ETHIOPIA

REMITTANCE REVIEW:
ASSESSMENT OF PAYMENT
AND FINANCIAL MARKETS
INFRASTRUCTURES

1
ACKNOWLEDGEMENTS

On behalf especially of the migrant women and men customers originating and receiving
remittances, and their wider communities in least developed countries, the United Nations
Capital Development Fund (UNCDF) would like to thank collaborators who are contributing
to our efforts. This appreciation is extended to many stakeholders, including programme
staff, implementation partners, knowledge leaders, expert influencers, wider global advocates
and advocacy organizations, United Nations colleagues, collaborators in the wider fields of
international and development finance and in the financial and remittance industries, research
participants, regulatory and policymaking leaders, and many other individual or organizational
stakeholders. This programme has been made possible by generous funding support from
the Swiss Agency for Development and Cooperation (SDC) and the Swedish International
Development Cooperation Agency (Sida).

The drafting of this exploratory paper was led by Hemant Baijal, with invaluable inputs from
Elia Mandari. Amil Aneja provided overall guidance and coordination. Contributions to the
drafting were also made by Amani Itatiro, Arunjay Katakam, Elia Mandari, Mamadou Saido
Diallo, Oswell Kahonde, Josephat Mutepfa, Ganesh Kumar and Sarah Lober.

Invaluable inputs have also been made by members of the management team at the National
Bank of Ethiopia led by Habtamu Workneh, Director for External Sector Analysis & Interna-
tional Relations, Marta Hailemariam, Director for Payment & Settlement Systems, and Melesse
Tashu, Senior Macro-Econimc Advisor.

Editorial and layout contributions: Green Ink, United Kingdom (www.greenink.co.uk)

CONTENTS

2 ACKNOWLEDGEMENTS

4 ACRONYMS AND ABBREVIATIONS

5 ABOUT THIS REPORT

Summary of recommendations 6

8 LANDSCAPE FOR CROSS-BORDER REMITTANCES IN ETHIOPIA

Remittance market overview 8
The Government of Ethiopia’s efforts to improve remittance inflows 10

11 KEY STAKEHOLDERS IN THE

PAYMENTS AND REMITTANCE MARKET
The National Bank of Ethiopia 11
Banks 11
Remittance service providers 11
Microfinance institutions 12
Payment service providers 12
Agents 13

14 NATIONAL PAYMENT SYSTEMS INFRASTRUCTURES

16 REMITTANCE PRODUCTS AND SERVICES

18 ASSESSMENT OF THE PAYMENT SYSTEMS INFRASTRUCTURE FOR DIGITAL

REMITTANCES
Retail payments access points for sending and receiving remittances 18
Access to national payment infrastructures by non-bank remittance service
providers 21
Interoperability and interconnectivity of domestic and regional payment
infrastructures 24
Interconnectivity with local, regional and international hubs, gateways and
multilateral payment platforms 27
ACRONYMS AND ABBREVIATIONS

ACH automated clearing house

ATM automated teller machine
BIS Bank for International Settlements
COMESA Common Market for Eastern and Southern Africa
COVID-19 coronavirus disease 2019
CPMI Committee on Payments and Market Infrastructures (formerly CPSS)
DMS dual message system
EATS Ethiopian Automated Transfer System
ECA Ethiopian Communication Authority
e-KYC know your customer
ETB Ethiopian birr
ETS EthSwitch
FSB Financial Stability Board
GCC Gulf Cooperation Council
GDP gross domestic product
ICT information and communications technology
MFI microfinance institution
MNO mobile network operator
MTO money transfer operator
NPS National Payment System
NBE National Bank of Ethiopia
POS point of sale
PSO payment systems operator
PSP payment service provider
QR quick response
RSP remittance service provider
RTGS real-time gross settlement system
SWIFT Society for Worldwide Interbank Financial Telecommunication
UNCDF United Nations Capital Development Fund

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ABOUT THIS REPORT

At the request of the National Bank of Ethiopia (NBE), the United Nations Capital Development
Fund (UNCDF) has been working with the NBE and other stakeholders from the Government
of Ethiopia to build capacity among policymakers and regulators as well as to adapt the
existing policy and regulatory frameworks to meet the NBE’s objectives – lower remittance
costs, improve cross-border remittance flows through formal channels and expand the use
of digital channels to receive remittances – all of which create opportunities for a broader
suite of migrant-centric financial products that can be linked to remittances.1 Such services
include, but are not limited to, insurance, pension, credit, savings and payments.

