LankaClear: Enabling a Digital Economy

Covid-19 may have forced Sri Lankans to be more accepting of digital transactions, but LankaClear had already laid the foundations to transform the nation’s payments ecosystem.

Sri Lanka is fertile ground for digital payments to flourish. The penetration rate for mobile phones is 149% of the population and 117% for active debit cards. Half the population uses smartphones and 45% enjoy internet access. The latter number, though not too impressive, points to a consumer base primed for fintech. However, there is a catch. Paper money has forever remained sacred in emerging markets like Sri Lanka. Unless necessity dictates otherwise.

For instance, fintech is booming in some African countries because ATMs and banks are scarce and several miles apart. In Sri Lanka, however, banks invested in internet banking and mobile apps while populating the countryside with their ATMs and then wondered why the uptake on their digital channels was low. Breaking the dependence on physical cash for a more efficient and inclusive payment system is LankaClear’s goal, explains its Chief Executive Officer and General Manager Channa de Silva.

Digital payments saw phenomenal growth during the covid-19 lockdown. LankaClear’s JustPay, a digital payment platform that allows customers to make retail payments using smartphones to transfer funds directly to merchant accounts, reached Rs1 billion in monthly transactions in May and volumes are growing each month. “Many people discovered the convenience, and power, of digital. They finally got a glimpse of what the future looks like,” de Silva said.

In this interview, de Silva explains how LankaClear is building that future:

LankaClear is revolutionising the payments landscape in Sri Lanka. How are you doing this, and can you take us through your journey so far?

De Silva: LankaClear started the revolution over a decade ago by introducing an automated clearing system for cheques. LankaPay is LankaClear’s flagship service connecting the country’s banks for extremely fast, reliable, secure, and affordable interbank payments. LankaPay enables an optimal level of convenience to the public. Earlier, interbank transfers and cheque clearance would take several days; with LankaPay these now take a fraction of that time.

We developed a common ATM switch, which appreciably elevated the convenience factor for users who no longer had to hunt for ATMs that belonged to their banks. The game-changer came when we launched a national platform for real-time digital fund transfers, which then enabled banks to push out internet and mobile banking services.

Around 2012, telecommunication companies introduced mobile-wallets and fund transfer facilities, but these involved the use of physical cash at some point, so they were not entirely digital payment systems. Sri Lanka is a well-banked society. There are more than 25 million debit cards for a population of 21.3 million.

Which means people have accounts with several banks, so a need emerged to seamlessly transfer funds from one bank to another. Today people can execute transactions in real-time from one bank to another using their computers or smartphones because of the infrastructure LankaClear built. Banks had invested in internet banking and mobile apps but struggle to get their customers to use these channels.

They did not help themselves by putting up ATMs in every corner either, because customers ironically saw this as a convenience rather than performing their banking transactions from the comforts of their homes. We had to do something to break this dependence on physical cash. The big breakthrough came when we introduced JustPay, which is an account-to-account mobile digital payment platform. Before JustPay, customers had to use an app that belonged to a bank they had an account relationship with.

Also, buyer and seller no longer need to use the same bank or payment app for a seamless transaction. With JustPay we broke the dominance of the onebank-one-app system and allowed anyone with any bank account to pay for goods and services using smart mobile devices by transferring funds from their bank accounts directly to a merchant, in real-time. All it takes is one click. Customers and merchants both now benefit from the easy to use and real-time fund transfer system. This has given the fintech landscape a boost. There are 15 payment apps, which are live on JustPay and we need to increase the usage.

We further consolidated the digital payments landscape when we recently introduced PEN, which stands for payment exchange name. This enables seamless cash transfers via mobile phones. With the PEN system, a bank assigns a nickname to a customer’s bank account linked to a registered mobile number of that user. A person will be assigned a unique name for each of his bank accounts registered under the same mobile number.

This will completely transform Sri Lanka’s peer-to-peer payment ecosystem. Taking a tuk ride, buying vegetables at the Sunday fair or the usual trip to the barber can be settled with a smartphone and does not need a hurried ATM stop. This would enable the digital payments chain to remain intact with no physical cash usage at any point. Another initiative is Direct Debit Authorization to enable automatic settlement of payments.

We are also fast-tracking the digitalisation of the payment systems across the government sector, which will increase productivity and service levels at a phenomenal rate. So apart from the Common ATM Switch, Common Electronic Fund Transfer Switch and Common POS Switch, we introduced a LankaPay and JCB co-branded National Card Scheme, which is a low-cost payment card option for banks. We are piloting a National Quick Response Code Standard for local currency payments, called LankaQR, for all financial institutions and fintechs to facilitate QR code-based payments.

How is covid-19 shaping the digital payments ecosystem?

