In a strategic move poised to redefine Kenya’s financial landscape, Safaricom and the Kenya Bankers Association (KBA) have jointly proposed the adoption of Pesalink as the nation’s next-generation fast payment system (FPS). This collaborative initiative aims to streamline digital transactions across the country by leveraging existing infrastructure, thereby promoting efficiency and cost-effectiveness.

The Proposal: Leveraging Existing Infrastructure

The proposal, submitted to the Central Bank of Kenya (CBK), emphasizes the utilization of Pesalink’s current framework over the development of a new FPS or the reliance on multiple private switches. Operated by the KBA through its fintech subsidiary, Integrated Payment Services Limited (IPSL), Pesalink has already facilitated approximately $8.5 billion (KES 1.1 trillion) in digital payments within Kenya. This substantial throughput underscores its capacity and reliability as a payment platform.

By positioning Pesalink as the foundation for the national FPS, the proposal seeks to ensure seamless interoperability among various financial platforms, including traditional banks, mobile money operators like M-Pesa, and emerging fintech entities. This integration is anticipated to bridge existing gaps in Kenya’s fragmented payments ecosystem, where mobile money services often operate in silos, separate from conventional banking institutions.

Addressing the Fragmented Payments Landscape

Kenya’s digital payments environment has evolved into a complex web of systems, with banks, Savings and Credit Cooperative Organizations (SACCOs), and fintech companies each maintaining private agreements to interface with mobile money platforms. This fragmented structure has led to disparities in transaction fees and inconsistent service quality, posing challenges for consumers and businesses alike.

The Safaricom-KBA proposal argues that by harnessing Pesalink’s established framework, the nation can standardize its payment systems, thereby reducing transaction costs and enhancing service consistency. This approach aligns with global best practices, where interoperability is key to fostering inclusive and efficient financial ecosystems.

Economic Considerations: Cost and Time Efficiency

Developing a new FPS from the ground up is projected to require an investment of at least $200 million (KES 25.9 billion) and an implementation timeline extending up to four years. In contrast, upgrading Pesalink presents a more economical and expedient alternative. The existing infrastructure can be enhanced to meet the demands of a nationwide FPS, allowing for quicker deployment and significant cost savings.

However, the proposal acknowledges that Pesalink would require substantial upgrades to handle increased transaction volumes and to meet the stringent requirements of a national FPS. Specifically, the system must be capable of processing at least 6,000 transactions per second and must bolster its interoperability features to seamlessly connect all payment platforms. Additionally, enhancements in risk management and security protocols are imperative to safeguard the integrity of the system.

Alternative Models: A Comparative Perspective

While the proposal advocates for an industry-led solution centered on Pesalink, it also considers alternative models. One such model is the Colombian approach, which employs multiple private switches managed by a centralized regulator, akin to the CBK. While this system offers a cost-effective solution, it may introduce complexities in service quality and governance due to the involvement of multiple operators.

The proposal suggests that a single, upgraded platform like Pesalink could mitigate these challenges by providing a unified system with standardized protocols, thereby simplifying regulation and oversight.

Industry Insights: Aligning with Regulatory Vision

Ali Hussein Kassim, Chairman of the Association of FinTechs in Kenya, supports the proposal, stating, “A more integrated payments ecosystem would support the growth of Kenya’s digital economy by making it easier for businesses and individuals to transact across different platforms. This aligns with the CBK’s vision for a unified and interoperable payments system, potentially simplifying regulatory oversight.”

The CBK has yet to make a definitive decision regarding the proposed FPS upgrade. However, there is considerable advocacy within the financial sector for the regulator to endorse an upgrade to the existing infrastructure, viewing it as a pragmatic approach to achieving a cohesive payment system.

Future Prospects: Envisioning an Integrated Financial Ecosystem

If the proposal gains approval, Pesalink will undergo significant enhancements to accommodate the anticipated surge in digital transactions. Safaricom and KBA envision a future where Pesalink not only facilitates basic payments but also supports more complex transactions, including cross-platform payments among mobile money providers, banks, and fintech companies.

This envisioned integration aims to create a more inclusive financial ecosystem, enabling consumers to transact seamlessly across various platforms. Such a system would reduce barriers between mobile wallets and traditional bank accounts, fostering financial inclusion and economic growth.

The Role of M-Pesa: A Catalyst for Integration

Safaricom’s M-Pesa, Kenya’s largest mobile money platform, is set to play a pivotal role in this integration. By joining the Pesalink network, M-Pesa aims to bridge the gap between mobile wallets and traditional bank accounts, creating a more unified payments ecosystem in Kenya. This integration is expected to make transferring money between mobile wallets and bank accounts faster and more seamless for millions of Kenyans, thereby enhancing financial inclusion.

Global Context: Kenya’s Digital Payment Landscape

Kenya has long been a pioneer in digital payments, with platforms like M-Pesa revolutionizing the way transactions are conducted. The country’s digital payments market is projected to grow significantly, with total transaction value expected to reach $7.64 billion in 2024 and an annual growth rate of 25.74% leading to a projected total of $24.01 billion by 2029. This growth underscores the importance of developing a robust and interoperable payment system to support the increasing volume of digital transactions.

Challenges and Considerations

While the proposal presents a compelling case for leveraging existing infrastructure, several challenges must be addressed to ensure successful implementation:

1. Technical Upgrades: Significant enhancements are necessary to ensure Pesalink can handle increased transaction volumes and provide seamless interoperability across various platforms.
2. Security Measures: Strengthening security protocols is crucial to protect against cyber threats and maintain user trust in the system.
3. Stakeholder Collaboration: Effective collaboration among banks, mobile money operators, fintechs, and regulators is essential to align interests and ensure smooth integration.
4. Regulatory Framework: Developing a supportive regulatory environment that fosters innovation while ensuring consumer protection will be key to the system’s success.

Conclusion

The joint proposal by Safaricom and the Kenya Bankers Association to designate Pesalink as Kenya’s next-generation fast payment system represents a strategic effort to unify the country’s fragmented payments landscape. By leveraging existing infrastructure, the initiative aims to enhance interoperability, reduce transaction costs, and promote financial inclusion. As the Central Bank of Kenya deliberates on this proposal, the nation stands at a pivotal juncture in its digital financial journey, with the potential to set a benchmark for payment systems across the region.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

4th January, 2025