In the context of UNCDF support to the NBE, this report was prepared to address the NBE’s
ongoing efforts to modernize its payments and financial markets infrastructures in line with
the aforementioned objectives. The report builds on UNCDF’s foundational analysis con-
ducted in the diagnostic for policy, legal and regulatory framework for remittances in Ethi-
opia. Additionally, for information and reference purposes, the report also uses several key
documents created by UNCDF, Better than Cash Alliance and the World Bank for guidance
on modernization of payments and remittance services in Ethiopia, as well as standards and
principles encapsulated in the Financial Stability Board (FSB), Bank of International Settle-
ments Committee on Payments and Market Infrastructures (BIS CPMI), the World Bank and
other standard-setting bodies on retail payment systems, cross-border remittances and
digital financial inclusion.

The scope of this report draws from the collaborative document developed by the NBE and
UNCDF in 2020 – Proposals for Enhancing Remittance Flows to Ethiopia – which identifies
key areas that require attention to enhance the remittance flows to Ethiopia, including
modernization of payment system infrastructures. In this context, four key challenges have
been identified that impede the development of modern and efficient payment system
­infrastructures to enhance remittance flows using digital payment channels.

• Low availability of access points for sending and receiving remittances, including
automated teller machines (ATMs), merchant point of sale (POS) and cash-in/cash-
out agents.

• Limited access to the National Payment System (NPS) infrastructures by non-bank

remittance service providers (RSPs), including mobile network operators (MNOs),
money transfer operators (MTOs) and fintech. Currently, only banks, the national
switch, premium switches (established by six banks) and Ethiopian Commodity
Exchange are connected to the NPS infrastructures.

1
The recently launched National Digital Payments Strategy (NDPS) Action 14 emphasizes the digitalization of
remittances.

5
 • Limited interoperability for key retail payment systems and instruments including POS,
mobile money services and agents. In fact, agent interoperability is currently not
available.

• Low levels of connectivity with local, regional and international hubs and gateways
as well as multilateral payment platforms.

The report assesses the progress made in the last five years under each of the four priority
areas identified by the NBE for modernization and upgrade of the NPS infrastructures and
provides guidance for future action by the NBE in coordination with industry stakeholders
to improve the NPS infrastructures for increased remittance flows through monitored and
regulated digital channels.

Summary of recommendations

Interoperability Interconnectivity
Retail payments and with local, regional
access points interconnectivity and international
for sending Access to NPS of domestic and hubs, gateways
and receiving infrastructures by regional payment and multilateral
remittances non-bank RSPs infrastructures payment platforms
• Establish • Build resilience in The NBE should The NBE
specific targets critical retail NPS prioritize completion should consider
for increasing infrastructures of POS and implementing a
Priorities and targets

the number of such as ETS. mobile money fintech regulatory

access points for • Implement digital interoperability in sandbox approach to
remittances. ID, e-KYC and 2021 over the launch promote long-term
• Increase the credit-scoring of the RTRP platform innovation in digital
number of infrastructures to ensure that the payments, financial
digital payments to facilitate payments ecosystem and banking services.
use cases by digitalization is fully ready for
improving of remittance deployment of digital
coverage and services. remittance products.
availability.

Provide clear and

Standardization

early guidance to
the market on a
standardization
and interoperability
framework for QR
codes.

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 Interoperability Interconnectivity
Retail payments and with local, regional
access points interconnectivity and international
for sending Access to NPS of domestic and hubs, gateways
and receiving infrastructures by regional payment and multilateral
remittances non-bank RSPs infrastructures payment platforms
• Upgrade its
supervision
and oversight
framework for
monitoring ETS
Supervision and oversight

and address
any additional
operational risks
arising because of
its heightened role
in providing access
to non-bank PSPs
to the NPS.
• In parallel to the
development of
the RTRP platform
for ETS, the NBE
should enhance its
oversight capacity
for new types of
payment services.
Speeding up the The NBE should
licensing process by expedite the
adopting automated licensing process for
Licensing

tools/processes for non-bank PSPs and

the non-bank PSPs PSOs to create more
would expedite efficiencies in the
the mobilization of market.
agents by entities
such as HelloCash.
Capacity-building
Capacity-

support to the NBE

building

and ETS for faster

integration of new
technologies in retail
payment services.
Connectivity
with international
hubs, gateways
Partnerships

and multilateral
platforms should be
encouraged for the
NPS to allow greater
access to digital
channels for local
banks and RSPs.

