The State of the Digital Payments

Ecosystem in South African

Townships
A study conducted in Tembisa and Hammanskraal
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Contents

Despite the risk, cash remains the payment option of choice in Overview 4
township communities. In this summary guide of the report on
• Background 4
Community Digitalisation: The State of the Digital Payments
Ecosystems in South African Townships (a study of Hammanskraal • Methodology 5
and Tembisa), we share the key insights and recommendations • Study objectives 5
based on the findings from the research conducted in 2022.
South African township context 6
• The township context, the state of digitalisation in townships and

why it matters 6

• The state of digitalisation in South African townships 7

Insights from the research 9

• The cash economy 9

• Perceptions and use of the banking sector 14

• Perception and use of non-banking financial services 16

• Business formality and digitalisation 16

Conclusion 18

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Overview

Although eight out of ten South African adults have a bank account, cash remains the primary form
of payment in the South African economy. People and businesses are vulnerable to theft, payment
Methodology
errors, and the high transaction costs associated with cash. Since there are no digital records of
The research was conducted using a combination of primary research and secondary research
how and where money is received and spent, the use of cash has an impact on South Africans’
methods. The primary research was based on a survey of 350 respondents conducted in two South
ability to budget, match up expenses, plan, and for businesses to secure financing.
African townships (Hammanskraal and Tembisa) both of which are in the Gauteng province.
FinMark Trust, in partnership with the World Bank, the Bill & Melinda Gates Foundation, and G2Px, Following the survey, a subset of survey respondents was assigned to six different user segments:
conducted research on the state of the digital payments ecosystem in Tembisa and Hammanskraal adult males (ages 24+), adult females (24+), young adults (ages 16 – 24), SASSA grant recipients,
to better understand the barriers to digitalisation in township economies. This report provides the and formal and informal MSMEs to gain deeper insights about their digital payment views and
South African context, key insights on the state of the digital payments ecosystem in South African behaviours. Key informant interviews (KIIs) were also conducted to gather the perspectives of
townships and recommendations aimed at increasing the use of digital payments within these community leaders and stakeholders.
communities.
The secondary research entailed a desktop review of publicly available literature and data on the
township economy and the state of digitalisation.
Background
Study objectives
Digitalisation has the potential to fundamentally transform local economies. The numerous
advantages of digital payments include increased convenience through transaction speed,
Given the critical role that digitalisation can play in improving South African lives, this report
efficiency, and increased transparency and security. According to the Centre for Strategic and
investigates underserved communities’ digital payment needs, attitudes, and barriers to inform
International Studies (CSIS), digitalisation enabled 700 million people in developing countries to
how role-players can support digitalisation efforts in South African townships.
gain access to formal financial services between 2011 and 2014, with 62% of adults having a bank
or mobile phone account.
These key insights will be used to outline the opportunities and potential for using digitalisation to
support local economic development.
With South Africa named the most unequal country by the World Bank in 2019, compounded by
the effects of Covid-19 on the local economy, digitalisation particularly in South African townships
is one way for the country to address some of the triple challenges the country faces. Despite
significant progress in South Africa’s financial inclusion agenda, large segments of the township
community remain underbanked. Although many have a bank account, people generally manage
their finances using cash or alternative financial services such as cash send services and retail
money markets.

Digitalisation can make a significant difference in South African lives by leveraging technology to
improve access, efficiency, cost-effectiveness and security, particularly in financial transactions.
There are several options currently available in the market, but there is still a low uptake of digital
solutions in communities. The study conducted aims to examine what people in townships believe
about technology and money to improve the understanding of why there has been a resistance
move towards the use of digital payments.

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South African Township Context

The township context, the state of digitalisation in townships The majority of township businesses are unregistered, unbanked and rely solely on cash for various
reasons, including a reluctance to formalise because of perceived cost and paperwork. Research
and why it matters has also shown that the lower-income market prefers cash as a payment method because it is
immediate and easy to use. It is also accepted almost everywhere and has no apparent hidden fees,
Townships are a spatial concept in South Africa that refers to settlements built through the enabling more effective micro-budgeting for households to keep track of every cent. Despite the
democratic government’s housing subsidy scheme, known as the Reconstruction and Development increased security risk associated with carrying cash and/or visiting ATMs, cash is generally more
Programme (RDP). It includes shacks that have sprouted up on previously developed land trusted.
(particularly in the backyards of RDP houses).

