Uganda has been largely cash based payment system economy with little or no electronic system of payment at all until 1997.The first evolution happened in 1997 with the introduction of the Automated Tellers Machine (ATM) by some of the commercial banks, which was followed by the introduction of the electronic clearing House in 2002 and the introduction of the Real time gross settlement payment system (RTGS) in 2005. As we speak today, other payments system innovations such as credit cards, mobile money and agency banking have also been introduced. The use of electronic payment systems has increased dramatically over the years, enabling more people to gain access to financial services beyond the traditional branch brick and mortar.
Despite the increased relevance of payment systems in day to day financial transactions, there is no comprehensive payments system law that supports the Payment Systems infrastructure in Uganda. However, there is a National Payment System Policy Framework which was approved by Cabinet on 22nd of December 2017. It is also imperative to note that the Principles of Financial Market Infrastructure emphasize the importance of a sound legal and regulatory framework for payment systems.
What is payment system?
Generally speaking, a payment system is a system used to effect a transaction through the transfer of monetary value. One of the unique characteristics of such a system is that it allows settlement of transactions between two or more parties.
Who is the regulator of Payment systems under the proposed law?
Under the National Payments Systems Bill 2018, the institution mandated to regulate payment systems in Uganda is the Central Bank which is also known as the Bank of Uganda. The Bank of Uganda will supervise payment systems service providers and all operators of payment systems and e-money issuers in Uganda.
Which payment system is eligible for licensing under the proposed Legal frame work?
A payment system is eligible to be licensed under the proposed legal framework if it satisfies the following objects:
Does the Bill anticipate Regulatory Sand Box frame work?
Yes. The proposed law anticipates a regulatory sandbox framework. The purpose of the sandbox is to govern the manner in which a person or institution obtains a limited access level to a payment’s system’s ecosystem for purposes of testing. A person who wishes to operate a sandbox will be required to make an application to the Central Bank specifying the location, whether physical or virtual, that is adequately accessible to the Central Bank from which experiments will be developed and where all required records and data will be maintained.
Does the Bill impose any threshold or limits on amount of transactions?
No. There are no proposed thresholds or limits imposed on transactional amounts by the Bill in its current form.
Are there proposed duties imposed on an electronic money issuer?
Yes. There is a duty imposed on an electronic money issuer to issue electronic money only after an equivalent amount of cash is deposited in the trust account or a special account opened with a regulated financial institution. The electronic money issuer will also be required to submit in electronic format customer information to the financial institution holding the trust account, indicating the names of the customer whose funds are held in the trust account; balances of the electronic money account and any other information as the Central Bank may prescribe.
Does the Bill anticipate financial collateral arrangements?
Yes. Financial Collateral arrangements are valid and enforceable against third parties.
Are there provisions on Consumer Protection?
Yes. The Bill contains provisions on consumer protection.
Is there retention of payment systems records in the Bill?
Yes. The proposed law provides for maintaining of all records relating to payment transactions and any other information obtained during the operation and managing of payments system.
What are your views on the proposed legal framework?
In the recent past, payment systems have not fallen under any regulatory purview. We think that the proposed law if drafted in a participatory manner taking into account consultations from the relevant stakeholders such as aggregators, mobile and e-money issuers would certainly provide a guiding frame work for business operations in this unique industry.
The proposed law also appears to us to provide for the extent of liability attributed to the parties involved in the e-money business. In the event of any transactional challenges the Bill sets out the nature of liability assumed by any of the participants and any incidental costs which have to be met in the form of indemnities.
We also think that the law if enacted in the current form will end the provision of aggregation services by entities with no physical presence in Uganda. On the other hand, we think that the Bill ought to have prescribed minimum qualifications and experience for all technical officers and managers employed by participants particularly, in the digital and financial services sector purposely to build capacity and promote stability in this space.
What are some of the current trends in payment and digital user platforms in Uganda?
There are currently developments in the e-money based merchant payment systems where customers are able to make payments to buy goods and services using an equivalent electronic value of cash. There are also merchant payment systems which are interlinked to customer bank accounts enabling payments made from electronic money accounts directly into merchant bank accounts either in real time or settlement periods ranging between one to two days (T+1 or T+2).
Generally, mobile money refers to the use of mobile money account(e-money) to perform financial and banking services. Mobile money transactions appear to be taking the center stage with many customers adopting the service compared to the number of transactions done via visa debit and credit cards. We have also noted in the recent past, integrations have been achieved between Mobile Network Operators and financial institutions, making it possible to withdraw money from ATMs machines through mobile money originated transactions and one-time PIN cord access.
Point of sale machines remain an important usage channel that enable swiping of cards either to facilitate payments between merchants or to make payments to merchants by holders of the cards to their merchandise owners. There has been also the introductions to card less withdraws on ATM Machines some commercial banks where holders need not to hold physical ATM Debit cards but can nonetheless transact on ATM Machines.
Lastly the emergency of agency banking has also enabled the adoption of branchless banking where services are extended to previously hard to reach areas. Although few commercial banks have fully embraced the idea of branchless banking, this could be one of the promising strategies for financial inclusion.
The Government of Uganda is also an active player in this space. By way of illustration, the Central Bank is effecting payments to civil servants, contractors and suppliers by electronic means using Electronic Funds Transfer. The Bank of Uganda with other key stakeholders has made significant progress in fostering the development of the interbank clearing and settlement infrastructure for both large value and retail payments over the years.
These improvements include the Uganda National Interbank Settlement (UNIS) system which is a Real Time Gross Settlement System (RTGS) operated by the Central Bank; the East African Payment System (EAPS) for cross border payments within the EAC; the Central Securities Depository (CSD) for government debt; the Electronic Clearing System (ECS) for processing low-value cheques and electronic direct debits and credit transfers; the payment switch which processes card payments; and the Regional Payment and Settlement System (REPSS) for processing cross border payments within the Common Market of the East and Southern African (COMESA) countries. Overall, these initiatives have helped to mitigate risk and enhance efficiency in the electronic payment and settlement systems. The development in the infrastructure has facilitated a steady migration from paper-based instruments to electronic means of payments.
Authors: Arnold Lule Sekiwano and Ronald Williams Lwanga