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LANDSCAPE FOR CROSS-BORDER
REMITTANCES IN ETHIOPIA

Remittance market overview

In 2020, Ethiopia had an overall population of 115 million people. As of 2020, there were an
estimated 946,100 Ethiopian migrants globally: 46 percent were female migrants and a ma-
jority were in the United States of America, accounting for 26 percent of the total migrants
(51 percent were women), 17 percent in Saudi Arabia (31 percent were women) and 8 per-
cent in Israel (51 percent were women).2 Ethiopian migrants sent about US$5 billion back to
Ethiopia, accounting for more than 5 percent of the country’s gross domestic product (GDP)
and about one quarter of its foreign exchange earnings. The United States, Saudi Arabia and
Israel are the main send markets for Ethiopia, accounting for 65 percent of the total value of
remittances received. Other markets of importance include the United Kingdom and Italy.
The largest send markets highlight that migration trends from Ethiopia are generally skewed
towards North America and Europe, with very few intra-African flows. This likely reflects
the political climate of the region and socio-economic status of many of these countries,
making them less attractive destinations of migration for Ethiopians. At the household level,
remittances represent a vital source of income for many individual recipients. The size and
scale of remittances also create the possibility of harnessing these flows for productive in-
vestment, thus contributing to Ethiopia’s long-term development.

According to the World Bank’s 2017 Global Findex Database, 34.8 percent of adults had an
account at a formal financial institution in 2017. Although the financial sector has expanded
significantly in the last decade, most of the progress has been made in urban areas where
approximately 20 percent of the population lives. With most bank branches and financial
services available in the capital city and a majority of the population living in rural parts of
the country, the access to formal financial services is very limited in rural areas. Most of the
account ownership is in the urban areas, with 33 percent of the population holding a bank
account – an increase of 11 percent since 2014. The lack of countrywide mobile money
programmes, coupled with a low penetration of banking and remittances services outside
the cities, is one of the main reasons for high levels of informal inflows in the country. More-
over, inward remittances are not leveraged to improve financial inclusion in the domestic
economy. The international remittances market is yet to be fully harnessed as a means to
encourage financial inclusion. When remittances beneficiaries withdraw cash, this may be
an entry point for other financial services, providing banks with an opportunity to cross-sell
digital financial services to them.

2
United Nations, International Migrant Stock (2020), www.un.org/development/desa/pd/content/international-
migrant-stock.

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In March 2020, there was an initial decline in remittance flows throughout sub-Saharan Africa
including Ethiopia, mainly as a result of loss of wages of migrant workers in send countries
during the COVID-19 pandemic. However, many countries saw resilience in the flow of re-
mittance after the initial decline.3 While country-specific data are not available for Ethiopia,
it was observed within sub-Saharan Africa that the overall costs of sending remittances did
not increase during the pandemic; however, the volumes of remittance inflows were severely
affected throughout the region, especially for cash-based remittances. On the other hand,
wherever adoption of digital channels4 was high, the remittance flows have increased since
the pandemic, bringing down the associated costs.5,6 The use of digital channels is heavily
dependent on access to transaction accounts as well as the ability of the RSPs to provide
digital solutions to participate in the NPS infrastructures as an extension to the traditional
cash-based access point network. Countries that had low financial inclusion rates and low
levels of digitalization suffered the most, especially populations in rural areas.

According to the World Bank’s Remittance Prices Worldwide database,7 compared to the
other countries in sub-Saharan Africa with an average cost of sending remittances above
8 percent and a global average of 6.5 percent, Ethiopia is one of the cheapest remittance
markets in Africa. When compared to other large receiving markets in Africa, Ethiopia is
relatively competitive – cheaper than Nigeria but more expensive than Egypt. The cost of
sending money to Ethiopia varies according to the sending country; however, as all the
banks offer the services of multiple MTOs on an open and competitive basis and with no
exclusivity arrangements, this tends towards lower costs. The cost of sending remittances
to Ethiopia from Europe, the Middle East and North America averages 7 percent, 4 percent
and 5 percent, respectively, of the transaction value.