South Africa has 532 African, Asian and Coloured townships, with a combined land area larger
The state of digitalisation in South African townships
than Johannesburg and Durban, the country’s two largest cities. The Western Cape has the most
Although access to digital devices has become easier in South Africa, residents face digital and
township residents (8.9 million), followed by Gauteng (3.2 million).
financial illiteracy. Despite having more than 91% smartphone penetration, some residents lack the
digital and financial skills and confidence to make digital payments or use other digital financial
Due to the high unemployment rate and the lack of opportunities, nearly 60% of township
services.
communities are unemployed, even though 38% of the country’s working-age citizens live there. As
a result of the high unemployment levels, township residents rely on social grants and remittances
Township merchants have historically been overlooked by bank-led point of sale (POS) solutions,
from friends and family to get by each month. These remittances are frequently received through
and as a result, digital payment acceptance has been limited. With the introduction of new, lower-
channels like Shoprite Money Market and banks’ cardless cash send services like FNB’s e-wallet
cost alternatives to the market, digital payment acceptance is improving. Several innovative mobile
and Capitec’s cash send, while social grants are received through SASSA cards or personal bank
POS solutions have recently entered the market, offering solutions tailored to micro and small
accounts.
merchants. However, there is still significant room to improve access to, and adoption of, these and
other solutions in townships.
In addition, the United Nations estimates that as of 2020, nearly 3 million immigrants have settled in
South African townships. Since many foreigners are unable to secure formal employment due to a
Generally, the infrastructure required to support a digital payments ecosystem is in place and,
lack of proper documentation, South Africa’s high unemployment rate, and institutional responses
mobile network coverage and internet penetration in South Africa are relatively high. Residents,
to migrants, they pursue entrepreneurial ventures where they live.
however, face high data costs, unstable connectivity, inconsistent electricity and limited access to
fibre networks. All these factors make it challenging to access the internet and use digital financial
Most township businesses are driven by necessity and are unable to expand beyond a single
services. Despite ongoing investments in expanding the electricity network, universal electricity
storefront or small-scale operation. They typically operate informally and generate low financial
is also inconsistent. In 2019, 94% of the urban population and only 67% of the rural population had
and employment returns.
access to electricity.
Townships have a high concentration of economic activity near transportation hubs like taxi ranks
South Africa has a well-developed financial system as well as an interoperable national switch that
and grocery stores. Spaza shops, tuck shops, fast food outlets, shebeens, hawkers, backroom rentals,
supports most electronic payments, although it is not yet fully interoperable and real-time low-value
mechanics, panel beaters, childcare services, barbers and hair salons are examples of the types of
payments are expensive for consumers. The payments industry is working to expand real-time inter-
businesses that operate in townships. These businesses play an important role in the South African
banking to accommodate low-value real-time payment services. The South African government is
economy and contribute to a significant share of the total number of MSMEs. According to the 1
also working to digitise the national ID , which could lead to increased digital financial inclusion
2021 FinScope survey, there were approximately 1,1 million township MSMEs in 2020, employing 5.6
and access to other services in the country.
million people and contributing 27% to GDP.

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South African Township Context Insights from the research

The primary goal of digital inclusion is to ensure that all South Africans can connect to and The cash economy
participate in the digital economy through affordable access and reliable digital infrastructure. For
all citizens to participate in the digital economy, digital connectivity must be accessible, affordable, Despite the potential advantages of digital payments, cash remains king in township economies.
and impactful. However, for a digital payments ecosystem to function properly, widespread internet According to the 2020 FinScope survey, of the 1.1 million township MSMEs operating in SA townships,
connectivity and digital device ownership are required. This must be accompanied by digital 66% operate informally and on a cash basis. The inability to make or receive payments through
payment infrastructure and other support networks that foster the use of digital technologies. The digital channels creates a series of issues, such as higher transaction costs, security concerns,
table below lists these prerequisites. corruption and wealth inequality. Low digital payment acceptance in townships combined with
negative perceptions and attitudes toward formal financial services, has a significant impact on
Table 1: digital payment adoption.

The preconditions to accessing the digital payments ecosystem2 The majority of township businesses are informal, unbanked and cash based.
Unwillingness to pay the tax associated with formalisation and South African regulations associated
with registering a business, such as perceived burdensome documentation requirements or
Access to digital Enabling digital Support stringent rules for opening a bank account, often prevent new businesses from operating formally.
devices infrastructure networks According to the 2021 FinScope survey, only 35% of township enterprises are formally registered,
and they do not generally provide goods or services that reach larger markets or create quality jobs.
• Access to smartphones • Mobile network coverage • Government support
• Access to merchant point- • Affordable and quality • Digital inclusion The lower-income market has a strong preference for, and reliance on, cash.
of-sale (POS) devices internet connection strategy Cash was ranked as the top payment method in township markets in a 2021 study of over 1,000
• Access to laptops and • Access to electricity • Innovation funding respondents4. The cost of cash is also less visible, such as the increased security risks of carrying
3
computers • An efficient and safe digital • Other support networks: cash or the cost of travelling to access cash at ATMs.
payments system • Incubators and
• A digital identity system accelerators Those who receive their income through bank transfers are often forced to withdraw some of it
• Digital literacy to spend it in the community.
programmes Due to the entrenchment of cash usage in the township economy, it is nearly impossible to get by
• Multi-stakeholder with just a card, as the township retail economy is made up of vendors and spaza shops, the majority
collaboration of whom do not accept digital payments. To use the community’s goods and services, one must

