their bank before the funds are released into their account. This adjustment aligns with national and regional modernisation expectations while ensuring compliance with regulatory standards.
Cross-border payments can incur high costs, consume time and involve risks.
Utilising Swift rails within the regional cross-border real-time gross settlement (RTGS) system in the Southern African Development Community (SADC) may result in delays.
While at the domestic level, infrastructure and governance structures enable the private sector to efficiently provide payment and financial services, at the international level, lack of coordination leads to inadequate provision and inefficient arrangements for cross-border transactions.
The absence of common settlement, rules and governance necessitates counterparties in different jurisdictions to rely on costly trusted relationships in today’s payments landscape.
Security
Despite extensive efforts and safety measures, security remains Swift’s foremost concern, as fraudsters persist in employing highly sophisticated techniques to defraud banks and individuals of their funds.
Cross-border payments are inherently time-consuming due to various checks, controls and multiple layers involved. Incomplete remittance information and anti-money laundering and fraud checks are among the primary reasons for delays.
Institutions employ different processes to mitigate risks, and cross-border payments must adhere to regulatory requirements in the originating, destination and any intermediary jurisdictions. Each country has its own systems and regulatory authorities to safeguard consumers, personal data and prevent fraud and illegal activities.
Moreover, banks face stringent regulatory and compliance requirements for anti-money laundering (AML) and Know Your Customer (KYC), potentially increasing setup costs despite the volume of cross-border payments not justifying the incurred compliance expenses.
Consequently, maintaining network security remains a continuous challenge for Swift. Nevertheless, Swift persists as the leading provider of secure financial messaging services globally.
‘Grey list’
Furthermore, to align with the expectations of both national and regional modernisation, payment adjustments must adhere to regulatory requirements.
The international community has long recognised the necessity for improved cross-border payments.
With the assistance of PSD-9, Namibia stands to be removed from the grey list.
The Financial Action Task Force (FATF), the Paris-based global financial crime watchdog, in February this year included Namibia on its “grey list” of countries, requiring heightened monitoring for their ineffective measures against money laundering and terrorism financing.
The PSD-9 move primarily benefits Namibia’s economy, financial systems and the safety and security of its citizens.
Policymakers, regulators and law enforcement agencies must convince the international community of Namibia’s value while simultaneously enhancing our legal and compliance framework to maintain competitiveness on the global stage. These changes should prioritise safety and security while fostering economic growth, international trade, global development and financial inclusion.
AfCFTA
The African Continental Free Trade Agreement (AfCFTA) will significantly involve PSD-9 due to the continent’s expanding financial flows.
Cross-border transactions are increasingly essential, especially with the majority being commercial transfers accelerated by sub-regional payment systems like the SADC-RTGS.
However, for a new regulation to effectively function in CMA countries, it must consider global credibility and the ability to simplify, clarify and make transactions affordable.
Especially in the current global trade and economic landscape, CMA cross-border payment countries must demonstrate adaptability and flexibility.
In light of these challenging issues, there exists an opportunity for a solution where technological advancements are leveraged to benefit CMA countries, fostering the creativity needed to surmount these obstacles.
Therefore, to ensure universal understanding of CMA PSD-9 cross-border payments, the BoN should develop educational materials in all of Namibia’s indigenous languages. Excluding any group from these resources would render the new regulation ineffective and unable to achieve its objectives.
These materials should be distributed to regional council offices by the BoN.
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