Although there have been improvements made in recent years to increase the flow of re-
mittances through regulated channels, evidence suggests that informal networks remain a
prominent way for Ethiopians to send money home. The primary reason is that there is a
spread of 12–13 Ethiopian birr (ETB) per US$ between the parallel market and the official
foreign exchange rates. Senders and receivers prefer informal channels to take advantage
of the higher parallel market rate, and this prevents the uptake of digital products for remit-
tances despite their growing availability. Direct account to account transfers are not fully
available for remittances because of limited interoperability. Further policy and regulatory
interventions may be needed to provide adequate tax and financial incentives in conjunction
with enabling interoperability in retail payment systems. Interventions may also have to be
considered to address the existing gap between official foreign exchange rates and those

3
A recent International Monetary Fund (IMF) research paper published in July 2021, Defying the Odds:
Remittances during the COVID-19 pandemic, documents a strong resilience in remittance flows. Despite an
unprecedented global recession triggered by the pandemic, the paper notes “remittances have proved to be
an automatic stabilizer during the pandemic.” The analysis is based on the remittances data from 52 countries
covering the period January to December 2020.
4
A digital remittance must be sent via a payment instrument in an online or self-assisted manner and received
into a transaction account, for example a bank account maintained at a non-bank deposit taking institution
(such as a post office), mobile money account or e-money account.
5
According to the World Bank’s Remittance Prices Worldwide database, the average cost of remittance for
sending US$200 to sub-Saharan Africa was 8.94 through cash channels versus 6.44 through digital channels.
6
Remittance Community Task Force, Remittances in Crises: Response, recovery and resilience (2020), https://
gfrid.org/wp-content/uploads/2020/12/Blueprint-for-Action_FINAL.pdf.
7
World Bank, Remittance Prices Worldwide, https://remittanceprices.worldbank.org/en.

9
in parallel markets, to revisit the foreign exchange holding limitations currently in place, to
address regulatory barriers for undocumented migrants in host countries and to enhance
migrants’ digital literacy pre-departure so they leave possessing the knowledge and skills
they will need to send remittances through formal digital channels.

The Government of Ethiopia’s efforts to improve remittance inflows

Over the last decade, the Government of Ethiopia has implemented several policy measures
to improve the operations and flow of formal remittances, as well as to reduce the costs of
transfers and increase access to international remittance services. These include reforms
undertaken by the Ethiopian authorities such as the Homegrown Economic Reform Pro-
gramme (HERP),8 launched in September 2019 to ease business constraints and foster private
sector development through a set of sectoral and macroeconomic measures, including those
targeted at breaking up monopolies and removing market distortions in the financial sector.
Additionally, the National Foreign Affairs and Security Policy and Strategy recognized the role
of the Ethiopian diaspora in promoting investments and trade ties and urged the government
to improve the enabling environment to attract remittance flows from the diaspora.

Ethiopian authorities have also taken concrete actions to promote the country’s digital
economy by developing a comprehensive national-level digital strategy called Digital Ethi-
opia 2025.9 The strategy envisions an inclusive digital economy approach that will catalyse
achievement of Ethiopia’s broader development goals. However, for the strategy to be fully
effective, the government must align and build on key pillars to benefit from economic lib-
eralization and digitalization. These include establishing digital platforms that enhance use
of digital financial services and e-commerce, passing relevant regulations and policies to
restructure the telecommunications market, promote competition in the information and
communications technology (ICT) and digital financial services sectors to enhance the social
and economic development of the country, and promote adequate consumer protection for
the ICT sector. Steps were also taken to establish the Ethiopian Communication Authority
(ECA), the mandate of which is to develop high-quality, efficient, reliable and affordable com-
munication services, promote a competitive market for the achievement of its goals, expand
access and protect consumers’ interests. To further unlock the transformational power of the
digital economy, the government has decided to issue two new telecommunications service
licences. Accordingly, the ECA has issued the final licence to Safaricom Telecommunications
Ethiopia PLC following its incorporation as a local Telecommunications Operating Company
in line with the prevailing legal and regulatory requirements.

8
The government has launched the Homegrown Economic Reform agenda, which aims to transform Ethiopia
from a largely agrarian low-income country to an industrialized lower-middle-income country by 2030.
9
Federal Democratic Republic of Ethiopia, Digital Ethiopia 2025: A strategy for Ethiopia inclusive prosperity
(2021), https://drive.google.com/file/d/18KbIfd65E_5AS6u9HTn6s_SC8j1wS17z/view.

