Focuses on the Market Analysis & Intervention concerning the digital payment systems in Tanzania.

Introduction

The high transaction costs are a significant barrier to the adoption and usage of digital payment systems in Tanzania. These costs discourage consumers from using digital payments and impede the transition to a cash-lite economy. The Bank of Tanzania, in collaboration with other stakeholders, conducted a market study to understand the pricing structure of digital payment products, including costs related to operations, regulation, commissions, and interoperability.

Study Findings

Interoperable Costs

• Cost Disparity Between Providers: The study found that transferring money within the same service provider is more affordable than sending money to a different service provider. Specifically:
  • Intra-provider Transfer: Costs 1.61% of the transaction value.
  • Inter-provider Transfer: Costs 5.24% of the transaction value.
• Average Costs:
  • Digital Banking Channel: 3.82% of the transaction value.
  • Digital Mobile Channel: 2.68% of the transaction value.

These figures suggest that interoperability costs are significant, particularly when transactions occur between different service providers.

Regulatory Costs

• Impact on Transaction Costs: Regulatory costs, which include fees like transaction levies, VAT, and excise duty, have a varied impact:
  • Mobile Money Operators (MMO): Regulatory costs contribute approximately 2.44% to transaction costs.
  • Banks: The contribution is higher, at 5.85%.

While regulatory costs are a part of the transaction costs, their impact is relatively low compared to other factors.

Operational Costs

• Significant Contribution to Costs: Operational costs, which include expenses for technology infrastructure, personnel, and customer services, have the highest impact on transaction costs.
  • Banks: Operational costs contribute 82.69% of the total transaction costs.
  • Mobile Money Operators (MMO): These costs account for 68.39% of transaction costs.

This indicates that the majority of the transaction costs come from the operational side, making it a critical area for potential cost reduction.

Commission Costs

• Influence on Pricing: Commissions paid to agents and business partners also play a substantial role in the overall transaction costs.
  • Digital Banking Transactions: Commissions account for 28.02% of the total transaction cost.
  • Digital Mobile Money Channel: Commissions make up 26.49% of the transaction costs.

Commissions are a significant cost driver, particularly in the context of agent-based models used in digital payments.

Recommendations

The study recommends that financial service providers and policymakers should work together to reduce transaction costs. Lower costs would make digital services more affordable and encourage greater adoption of digital payments.

Policy Intervention

The Bank of Tanzania has responded to the findings by issuing guidance on transaction fees for large-value payments processed through various systems like TISS, EFT, TACH, and TIPS. The revised interbank transfer fees are aimed at addressing cost challenges to boost the usage of banking services, which is notably low at only 22% among Tanzania's adult population, as reported in the Finscope Survey 2023. Cost was identified as a major barrier to increased usage.

Revised Interbank Transfer Fees (Examples)

• EFT Interbank Transfer Fees:
  • Incoming Transfers: All amounts charged at TZS 0.
  • Outgoing Transfers:
    • TZS 1-50,000: TZS 0-500.
    • TZS 50,001-500,000: TZS 0-1,000.
    • TZS 500,001-5,000,000: TZS 0-1,500.
    • TZS 5,000,001-20,000,000: TZS 0-2,000.
• TISS Transaction Charges:
  • Incoming Transfers: All amounts charged at TZS 0.
  • Outgoing Transfers:
    • TZS 1-10 million: TZS 0-2,000.
    • Above TZS 10-50 million: TZS 0-5,000.

Focused on market analysis, intervention and implications for Tanzania's economic development

The focus on reducing transaction costs and promoting digital payments in Tanzania has the potential to significantly contribute to the country's economic development. It supports financial inclusion, enhances economic efficiency, and creates a more competitive and stable economic environment, all of which are critical for sustained economic growth.

Reduction in Transaction Costs

• Encouraging Digital Payment Adoption: The high transaction costs associated with digital payments are a barrier to their widespread adoption. By addressing these costs, particularly through policy interventions like reducing interbank transfer fees, the Bank of Tanzania aims to make digital payments more affordable. This, in turn, can drive greater adoption of digital financial services across the population.
• Economic Efficiency: Lower transaction costs can enhance the efficiency of financial transactions in the economy. When individuals and businesses can transfer money more affordably, it reduces friction in the economy, potentially leading to increased economic activity and growth.

Financial Inclusion

• Increased Access to Financial Services: The document highlights that only 22% of Tanzania's adult population uses banking services, with cost being a major barrier. By reducing costs, more people, particularly those in lower-income brackets, can be included in the formal financial system. Greater financial inclusion can empower individuals, foster entrepreneurship, and improve overall economic stability.
• Digital Payment Ecosystem: As more people adopt digital payments due to lower costs, the digital payment ecosystem in Tanzania can grow. This growth can lead to more innovation in financial products and services, further driving economic development.

Support for a Cash-lite Economy

• Transition to a Cash-lite Economy: The Bank of Tanzania's efforts to promote digital payments support the broader goal of transitioning to a cash-lite economy. A cash-lite economy can reduce the costs associated with handling physical cash, such as security and transportation. It also makes financial transactions faster and more transparent, which can reduce corruption and increase economic transparency.
• Increased Economic Formalization: As more transactions move to digital platforms, there is an opportunity for greater formalization of the economy. This can lead to better tax collection and more accurate economic data, which are essential for effective economic planning and development.

Boosting SME Growth

• Support for Small and Medium Enterprises (SMEs): SMEs often face higher relative transaction costs compared to larger businesses. By reducing these costs, SMEs can become more competitive, improve their cash flow, and potentially expand their operations. This growth is crucial for Tanzania's economic development, as SMEs are a significant driver of employment and economic activity in the country.
• Facilitating Trade and Commerce: Lower transaction costs can also facilitate trade and commerce, both domestically and internationally. As Tanzanian businesses find it cheaper to engage in digital transactions, they can more easily participate in global markets, potentially leading to increased exports and foreign exchange earnings.

Regulatory Reforms and Economic Stability

• Impact of Regulatory Costs: The document notes that regulatory costs contribute to transaction costs, particularly in the banking sector. By addressing these costs through policy reforms, Tanzania can create a more favorable business environment. Regulatory reforms that reduce unnecessary costs can make Tanzania more attractive to both domestic and foreign investors, leading to increased investment and economic growth.
• Stable Financial Sector: By ensuring that the digital payment system is affordable and efficient, the Bank of Tanzania is contributing to the stability of the financial sector. A stable and efficient financial sector is a cornerstone of economic development, as it provides the necessary infrastructure for savings, investments, and the efficient allocation of resources.

Potential for Economic Growth

• Multiplier Effect: The reduction in transaction costs and the resulting increase in digital payment adoption can have a multiplier effect on the economy. As more people and businesses engage in the digital economy, there can be increased productivity, higher levels of investment, and ultimately, stronger economic growth.
• Innovation and Competitiveness: By fostering a more competitive and innovative financial services sector, Tanzania can better integrate into the global economy. This can lead to increased economic resilience and the ability to compete on a global stage.