“
always have cash on hand.

The lower-income market has a strong

preference for cash.
“
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Barriers to banking The ubiquity of cash is reinforced in
communities
• The cost to acquire POS devices
• Bank fees for digital transactions • Many workers are paid in cash
• Business will need to close while merchant • Community merchants do not accept digital
visits a bank payments
• Unregistered businesses struggle to get a bank
Th • There are limited or no cash withdrawal points

ts
account in the community
• Travelling to the bank or ATM costs time and
money so people withdraw all of their cash at

Merchan

e
once to avoid more trips

Con ume
There is no
incentive for Communities
Merchants remain
merchants to avoid storing funds
unbanked

s
provide digital digitally
payments
Barriers to formalisation Even SASSA recipients, who receive

e
rs grants digitally, transact in cash
• Merchants fear that registration will have tax
implications
Th
• SASSA recipients fear that their unused
• Businesses need to close while merchant visits SASSA card balance will be reclaimed so they
offices to register withdraw the full amount.
• The perceived administrative burden to
register business
• For immigrants, the administrative
burden may be further limited by required
documentation
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Insights from the research

“
From a merchant perspective, cash is convenient for unbanked merchants, some of whom

Digital payment solutions must compete with the

perceived benefits of cash.
“ tend to be migrants who face challenges when trying to open bank accounts.
There is also a perception among business owners that formalising business operations and
introducing digital payment solutions may subject one to paying taxes and excessive fees,

The fact that merchants only accept cash as a form of payment is one of the main factors that
influence the use of cash in the two communities.
One respondent indicated that having the ability to use his bank card to pay for bread at a nearby
For community members, the costs of cash include transportation, higher-than-normal spaza would make him feel more secure using it. This shows that customers are often compelled
withdrawal fees through unofficial channels, and the risk of theft/loss. to pay using cash because local businesses do not accept other forms of payment. Despite their
ATMs and bank branches are typically located a distance away from residential areas in peri-urban willingness to use digital payment solutions, many retailers admitted that they were unaware of the
areas like Hammanskraal. As a result, taking taxis to ATMs and branches to constantly deposit or various digital payment options, their fee structures, and whether they would be eligible or not to
withdraw money is a costly and time-consuming process for community members. Additionally, access and use those services.
the few merchants in the township who have POS devices offer customers the ability to withdraw
money from their spaza shops. This service is provided at a cost of ZAR 10 (USD 0.68) per ZAR 100 Beneficiaries are still aware of the ‘Net1 scandal’ that occurred in 2017.
(USD 6.76) withdrawn, which is expensive for the majority of the community when compared to Net1, a financial services provider, and its subsidiary Cash Paymaster Services (CPS) were awarded a
the cost of an ATM withdrawal of ZAR 8 (USD 0.54) per ZAR 1,000 (USD 67.6). As a result, community single mandate to distribute social grant payments through digital channels in 2012. Net1 then sold
members tend to always keep some cash on hand to avoid these indirect withdrawal charges. This grant recipients other private financial services such as loans, funeral policies, and mobile airtime
is also the reason people withdraw relatively large sums of money from ATMs and then operate in through a network of subsidiaries. CPS was able to deduct payments for these products from grant
cash for the rest of the time. recipients’ accounts before they reached their accounts, as well as ensure that debit orders due
to Net1 group members were prioritised. Illegal and fraudulent deductions were discovered, and
The South African government digitised the social grant payment process in recognition of customers’ recourse was extremely difficult due to the control of a single provider.
these benefits and challenges.
The introduction of the SASSA card, through which beneficiaries can receive their grants and Consumers also prefer cash for its convenience and lack of explicit charges.
transact, was a significant step toward digitising payments in low-income communities. However, Respondents are concerned about losing money to digital fraud as well as having money taken out
studies have revealed that recipients merely use their SASSA cards as a mailbox to receive their social of their accounts for bank fees, which are frequently high relative to the low-income levels in these
grants as they commonly withdraw their money on the day it is received to transact in cash rather communities. Participants across all groups expressed reluctance to leave money in their bank
than digitally5. accounts because there is no guarantee that they will find the same amount of money there when