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KEY STAKEHOLDERS IN THE
PAYMENTS AND REMITTANCE MARKET

The National Bank of Ethiopia

As the central bank, the NBE is responsible for licensing and supervising banks to provide
remittance services, including approval of partnerships with various RSPs. The NBE is also
the overseer of the payment system in which the keynotes, guidelines and principles related
to the payment settlement systems are established, and developments in the existing and
planned systems are monitored and assessed against determined objectives. Lastly, as noted
in the section below, the NBE plays the role of owner/operator of critical NPS infrastructures,
including the Ethiopian Automated Transfer System (EATS) and automated clearing house
(ACH).

Banks

There are 18 banks in Ethiopia (including the two state-owned banks), collectively holding
about 92 percent of total financial sector assets. The state-owned Commercial Bank of
Ethiopia (CBE) holds a disproportionate share of the market, with 59 percent of total banking
assets and 60 percent of total deposits. By June 2020, there were 6,508 bank branches
across the country, and 34.1 percent of the branches were located in Addis Ababa. As noted
above, banks mostly offer remittance services through MTOs. Banks also offer transfers
via correspondent banking relationships (CBRs) using the Society for Worldwide Interbank
Financial Telecommunication (SWIFT) messaging system. This is generally expensive for
small amounts, and it is unsuitable for those who do not have bank accounts. Correspondent
banks/SWIFT-based international remittances are used for larger business-to-business/
organizational transfers that do not facilitate a cash pickup (non-governmental organizations,
aid organizations, companies, etc.).

Remittance service providers

Ethiopia requires that all non-bank RSPs partner with banks to provide cross-border re-
mittances services. A large majority of cross-border remittances are sent through the MTO
channels, especially for person-to-person remittances. Banks use the correspondent banking
relationships leveraging the SWIFT network for business-to-business or organizational in-
flows. There are eight MTOs operating in Ethiopia – Western Union, Money Gram, Ria Finan-
cial, Xpress Money, Transfast, WorldRemit, Dahabshiil and one other smaller MTO. More than
50 percent of remittances coming through MTO channels are through Western Union. Since
2009, to improve flows through regulated channels, the NBE regulations prohibit exclusive
partnership agreements with MTOs, and this provides good options for both banked and
non-banked recipients to go to any bank branch and cash out remittances. Of remittances

11
sent through the MTO channels, 80 percent are picked up in cash, and the remaining are
deposited into bank accounts, indicating that there is room for improvement in terms of
converting cash remittances to digital payment instruments. However, the trend is shifting in
the right direction for promoting digital remittances using international fintech platforms. In
2019, two leading banks, the Bank of Abyssinia and Wegagen Bank, announced partnership
with WorldRemit to enable digital money transfers. For each bank, the partnership means that
Ethiopians living abroad in over 50 countries, including the United States, United Kingdom
and Canada, can send money digitally to the Bank of Abyssinia and Wegagen Bank accounts
and more than 300 cash pickup locations across Ethiopia.

Microfinance institutions

Thirty-eight microfinance institutions (MFIs) in Ethiopia collectively hold 6 percent of all

financial sector assets. The five largest MFIs are also state-owned. As of June 2020, there
were 2,007 MFI branches across the country. None of the MFIs are integrated into the na-
tional switch as they are lagging behind banks in technological terms. MFIs are permitted to
engage in international remittance business if they become electronic money issuers. Given
that a large section of the population lives in rural areas and does not have proper access to
banking, MFIs could serve as an important channel for remittances if they had the oppor-
tunity to partner with some of the emerging payment service providers (PSPs) and fintech.

Payment service providers

With the passing of the recent NBE Directive on Licensing and Authorization of Payment
Instruments Issuers and Payment System Operators, domestic non-bank PSPs can issue
electronic money instruments and can get a payment systems operator (PSO) licence to
provide payment and remittances services. There are four types of designations under the
PSO licence – payment switch, ATM operator, POS operator and payment gateway operator.
A PSP can choose one or more of these designations under a single licence. Ten switch op-
erators and three mobile money operators have applied for licences since the NBE Directive
was passed and are awaiting approval.