De Silva: Unfortunate as covid-19 is, it has given a tremendous boost to digital transactions with a surge in usage since the lockdown. Before covid-19, most people preferred to transact in physical cash, and they opted to visit bank branches and ATMs for this same reason; most consumers just prefer banking the traditional way. However, the lockdown has since changed perceptions in dramatic scale. Forced to stay indoors people had no choice but use digital payment channels to pay for goods and services.

There was a 600% spike in internet banking volumes and more than 200% increase in fintech app registrations. JustPay volumes more than doubled during the lockdown and monthly transaction value grew by 60% during the same period. We reached a landmark Rs1 billion in monthly transaction value in May, and the average transaction size was below Rs2,500, which speaks volumes of the level of public acceptance.

Many people discovered the convenience, and power, of digital. They finally realised what the future holds for them. Even banks are now beginning to realise the importance of JustPay. Earlier, banks had been cautious about this latest payment platform because they wanted to protect their digital banking investments.

Before covid-19, we had 15 financial institutions, from state banks to private sector banks and finance companies, signing up with JustPay. They included state-sector banking giants Bank of Ceylon, NSB, and People’s Bank, three of the largest private sector banks Commercial Bank, Sampath Bank and HNB and a few more. Now, after the lockdown experience, many others are showing interest in joining the network.

Apart from the digital payment infrastructure, how else is LankaClear facilitating the post-covid new normal?

De Silva: The lockdown has had a devastating impact on many businesses. Not many transitioned seamlessly nor completely to Work from Home because they did not have systems to raise invoices and authorise payments. This is where LankaSign, our digital certification platform, can have a positive impact. Digital signatures are widely accepted and used for interbank settlements, customs document uploads and stock market trades. Only a few companies had adopted tools for digital signatures before the lockdown.

Making a payment is only a fraction of any transaction process, which requires the relevant documentation and authorisation to proceed. To facilitate digital payments in the backend, it is critical to share the authorised documents. Interest in LankaSign is growing and both public and private sector enterprises are working with us to adopt this technology.

What is the case for the need to accelerate Sri Lanka’s digitalisation strategy?

De Silva: Sri Lanka needs to move faster towards a digital economy to remain competitive in the fast-paced world. In China, around 92-95% of retail payment transactions are via mobile phones. Sri Lanka is still a cash-based economy. Digital is a means to uplift standards of living. Greater accessibility, convenience, and security that digital transactions can give means that people can focus more on the things that are important to them.

There are tremendous benefits and cost savings for business enterprises too that adopt digital payment channels and the SME sector has the most to gain. Our mission at LankaClear is to build Sri Lanka’s national payment infrastructure up to international standards and we have introduced several revolutionary technologies in this respect. While Sri Lanka is making impressive progress on the digital-payments infrastructure front, the uptake from the consumer side is slow compared to regional peers.

Most people still prefer transacting in physical cash despite the many digital options available. Sri Lanka’s lower internet and smartphone usage compared to peers in the region may best explain the low uptake of digital payments. For instance, mobile phone penetration is 134% of the population in Thailand, but its higher at 149% in Sri Lanka.

However, internet usage is higher in Thailand at 75% compared to 45% in Sri Lanka where smartphone penetration is around 50%. Social media usage on mobile devices is 75% in Thailand, but 30% here. We have a low urban population at 18%, compared to 50% in Thailand, which may explain the mismatch between the levels of customer sophistication and the adoption of technology that remains underutilized as a result. Technology must go rural to achieve the penetration levels like those of Thailand.

Merchants are reluctant to accept payment cards because of the merchant commission and the usage of cash was not a hindrance. In some African countries, the adoption and growth of digital payments was rapid. This is because reaching bank branches or ATMs was not convenient. In Sri Lanka, there are ATMs everywhere and most merchants are more than happy to accept cash. We must bring the merchant commission down. The low uptake is also an opportunity, and this is something that excites us at LankaClear.

There is an opportunity not only to build the infrastructure, but also to grow the size of the market by empowering consumers across the country. To do this we had to deploy cutting-edge technology that is easy to use, like JustPay for instance. Reaching the bottom of the pyramid is critical. We need to boost internet usage and simultaneously increase the adoption of digital payments, which is why LankaClear focuses on extending the digital infrastructure to SMEs and rural areas where 80% of the population lives.

This is imperative for digital payments to take hold and grow. An economy that relies on physical cash is a slow, inefficient one. Sri Lanka spends approximately 1.5% of its GDP just to keep cash in circulation! The country’s education spend in 2018 was only 2.1% of GDP. If we can increase digital payment penetration up to 30% of the cash transaction volume, that should free up at least 0.5% of GDP for something more useful for the economy. At the policy level, several measures can help further consolidate digital payments in the country. The Central Bank recently allowed banks to on-board new clients digitally, which is a positive step. It will soon introduce guidelines for banks to carry out KYC digitally and further streamline the on boarding process.

Sri Lanka also needs an electronic biometric identification system because this will enable faster authentication, which is critical for an efficient digital payments ecosystem.