“
they need to spend it.
Any digital payment solution must be able to compete with the perceived benefits of cash to
take root and thrive in township communities.
Cash is immediate for most consumers, simple to use and understand, accepted almost everywhere,
has no obvious hidden fees, and can generally be trusted. Additionally, using cash does not require
internet access, cellular data or Wi-Fi, or digital literacy. There are some costs associated with cash,
such as the high security risk of carrying cash or the transportation costs associated with accessing
Trust in banks is impacted by
perceptions of high bank fees.
“
cash at ATMs or retailers. While these costs are often carried by the consumer, they are not always
directly attributed to cash.

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Insights from the research

Perceptions and use of the banking sector to withdraw all their income as soon as they receive it and keep it in cash because it allows them to
transact more easily.
The levels of trust that the community has regarding financial institutions are negatively
Technical issues such as connectivity issues, PIN failure, and so on may restrict the adoption
impacted by perceptions of high bank fees.
of digital payment solutions by people of all ages.
When it comes to formal institutions, there is a general lack of trust and suspicion among community
The sporadic use of bank cards, has resulted in users forgetting their PINs. This is also an issue for
members. Many people believe that banks “take your money” and that they are unreliable because
the young adult demographic, who have expressed the need for new cards when their PIN codes
of the fees they charge customers. This perception may be caused by a lack of knowledge about
stop working.
bank fees connected to the kind of account they are opening.
Cash is seen as easier to budget with and track spending because there are no explicit
The fact that bank representatives do not fully explain products to community members
charges associated with its use.
contributes to their mistrust.
In addition to being perceived as unaffordable, respondents frequently perceive bank charges as
Members of the community expressed a lack of knowledge about various savings and investment
unclear and inconsistent, making it difficult for households to plan their expenditures with certainty.
products, with many reporting that bank agents often assist them in a hurry and only explain basic
Withdrawing the cash immediately offers them certainty and allows them to budget down to the
concepts of debit card and app usage without providing details about the various savings and
last cent without fear of bank fees unexpectedly reducing their funds. Many participants complained
investment products. According to one respondent, ‘bank agents only show you how to use the
that bank charges were not clearly explained when they opened their accounts and that they did
app’. Some respondents also reported that when they opened bank accounts, the various types of
not understand the reasons for the various fees that were deducted.
bank accounts and fee structures were not properly explained to them.
Concerns about cybercrime and fraud also limit the use of digital payment methods.
Stories of alleged bank fraud circulate in communities, eroding trust in financial institutions.
The communities’ low levels of financial and digital literacy make them a target for opportunistic
Moreover, there have been several reports of unexplained disappearances of funds allegedly under
criminals. While digital financial services eliminate some of the risks associated with cash usage,
the care of banks that have spread throughout the communities. In one FGD, a participant shared
they also introduce new risks that merchants may be unprepared to detect and mitigate.
that a community member went insane after his lobola money went missing from a bank. These
are the kinds of stories that circulate in the communities and have a negative impact on people’s
perceptions of financial institutions.

When it comes to using digital devices many are technologically illiterate.

Some respondents do not use bank apps because they do not understand how to use them and

“
do not have compatible phones. Young adults (16–24) are, however, more are more aware of digital
banking products as a result of television commercials and billboards but have little experience
using them.

There is a general belief, that low-value purchases are expensive.

Cash is used to pay for small-value items such as airtime, electricity, and so on. This is done because
most community vendors do not accept card payments and customers are discouraged from using
their cards for transactions below a certain amount. Spaza shop owners sometimes tell customers
Technical issues such as connectivity and PIN
failure may restrict the adoption of digital payment
solutions.
“
that they can only swipe for transactions over ZAR 20.00 (USD 1.38). As a result, respondents prefer