Some examples of new developments under this directive include development of the
HelloCash payment processing platform, which provides different types of payment services
to small banks and MFIs with limited technology resources and know-how. Payment services
include merchant aggregation services for small and medium-size merchants to develop POS
and e-commerce acceptance and for pay-as-you-go services. HelloCash is also partnering
with Visa to leverage their Visa Direct platform to enable cross-border remittances in Ethiopia.
In another example, Kifiya, through its subsidiary Melapay, is offering its payment processing
in combination with the clearing and settlement services for the banks interested in using
its platform. Melapay has essentially become the local processing hub for different types of
payment services for banks that do not have the capacity to develop in-house processing
systems. They are also leveraging the Visa Direct platform to enable international transfers in
key corridors including the United States, Europe, Gulf Cooperation Council (GCC) and Israel.

12
Agents

The NBE recently issued a Use of Agents Directive No. FIS/02/2020. The directive defines
activities that can be carried out by an agent, provides a framework to offer agency business
services and sets minimum standards of customer protection and risk management to which
agents must adhere. The directive applies to banks, MFIs, payment instrument issuers and
their agents (including super and sub-agents) that provide agent services in Ethiopia. Several
banks have agents’ networks that are equipped with POS and allow users to send and re-
ceive remittances. Banks that have agent banking networks operate on an exclusivity basis.
HelloCash also provides a network of agents for its mobile money wallet (estimated around
10,000), but the capacity for delivering remittances is dependent on the partner banks.

13
NATIONAL PAYMENT SYSTEMS
INFRASTRUCTURES

Starting in 2011, the NBE has taken several important steps to modernize its payments and
financial markets infrastructures after signing the Maya Declaration, including the imple-
mentation of the EATS and the ACH. The EATS is a modern digital clearing and settlement
system that is owned and operated by the NBE. The EATS includes a real-time gross settle-
ment system (RTGS) for the final settlement of payments between financial institutions. The
system also integrates automated processing or transactions for the Ministry of Finance,
Ethiopian Revenues and Customs Authority and Ethiopian Commodities Exchange. The ACH
was recently operationalized and plays a critical role in fostering development of retail pay-
ments services in Ethiopia, increasing the efficiency, interoperability and cost-effectiveness
of ACH-based payments for both the private and public sectors.

The national e-payment switch EthSwitch (ETS) was launched in 2016 with the goal of al-
lowing the interoperability of ATMs, mobile money services and POS networks. In addition
to the banks, MFIs are also allowed to connect to ETS. The NBE plans to give non-bank RSPs
access to the NPS infrastructures by establishing connectivity between ETS and the RSPs.
ATM switching is currently functional, and both POS and mobile money switching capabilities
are being piloted, with the pilot for POS in more advanced stages. ETS’ Ethiopay platform
has also launched a remit to “pay services” for the Ethiopian diaspora to pay for school fees,
telecom, utility bills and other needs of family members. The platform is still new and has low
volumes. As noted below, ETS is also being leveraged to further modernize the retail payment
and remittance platforms through the anticipated launch of its RTRP in 2023. This system will
include real-time clearing and settlement services among other types of payment services.

The existing personal identification (ID) infrastructure is basic in Ethiopia, with different
kebele (the smallest administrative unit) offices issuing Kebele Cards that serve as ID cards
for citizens. The cards contain a standard set of information but do not follow a standard
format. Coverage appears to be very high for both men and women, although there is no
centralized database that allows for an accurate count of how many individuals hold Kebele
Cards. These cards are used for many private and public sector transactions. However, Kebele
Cards lack any security features and are therefore vulnerable to forgery. There is also usually
a cost associated with procuring these cards.

The Digital Ethiopia Strategy 2025 recommends adoption of the ten Principles on Identifi-
cation for Sustainable Development drawn around inclusion, design and governance. Im-
plementation of the recommendation will provide another impetus on flow of remittances
through digital channels. In June 2020, the National ID Pilot Project was launched with the
objective of upgrading the existing ID cards to digital IDs with support from the World Bank
ID for Development (ID4D) Programme. The project is expected to be completed by the end
of 2021 and is likely to greatly benefit digital financial services as it will be interoperable with

14
other digital platforms and financial infrastructures. Currently, there are no stated plans to
incorporate credit-scoring systems or to develop electronic know your customer (e-KYC)
platforms. However, with an envisaged digital economy, such key infrastructures will be
important in further harnessing the market potential to expand the credit market and allow
smarter customer onboarding and e-KYC capabilities.

