South Africa embraces FinTech – discards cheque culture

On October 2nd the Payments Association of South Africa announced that it will be completely dropping its support for the cheque withdrawal methods in the country. It may seem like a disillusioned decision from a government organization very distanced from the reality of daily SA life, but in reality, it is a decision in which several large South African banks took part in as well.

You see, The Payments Association of South Africa, also known as PASA consists of several large commercial and investment banks as well as government representatives. According to their calculations and data, the use of cheques in SA has decreased by nearly 30% in 2019 alone and a further 80% decrease in 2020 due to the COVID-19 pandemic as well as a general loss of interest in the method.

By general metrics, it’s predicted that only 0.1% of all payments inside the country are made through cheques. Due to this minuscule demand for the method, banks are suffering additional costs and fees to keeping the service running. This includes having manpower for processing and approving these checks as well as making sure that everything goes through accordingly.

Due to this unnecessary cost, banks should be more than happy to get rid of cheques altogether.

But there is also another reason as to why cheques have lost their touch in a country that seemingly lived for these expensive pieces of paper you could turn into a new house or car. And that reason is FinTech.

Digital is just better

Due to a lot more accessibility as well as safety during the pandemic, the majority of South African citizens favored digital methods of transferring and receiving money over writing cheques or using cash in that sense.

It is likely due to South Africa’s heavy concentration of FinTech startups as well as significant mobile penetration even in the most remote areas of the country. Almost every citizen in South Africa has some access to digital banking, be it through a direct internet connection or an SMS system, there is always money available for the customer to receive and send.

Classifying income

One of the main advantages of cheques was that it was extremely easy to classify them as direct income from the employer or through other means. The employee would receive a cheque with their employer’s signature and the bank would do the heavy lifting in classifying it under salary. But that small advantage has also been overruled by just declaring several types of transactions as stable monthly payments.

However, due to the country’s relatively large self-employed population, it may be a slightly harder transition to fully digital banking methods than many anticipate. You see, South Africa is riddled with FX brokerages that give locals the means to generate income without having to necessarily apply for a job or to pay anything upfront. These people become traders, and classify their incomes as capital gains if they withdraw it through a digital method. However, an advantage of the cheque was that it could just fall under a regular base salary, thus avoiding any further documentation and taxes from capital gain.

Waiting times & commissions

For example, there are specific methods of trading that generally require the trader to withdraw as often as possible. Most of them entail fast and small trades to capitalize on minuscule market movements and are usually called forex scalping strategies or day trading strategies. Due to the fact that these strategies require frequent withdrawals, most traders preferred using the cheque system due to its relatively lower commission base from the bank. Nowadays it’s not uncommon to see a digital withdrawal to have a 1-2% commission base, while a cheque system would have either less than 1% or none at all. Regardless of the small withdrawals, the fees would eventually stack up.

The same issues can be mentioned with non-scalpers who trade long-term and withdraw significant amounts of money, thus exposing themselves to much larger commissions.

If we take a regular FX broker as an example, we usually get several methods of withdrawal through different channels. For this example, we’d like to use Axiory, a broker supported in multiple jurisdictions, which makes it a good base to see withdrawal activity. With this particular broker, we see 8 different methods of withdrawal all of them having their own commission base or being free in Axory’s case.

Unfortunately, very few brokers offer commissioned withdrawals nowadays, thus either forcing the traders to go with the least expensive options, meaning longer waiting times, while cheque can be received and cashed out within minutes.

It’s definitely not black & white

Although the new system will benefit the majority of the population, there will still be people willing to either pay for an option for cashing out via cheque or just signing up with a bank that specifically offers that kind of service.

PASA should still be commended for putting forward the usefulness of tech innovation in the country and promoting the use of local FinTech opportunities as opposed to the old and rigid method of going to the bank and getting cash, especially during a deadly virus which just keeps on getting worse.