Guide: Payments in South Africa - a look at the landscape

The payments landscape in South Africa is going through a period of rapid change, with new digital payment methods rising to prominence and a traditionally cash-based economy growing increasingly open to alternative ways to shop and pay.

No one can say for certain where things will go from here, but it is helpful to understand where we’ve come from and what the current landscape looks like.

With that in mind, we’ve created this overview of the payments system in South Africa, covering the history and current state of the landscape, as well as a glossary of key terms.

Download the full Payments in South Africa guide. 

The history of payments in South Africa

South Africa has traditionally relied strongly on cash as a preferred payment method. While many still opt to pay with cash, in recent years we’ve seen a rapid rise in adoption of digital and alternative payment methods that continues to gain momentum.

To put this into context: in 2011, just 54% of South Africans over the age of 15 had a bank account. By 2021 this had risen to more than 84%, driven by a range of factors such as growing numbers of phone-based financial services and the government’s goal to foster financial inclusion, as highlighted in the South African Reserve Bank’s Vision 2025 Strategy.

The speed of change has made South Africa an outlier, and not just within Africa. The World Bank’s Global Findex report found that South Africa’s shift, along with those of Peru and Uganda, drove up the average for account adoption globally.

This points to a country that is changing incredibly quickly. About 20% of adults in South Africa only made their first digital payment in the years since 2020, driven by the onset of COVID 19. But McKinsey has noted that South Africa is one of the nations leading the continent in its rapid transition towards a digital payment system.

In spite of the changes, South Africa’s economy is still heavily reliant on cash. A recent survey of consumers in South Africa revealed that although more than 95% of individuals get paid into a bank account, more than 65% of people withdraw over half of their monthly income to make day-to-day transactions using cash.

A recent survey found that cash remains popular, with cash purchases a regular occurrence across the board, and that most people still withdraw a significant amount of their salary in cash every month.

Research in South Africa’s townships uncovered a deep distrust of financial institutions, which has been one of the key factors leading many to resist efforts to move away from cash.

The payments landscape in South Africa

While cash remains popular, South Africa’s payment landscape is evolving rapidly, driven by a few key themes.

The rise in contactless payments

Perhaps the most notable theme is the rise in contactless payments. South Africa has the highest penetration rate for contactless in Africa, accounting for 50% of all digital transactions. 

No doubt this is driven in large part by a demand for convenience, and has been boosted by the numbers of small business owners adopting affordable card terminal services such as Yoco.

The rise in contactless payments has also had a knock-on effect on scan-to-pay and other QR code-based payment services, which have lost market share as customers opt for the convenience of contactless. However, even as contactless grows in popularity, many lower-end phones still lack the NFC capability needed, so QR code payments will maintain a place in the overall payment landscape, even if they aren’t dominant.

A mixed picture for mobile money

The rise in mobile money has been a major factor in the changing payments landscape across Africa, but while it has had an impact, it hasn’t been quite as important in South Africa as it has elsewhere on the continent.

Compared to other African markets such as Kenya or Ghana, penetration of mobile money accounts is relatively low. There are a few reasons for this: for one, the value proposition just isn’t as attractive in a country where overall bank account usage is higher, as fewer people need access.

The other reason is based on regulatory differences in the country. South African legislation classifies mobile money wallets as a banking service, which brings with it strict regulatory requirements. This in turn makes it less attractive for providers to build solutions in the market.

However, recently, MTN MoMo has seen a rise in popularity, particularly among lower income consumers, reaching more than 8 million users as of July 2023. This growth is attributed to the launch of additional offerings such as remittance services, personal loans, access to online gaming, fee free bill payment and other perks available through the platform, as well as a growing desire for lower income segments to reduce costs associated with fees and to access an increasing range of services from a single source.

As well, the rise of digital wallets is driving growth in mobile-based payments. Apple Pay launched in South Africa in 2021, followed by Google Pay the following year. Both have seen extremely strong adoption, with 52% of South African Consumers saying they have used a smartphone and digital tap-and-pay platforms in the past year. This is set to grow further, with 60% predicting they will use them in the coming year.

BNPL popular, but concerns about regulation abound

As in many countries around the world, buy-now-pay-later (BNPL) solutions have become popular in South Africa, with adoption growing at 64% annually between 2019 and 2022, and 35% annual growth expected through 2027. A recent consumer survey from Stitch found that over half of South Africans have used BNPL services for e-commerce purchases.

