Oct 30 , 2021

A national switch operator has launched a long-overdue connectivity between banks that allows for the instant transfer of funds. A microfinance institution and nine banks have already been integrated, while 10 other commercial banks are lined up to join a national integrated payment system. From the state-owned Commercial Bank of Ethiopia (CBE) to the Bank of Abyssinia and Berhan, as well as the Somali Microfinance Institution, many have joined the system.

EthSwitch S.C. was established a decade ago by the banks and the National Bank of Ethiopia (NBE) as founding shareholders to create a national payment system. It has been testing the system over the past few months, with the pilot project undertaking close to 125,000 transactions with a value of 1.1 billion Br. The switch operator observed a surge in transactions when Somali Microfinance was integrated into the system.

"There's a habit of using digital transactions in that area," said Fikru Woldetensie, director of marketing and innovation at EthSwitch.

Bank executives are enthusiastic about the system, which they hope offers convenience and easy access to banking.

Melkamu Tadesse, head of card banking at Awash International Bank (AIB), sees the integrated system cutting down costs for banks associated with branch-based inter-bank transfers. For Aklilu Wubet, acting president of Wegagen Bank, it is a crucial feature in building a digital ecosystem and a milestone towards attaining a cashless society.

Bank-to-bank account interoperability was carried out through real-time gross settlement and an automated clearinghouse under the central bank. Though these have been in operation for a decade now, they have some drawbacks.

The settlement is used to transact high-value or time-sensitive payments, where money transfers from one bank to another in real-time. It is meant for large transfers, amounting to no less than 250,000 Br. All commercial banks have an account with the central bank where the transferred sum is debited and credited to the receiver bank. However, the banks need to know whether they have sufficient balance at the central bank before committing to the transfer. They check their balance from finance departments before approving the transactions.

Recently though, banks have begun using gross settlement for small value transactions. These transfers have an estimated efficiency rate of above 95pc as transactions are declined only if the bank does not have sufficient balance with its account at the central bank. The service is commonly provided at branches, but a few banks such as the Bank of Abyssinia and the CBE have integrated it with their respective mobile banking applications.

The automated clearinghouse is used only for cheques, for payments to get settled within two days. The central bank has developed a digital payment strategy to expand its clearinghouse system to accommodate low-value payments, to be settled in a day. The improvement of interoperability features is among the critical priority this strategy.

The limited coverage of telecommunications remains one of the main roadblocks for the nascent digital banking industry. The highest Internet coverage is 86pc for 2G, and 70pc for 4G. However, only 19pc of Ethiopians report regular Internet use, according to data from the central bank. Countrywide infrastructure challenges directly impact financial services and the digital payments infrastructure, particularly the lack of reliable and ubiquitous network coverage, limited access to electricity, and the absence of a centralised national identification system, reads the digital payment strategy document.

Expanding mobile wallet interoperability (where multiple mobile wallets exist) can increase financial inclusion by bringing down the costs of payments in the market, especially for people in the low-income bracket, says Endashaw Tesfaye, a digital financial services expert leading digital programming at the United Nations Capital Development Fund (UNCDF).

"The significance of this system is beyond what is broadly conceived," said Endashaw.

Digital wallet services such as Gize Pay, Yene Pay, and mobile money service providers like Telebirr are expected to join the integrated system, connecting users with banks, microfinance, and mobile wallets. Telebirr has taken the mobile money market by storm since its launch last May. Operated by Ethio telecom, the platform has garnered more than 10 million users and integrated over a dozen commercial banks.

Executives of the Ethio telecom were not aware that the infrastructure existed, according to Fikru.

"We've held discussions for them to join EthSwitch's system," he told Fortune.

East African countries have successfully implemented mobile money interoperability systems for several years now. Tanzania launched it in 2014, accounting for nearly a third of all person-to-person transactions in the country. Kenya's central bank launched the interoperability of mobile financial services in 2018. Ethiopia has a long way to go.

As news of the integrated system launching was shared last week, clients who attempted to make bank-to-bank transfers were met with failure.

Ebba Debare was one of these clients who tried to send money. Unable to have his account credited, he contacted the call centre of one of the commercial banks. He was told to wait for up to 10 days for the issue to be sorted out. It was frustrating, but Ebba says the tool will be indispensable when fully operational.

"I may try it again when I've more confidence," Ebba told Fortune.

Failures in transactions could be associated with multiple factors, ranging from issues with the banks to internet connectivity and systematic flaws, according to Fikru, EthSwitch's innovation director.

"Complete efficiency can't be achieved," he said. "It's a work in progress."

When a dispute arises due to incomplete transfers, the banks themselves are expected to settle it. They are subjected to fees if settlement is delayed.

PUBLISHED ON Oct 30,2021 [ VOL 22 , NO 1122]

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