National switch: A long overdue project or a waste?

The Bankers Association of Malawi (BAM), a grouping of 11 local banks, with World Bank funding channeled through the Reserve Bank of Malawi (RBM) wants to operate a National Switch (Nat Switch)—to connect all the banks—expected to go live in March 2014. However, the introduction of Nat Switch is not without controversy as Malawi Switch Centre Limited (Malswitch) fears this threatens the company’s survival. Our News Analyst, CHIKONDI CHIYEMBEKEZA unties the controversy and the importance of a National Switch to the economy.

Malawi’s banks, it seems, under the tutelage of BAM have, against all odds, resolved to have their own switch, National Switch—a shared switch facility to connect all the country’s banks and other financial institutions. Currently, Malawi does not have a National Switch and it is only four Malawi Stock Exchange (MSE)–listed banks; National Bank of Malawi, NBS Bank, FMB and Standard Bank that are interconnected through Visa, that facilitates electronic funds transfer throughout the world, most commonly through Visa-branded credit cards and debit cards, controlled in the US.

Effectively, this means that Nat Switch will replace Visa net, which has been a cost to the economy, according to RBM officials.

But the move by the banks has raffled a few feathers, with Malswitch, a one-time baby of the RBM established in 1999 before letting it go in 2006, complaining that the Nat Switch has the potential to cripple them financially because they rely on switching services, particularly to banks for 64 percent of its revenue base, according to documents.

Malswitch further argues that if this revenue stream is cut, jobs of most of the firm’s 75 employees could be lost.

Nat Switch funding

The National Switch is largely funded by the World Bank through part of a five-year loan amounting to $28.2 million (K9.8 billion) under the Financial Sector Technical Assistance Project (Fstap, according to the chairperson of the National Switch steering committee William Kaunda.

He says the disbursement of the funding is through the RBM and that BAM will supplement the cost of implementing the project.

Kaunda, who is also National Bank of Malawi head of cards and e-banking, puts the total cost required to implement the National Switch project at $3 million (K1 billion), with the banks contributing a combined 10 percent of the total cost [K105m] to be shared equally.

“All member banks will fund own costs relating to own or in-house switches and other infrastructure requirements such as licences and upgrades, among others,” he says.

NatSwitch operationalisation

The Nat Switch, which will not only be for banks but other financial players, will interconnect banking operations and financial transactions [inter-operability] through automated teller machines (ATMs), point of sale (POS) devices, mobile banking, e-banking transactions, Visa and MasterCard gateway and other over-the-counter transactions

It has been instituted to set up shared switch facilities in Malawi, and the implementation process involves a careful analysis of the payment system technology options that can be leveraged to achieve the goals and objectives of low-cost services.

The switch, according to Kaunda, will be operated under the shared payment services arrangement in which BAM members will have stakes in the switch despite that the members are largely competing payment service providers.

“Being shared services, the components will carry public good elements. Such being the case, RBM’s participation will focus on ensuring that the institutional setting for such arrangements continues to promote efficiency, competition and innovation,” he says, adding that a customer does not need to be confined to a particular bank to transact business.

RBM officials were in Blantyre last week where they sensitised business journalists to the link between the Financial Sector Technical Assistance Project (FSTAP), National Payments System and the National Switch.

Role of Malswitch in Nat Switch

Nat Switch and Malswitch, according to RBM officials are separate entities. Malswitch is an integrated technologies business with core activities in the areas of electronic payment, information technology infrastructure and data communication services. The company was established as RBM fully funded project in 1999 and was later incorporated in March 2006 after a prior five-year growth period during which the operations of the company were run as part of the central bank.

Malswitch was later delinked from RBM in 2006 and is now an independent company with its own management and board of directors. Malswitch was formed to act as a platform upon which electronic-based payment products and services could be implemented in the country.

In one of correspondents to the RBM Governor Charles Chuka, Malswitch chief executive officer Gideon Kalumbu-Phiri expressed fears that Nat Switch implementation will take away 64 percent of their business.

This is after the firm proposed that it be considered to manage the Nat Switch. BAM shot down the suggestion.

Former president of BAM John Biziwick said: “We write to acknowledge receipt of the proposal Malswitch submitted to Bankers Association of Malawi for the inter-operability project. We would like to advise that BAM technical and business committees scrutinised the proposal and due to the high management fees, BAM will not afford to engage Malswitch as project manager.”

But what will be the role of Malswitch in all this? An official from the central bank said the firm is at liberty to connect to Nat Switch as a Mobile Money Operator (MMO) and be providing services to other micro-financial institutions (MFIs), merchant shops, insurance companies and not banks.

“What they need is to be aggressive and ensure that they market themselves and connect other financial institutions to the National Switch. But what you should know is that the financial institutions are also at liberty to connect directly to the National Switch,” said the official.

In an earlier interview with The Nation, RBM spokesperson Mbane Ngwira dismissed fears that the investment made in Malswitch will be wasted.

“It is believed that the return on investment was already made and what may need to be done is to completely replace the existing switch which Malswitch management, as an independent company, may consider including in its strategies without necessarily resorting to public funds,” he said.

Benefits of Nat Switch

The controversies of the National Switch in relation to Malswitch operations aside, the former will have far-reaching benefits to customers and the wider economy.

Kaunda said Nat Switch will facilitate inter-operability among banks by building an efficient financial and trading platform.

“[It will provide] easy banking, a move that could potentially attract the unbanked population to start using the banking system,” he said.

This is against the backdrop of the Finscope Survey of 2008 which showed that a paltry 19 percent of the country’s population at more than 15 million is banked.

But BAM executive director Lyness Nkungula said the situation may have improved since then.

Some few years back, the Malawi Government directed that all civil servants and all businesses who supply goods and services to it be paid through the banks. This move may have contributed to the increasing numbers of Malawians accessing financial institutions, according to the RBM.

Kaunda said with Nat Switch in place, it will no longer be necessary for each bank to have so many ATM /POS devices to achieve convenience that customers look for when choosing a banking service.

“When it becomes possible to use the ATM cards to shop, banks can use point of sale devices to create branchless banking outlets and avoid the huge cost of operating a bank branch or an offsite ATM,” he said, adding that it will provide a switching platform for Internet banking, remittances and mobile money transactions, thereby becoming a key enabler for e-wallet and bank account interactions.

The switch will drive unparalleled satisfaction by connecting customers to their finances in the most intuitive, innovative and seamless approach.

He said with the latest security features, both customers and financial services providers will have the peace of mind that their customers’ data, transactions and reputation are protected.

“The switch will open up the financial market to international banks through an international gateway. RBM didn’t have the infrastructure and this was a cost to the economy,” he said.

This switch will also entail that transaction costs using POS and Visa cards will drastically drop. And, in case of operational problems, they will be sorted out swiftly since the switch will be operated from Blantyre, Malawi, unlike the Visa net.

Conclusion

Banks, in their pursuit for a cashless society, have been wooing their customers to be using POS and Visa-branded cards in their transactions. However, this has proved a tall older particularly because of the charges levied on the transactions which were felt to be exorbitant, resulting in only the affluent transacting business using them.

But with the coming of the Nat Switch, that will be a thing of the past because charges will reduce drastically, largely because the banks will be in competition for customers.

Despite that Nat Switch threatens jobs for Malswitch, it is high time Malawi had its sole real-time national electronic funds switch and be like the rest of countries in tune with modern technological advancements.