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Arvind Subramaniam recently made statements in the Central Bank about rebuilding the social contract. He put forth a narrative of reform whereby he called for the building of trust in government institutions. The statements also coincided with the revelation to the general public that cheque payments had been made to the former president, members of COPE, and to political foundations. Here the general public should see an opportunity. We have a Central Bank eager to impress Mr Subramaniam and a political desire for some action. On your behalf this article looks to achieve two things;
- Reduced cheque usage via a reduction in the SLIP system cost to the consumer
- ITCA representation on the LankaPay Board
Cheques are notoriously bad instruments of payment. They are slow, subject to error, and expensive. According to LankaPay’s annual report “Out of the 51.45Mn cheques presented for clearing, 2.15Mn cheques were returned due to non-payment. This amounts to 4.18% of the cheques presented for clearing of the total cheques returned, around 48% were returned due to lack of funds.” Cheques also facilitate fraud and money laundering as they can be easily transferred and even encashed by 3rd parties notably members of a Minister’s Security Detail (MSD) with no questions asked. We have a perfectly good SLIP system which is underutilized due to extortionate pricing which was written about earlier (http://www.ft.lk/columns/Money-transfer-and-the-CBSL/4-658243). The previous article shows that to the consumer cheques are cheaper than electronic transfers even though the bank would find it cheaper to perform the latter via LankaPay.
Source- Central Bank Q3 Payments Bulletin
Looking at the charts from the payments bulletin we see that the majority of transactions in the SLIP system are also only for salary payments. These payments tend to happen only once a month. More widespread usage can be achieved with a lower price. The regulatory hatred towards digitization is also unfounded. Take the IRD, one of the few revenue institutions not to show a marked improvement since the taking over of the new government. One of their only long term achievements is the collection of PAYE tax. This is because the system does it for them. Mandating for instance that doctors and lawyers receive payment via the SLIP system or via card would be easy to implement given a more widely used digital payment system. This would then make it easy to collect revenue. To be fair to the IRD, it is the CBSL down the road in the much nicer office who are to blame. According to the Central Bank’s Payment Bulletin in excess of 90% of the total retail payments continue to be made via cash. The Central Bank is keener to see their friends at De La Rue succeed than for the IRD to meet revenue target.
All of this is facilitated by the undue power and lack of public accountability with the Central Bank and its many subsidiary operations. LankaPay, running contrary to the Capital Maharaja narrative, is a private company. It has some state and proxy state ownership but operates for profit and in the interests of its shareholders inclusive of the private banks. Also its monopoly status is not in the public interest. The board is also oddly comprised with the regulator taking board seats in the company. This ensures that the company is not particularly well regulated. The board also lacks any technical experts or any involvement of ICTA. This ensures that state institutions are unable to interface directly with the company bypassing the banking system. Sri Lanka customs was only recently given a solution through LankaPay. Institutions like the SEC who would greatly benefit from an operational digital payment platform have been noticeably silent. This may be due to the SEC commission comprising of one Ranel T Wijesinghe who is also on the board of the Bank of Ceylon, a major beneficiary of the poor payment system. The existence of these so called independent commissions might increase the number of interests represented but one must question if these interests are public or vested?
|Name of Bank||No. of Lanka Pay Shares Mn||Value Rs. Mn||% Held|
|Bank of Ceylon||2.1||21||14%|
Source- Lanka Pay Annual Report 17/18
LankaPay is best judged by the status of their planned expansion. The Central Bank has squashed both PayPal operations in Sri Lanka and also the planned operation of a competitor by ICTA. This is sad as PayPal would have helped Sri Lankan businesses better interact with companies overseas and ICTA’s competitor might have brought in innovation into an otherwise sluggish sector.
LankaPay acts as a rent seeking monopoly. The profits however are on respective banks profit and loss statements as they charge excessive mark ups on services provided by the company. It has failed to implement a national card system. It has failed to bring about wide usage of its certification technology. It reinvests in outdated technology. It prevents entry into the industry both through regulatory pressure and also through the excessive unutilized capacity of its own systems. The current switch has been tested and proven to process approximately 7 Mn commercial transactions a day. Sri Lanka is nowhere close to this figure. The marginal cost of processing an additional transaction must be negligible and as such the usage of cheques can be phased out in a few years.
The implementation of a national card system is something LankaPay will not do. It is in the national interests as it allows for lower costs, retention of payment information domestically, and wider financial inclusivity. The Banks however have very lucrative deals with VISA and Mastercard and will not allow for a domestic competitor to form. The technology is already available through a partnership with JCB and probably is already operational in a different form under the previous CPS system. Even though the CPS system is live there are no participant members. LankaPay’s 2018 investment in the common card and payment switch according to the cash flows is zero. The Central Bank is also pretending to work on a payment system for our transportation network. As a country we will continue to be declined widespread card usage by our Central Bank. What do we have to show for 436 million LKR in investment?
The maximum price for a SLIP transfer can be reduced and the cost of a cheque transaction can be increased. This is us, the general public, putting forth an offer for the beginning of a social contract.