However, as is the case in other countries, there are concerns about the lack of regulation in the sector. BNPL is currently self-regulating in South Africa, but regulators from the UK, to the US and Australia have all either stepped in or announced plans to step in and regulate BNPL in their countries. So it seems likely the same could happen in South Africa.

Defining digital payments in South Africa

What is a payment gateway?

A payment gateway is the technology that allows companies to securely accept digital payments through websites, mobile apps or other digital platforms.

The payment gateway sits between the merchant and the customer. When a customer enters their payment details, these are passed securely to the payment gateway - sometimes the payment gateway hosts the payment page itself.

A payment gateway can be thought of as the front-end of the transaction. It is the only party that the customer interacts with during an online purchase, from entering their payment information to receiving confirmation of a successful transaction.

Read more about payment gateways here.

What is a payment service provider?

Payment service providers (PSPs) are third-party companies that allow enterprises to accept electronic payments. They connect companies with the broader payments infrastructure.

A payment service provider will typically offer customers a gateway to collect payment details, a merchant account to accept and process electronic payment and the regulatory and security compliance infrastructure needed to transact safely.

Crucially, the merchant owns and manages the merchant account themselves, a key difference from a payment facilitator (payfac).

Merchants use PSPs because it allows them to offer their customers a seamless, secure payment experience. This ultimately drives higher conversion rates and customer satisfaction.

What is a payment facilitator (Payfac)?

A Payment Facilitator is a payment service provider that allows merchants to collect payments from customers. It does this in a different way from traditional payment service providers: by offering what is known as a sub-merchant account.

A merchant account is a type of account that can accept credit and debit card payments. With a typical merchant account, the acquiring bank funds the merchant, and the merchant must manage their own account. A payment facilitator offers an integrated model. It operates what is known as a master merchant account, allowing it to give merchants sub-merchant accounts and fund them directly. This means faster onboarding and less work for merchants.

Payment facilitators are typically attractive to smaller merchants that don’t qualify for their own merchant accounts, or those that want a provider to manage their risk and compliance.

Learn more about the difference between payment processors and payment facilitators here.

What is a payment processor?

A payment processor is a company that manages the card transaction process. Sitting between the bank and the merchant, it facilitates the transmission of card information between the merchant, the card network and their banks.

Payment Processors are sometimes also referred to as the “Acquirer” or “Payment Service Provider”, as well as the “Third Party Payment Processor (TPPP)”.

Learn more about payment processors here.

What are integrated payments?

Integrated payments are a form of payment system where the business’s point of sale system is integrated directly into a payment processor. This allows customers to use different payment methods without the need for manual processing or separate terminals.

Integrated payment systems also allow for real-time sales and inventory updates, which improve overall efficiency. Businesses that choose to use integrated payments usually do so in order to take advantage of the increased customization they offer.

What is payments orchestration?

Payments orchestration is the process by which companies integrate, manage and monitor multiple payment methods, providers, banks and more - often across markets.

Increasingly, companies choose to do this through a Payments Orchestration Platform, which sits between the payment gateways, payment processors and the rest of the payment ecosystem, coordinating the different players on behalf of the company and allowing for optimisation, easy access to data and reporting and streamlined reconciliation.

Robust payment orchestration makes it easier for companies to integrate new payment methods and optimise their performance. 

What are alternative payment methods? (ie digital wallets, crypto, etc)

Alternative payment methods is a catch-all term given to payment methods that are not the traditional three: cash, debit card or credit card.

This can include methods as diverse as digital wallets, account-to-account payments and even pay with crypto. Often, particular alternative methods will rise to prominence in specific areas of the world. For example, Alipay is a popular alternative payment method in China, while Venmo is widely used in the US.

What is open banking?

Open banking allows consumers to grant access to their transaction and financial data to regulated third-party financial services providers (TPPPs).

For example, consumers can use open banking to see all of their account details and balances in one centralised dashboard, or they could allow a lender to analyse their transaction data when applying for a loan to allow for more competitive pricing.

By making it easier for consumers to share their data, open banking increases competition between banking providers and makes all kinds of new banking products possible.

Open banking should not be confused with open finance, which is an extension of open banking’s principle of transparency to enable access to a consumer’s entire financial footprint, including things like their insurance, investments, mortgage and more.

Countries all around the globe have their own open banking initiatives, each with different levels of adoption. Many consider the UK to be the current leader in terms of adoption, with more than a million open banking transactions taking place each month.

However, it’s important to remember that open banking launched in the UK back in 2018, while it remains relatively nascent in South Africa - despite the recent success of new offerings like Capitec Pay.