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Insights from the research

Perceptions and use of non-banking financial sercives do not meet the requirements due to insufficient documentation. Those who do qualify believe the
fee for POS devices provided by banks is too costly. Foreign consumers and merchants in possession
When compared to traditional financial institutions, attitudes toward mobile network of asylum permits face difficulties opening bank accounts in South Africa, as they are often required
operators (MNOs) and fintech are more negative. to produce proof of employment in addition to their asylum permits, which many do not have.
Residents in both communities are sceptical of MNOs’ ability to provide secure financial services. One
respondent’s view on MNOs was ‘their business is (mobile) networks, not finances’, while another Fear of being taxed adds to the reluctance to formalise operations and eventually adopt
asked ‘what if someone wants to send me money but sends money to the wrong number?’. These digital payments.
views are primarily based on consumers’ current experiences with their mobile network operators, MSMEs understand formalising business operations can be the first step in establishing a digital
with many users dissatisfied due to MNOs’ frequent and unexplained deductions of airtime. Again, and financial footprint for their companies, allowing them to access credit and business training
a perceived lack of transparency undermines trust in formal institutions. opportunities. However, merchants believe that this digital and financial footprint could be a dual-
edged sword because MSMEs may be required to pay taxes that they believe are excessive.
This perspective is exacerbated by residents’ lack of familiarity with various fintech providers
and their products. MSMEs face cash flow issues because of digital payment options.
Within the communities, there is limited understanding of fintech like Mukuru or Mama Money. Most digital payment options have a lag between when the money is purchased and when it reflects
Although some may have seen them on TV or billboards, very few have interacted with them or in the merchant’s bank account. For MSMEs, this causes cash flow issues and uncertainty. One
know someone who has. This lack of familiarity makes consumers more hesitant to try new products respondent said, ‘if a customer pays me on Friday, instead of money reflecting on Monday, I would
or services, particularly financial services. Advocacy among members of the community would be a want it to reflect on the same day’.
significant driver of digital adoption.
The current digital payment options are not intended for small, survivalist township
Business formality and digitalisation businesses.
Most digital payment options have complex pricing structures, high merchant fees and few
Informal survivalist businesses have a limited digital presence. incentives for small business owners to abandon cash. Merchants believed that to cover the high
According to interviews with the township businesses, the main barriers to formalisation are a lack transaction costs, they would have to pass the cost on to customers in the form of higher prices for
of knowledge about registration processes and an unwillingness to pay the tax associated with goods and services, risking their competitiveness. Merchants are concerned about whether their

“
formalisation. This lack of formalisation not only prevents these businesses from accessing resources low-value business and low turnover qualify them for a POS device from a financial institution.
that can help them grow but also slows the adoption of digital payments.

In the absence of digital alternatives for unbanked foreign MSMEs, the informal sector’s use of
cash payments for stock purchases is likely to persist.
Migrant MSMEs from various sectors of the township economy make up the informal MSME sector.
Fear of tax prevents formalisation and
digital adoption.
“
Many migrant merchants were found to be unbanked because of KYC issues, specifically the
challenges they face when attempting to open bank accounts.
End notes
Alternative digital solutions for unbanked merchants and consumers, particularly those from
other countries, are scarce. 1 The World Bank, Achieving Effective Financial Inclusion In South Africa: A Payments Perspective, 2018 — available here.
2 The preconditions for digital payments ecosystem are high level and developed by Genesis Analytics for this particular study.

Some foreign informal merchants operating in townships would like a POS device from a bank but 3 According to FinScope MSME South Africa 2020, only 14% of MSMEs in South Africa use computers or laptops.
4 Chitimira & Ncube, Legislative and other Selected Challenges Affecting Financial Inclusion for The Poor and Low-Income Earners in South Africa, Journal Of African Law, 2020 — available here.
5 The World Bank, Achieving Effective Financial Inclusion In South Africa: A Payments Perspective, 2018 — available here.

Pocket guide
Conclusion

The report on the state of the digital payments ecosystem in South African Townships - Tembisa
and Hammanskraal is summarised in this pocket guide. The full report contains all of the study’s
findings and recommendations for best practices in stakeholder coordination and actions to drive
an inclusive digital payments ecosystem.

Based on the findings, several measures may be implemented to increase the use of digital
payments in South African townships. Recommendations have been grouped into four categories
below.

Collaborate with private and Build digital infrastructure

development sector partners • Improve connectivity in township
• Policy and funding to enable and areas
digitalisation • Electricity access/energy solutions
• Initiate identity systems • Interoperable electronic payment
• Support private incubators/ systems For more information
programmes • Incorporate biometric/identity
• Stakeholder engagement to systems Contact:
support initiatives
t Pri +27 (0) 11 315 9197
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m te info@[Link]
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[Link]
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Go

Sanofi House, Second Floor,

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Digital
44 on Grand Central Office Park,
payments
2 Bond Street, Grand Central Extension 1,
ecosystem
Midrand 1632
South Africa
Co

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um
ha
ns

rc
Gain trust and confidence to
er Me Digital payment acceptance and
transact digitally formality
• Digital and financial literacy • Seek affordable digital solutions
skills to offer different payment
options

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