South Africa’s regulators, fintechs, payment companies and financial institutions have launched a range of powerful digital finance services and solutions over the past few years in an effort to displace cash-based payments and improve financial inclusion.
By Bradley Elliott, CEO of RelyComply
Innovations such as digital wallets, peer-to-peer lending, online credit scoring and insurtech have transformed the financial fabric during this time.
Yet for many consumers, and not just those in remote areas or low-income groups, cash remains a preferred medium for transactions. In 2023, 73% of South African point-of-sale transactions were made using cash and 95% of nationals withdrew money from ATMs at least once a month. The prevalence of cash is one key reason that global watchdogs are scrutinising the South African financial system so carefully.
Cash, although trusted by consumers, easy to use and ubiquitous, brings with it far higher risks of financial crime. Cash transactions, unlike digital payments, often leave no footprints. A reliance on cash is thus a systemic vulnerability that can facilitate financial crimes such as state corruption, organised crimes such as drug and human trafficking, illicit mining, terrorist financing, and more.
In one high profile South African case, hidden cash worth R1,2-million was found under a Mpumalanga businessman’s bed. In another, 2020’s ‘Farmgate’ saw President Cyril’s Ramaphosa’s Phala-Phala farm home robbed of millions of undisclosed foreign cash. These high-profile cash seizure stories reflect cash’s dangers and the need for systemic reforms that rebuild trust in the South African financial system.
A failure to close down these loopholes could harm South Africa’s financial status and prolong its stay on the Financial Action Task Force (FATF) greylist. It is thus imperative for South Africa to accelerate its move towards digital solutions that facilitate compliance with rigorous anti-money laundering (AML) and know your customer requirements without exacerbating financial exclusion.
Modernising South Africa’s financial system
Fintech innovators and payment service providers (PSPs) have a key role to play in modernising South Africa’s financial system, as long as they use modern AML solutions for onboarding checks and consistent transaction monitoring. These new entrants may find it simpler to build cutting edge AML frameworks from the get-go, while traditional banks are also required to shift to modern compliance platforms.
By leveraging solutions powered by artificial intelligence (AI) and data analytics, fintechs and banks can maintain flexibility in the face of evolving criminal techniques. Machine learning helps spot anomalous transactions in real-time and can flag customer identities carrying high-risk (sanctioned individuals, or those on global watchlists, for example) to make submitting timely and relevant reports simple.
Moving beyond cash transactions is more realistic with advanced AML technology providers, regulators, governments and financial institutions working together to counteract sophisticated laundering and terrorist financing. Partnerships between the public and private sectors will help secure financial integrity by sharing ideas and encouraging the use of modern AML frameworks and solutions to scale.
This keeps the entire ecosystem compliant with regulatory measures and increases determination to penalise businesses that fail supervisory checks. This, in turn, can influence policy changes that drive uptake of cashless options and encourage people to join the formal financial system — for example, public education about the risks and costs of cash as well as incentives such as tax breaks and reduced fees.
Facilitating financial inclusion
AML technology adoption can help fintech innovators to more cost-effectively meet AML and KYC screening and transaction monitoring requirements, so they can onboard excluded customers at scale. It also allows them to exceed the standards set by FATF, a show of integrity for an economy that is continually growing and adapting to address modern risk.
Compliance with the global watchdog is no longer only about jumping through hoops, but also staying one step ahead of financial criminals, safeguarding public data, and ensuring South Africa remains an attractive destination for international investment. After all, cash usage will not just disappear overnight, and even if it does, the criminal mindset is advanced in creating new typologies just as quickly.
It’s now the right time for a tech-focused group of public and private companies to put AML solutions to effective use in detecting and acting against financial crime, and staying prepared for a more complex future. The only constant is change, and South Africa is seeing a light at the end of the greylisting tunnel while journeying through the digital payment revolution.