15
REMITTANCE PRODUCTS
AND SERVICES

Although the NPS has undergone significant modernization, its usage is still low, and most
remittances are cashed out immediately. Consumer preferences for cash and low levels of
financial inclusion and literacy may explain why inward remittances continue predominantly
to be terminated as cash after beneficiaries collect their funds at bank branches or agent
locations. RSPs are legally required to handle foreign exchange transactions through com-
mercial banks, which are required to pay out cash to the recipients in local currency. This
is another reason for the thriving informal market for remittances as the exchange rates are
lower than what the informal market provides. For those who do not cash out immediately
and leave the remittances in the bank accounts, the options to convert the remittances into
digital products are limited – they can only either withdraw funds at an ATM or at a POS of
one of the agents.

As many of the new digital products and services are not yet fully launched, opportunities
to convert international remittances into bank deposits and/or digital channels depend on
availability of full spectrum of digital products offered by banks and non-bank RSPs. There
are a few active schemes for domestic person-to-person transfers using mobile money
wallets. The HelloCash solution is offered by integrating its services with the core banking
system of the partner bank, and the money can be instantly credited to the recipient if they
choose. Regulations in Ethiopia allow use of mobile wallets for inbound remittances (MTOs
can credit funds to a customer’s HelloCash account); however, outbound international
remittances initiated through a mobile wallet are not permitted. HelloCash also offers utility
payments and merchant payments as use cases for its customers. Despite these services,
international transfers are limited to pilot programmes involving banks’ proprietary wallets,
M-birr or HelloCash, working with WorldRemit and Visa Direct. Some transactions have been
successful, but the service has not been actively promoted and volumes are currently very
low.

In terms of domestic remittances or person-to-person transfers, the 2017 World Bank Findex
reports that 24 percent of adults sent or received domestic remittances. Most of these
remittances were processed via a bank or MFI (59 percent of senders), followed by in-person
or cash (40 percent of senders). Less than 1 percent of senders stated that they had sent
or received remittances using a mobile wallet. This implies that essentially all remittances
services, both cross-border and domestic, are conducted via over-the-counter services or
in person.

As for cross-border remittances, the fee to send the equivalent of a US$200 transaction
to Ethiopia averages around 7.2 percent depending on the country: from Saudi Arabia,
5.1 percent; from the United States, 5 percent; from Italy, 9.3 percent; and from the United
­Kingdom, 9.4 percent. Non-over-the-counter remittances – that is, those where the

16
transaction originates and terminates in a bank account or mobile wallet – cost considerably
less, at an average of 3 percent.

As noted earlier, digital remittance models that partner with domestic financial institutions
have been gradually emerging, but significant efforts are still required to expand the digital
channels sufficiently to increase adoption and usage and thereby drive costs down. Both the
supply side (the expansion of reliable network coverage via the liberalization of the telecom
sector) and the demand side (the enhanced digital literacy of migrants and recipients) among
other interventions will be key to the success of these efforts.

17
ASSESSMENT OF THE PAYMENT
SYSTEMS INFRASTRUCTURE
FOR DIGITAL REMITTANCES

This section assesses progress made by the NBE and market stakeholders in the four key
areas identified in the scope of the study to address the NPS infrastructure gaps and remain-
ing challenges.

Retail payments access points for sending and receiving remittances

Context
The usefulness of transaction accounts for payments or remittance services is augmented by
a broad network of access points with wide geographical coverage and by offering a variety
of interoperable access channels.10 The existence of a national-level retail payment infra-
structure including ACH, payment card and mobile money switches can effectively increase
the network of access points (e.g. ATMs, POS, branches or agent networks) for individual
customers. Such centralized infrastructures act as hubs for processing interbank transactions
and consequently improve interoperability and exhibit positive network externalities for all
system participants. Any branch of a bank or other PSP participating in the ACH or switch
can be used to initiate a funds transfer to a customer of another ACH or switch participant.
This supports countrywide reachability, even if a particular bank does not have access points
deployed in specific regions. The success of digital remittance services that use the rails of
retail payment systems depends critically on the availability, quality and reliability of customer
service and access points.

Situation in Ethiopia
In Ethiopia, bank branches, ATMs and agent-based POS terminals are important access
points to disburse remittances. Of remittances sent through the MTO channels, 80 percent
are picked up in cash at bank branches or agents, and the remaining 20 percent are cred-
ited to bank accounts that can be accessed through ATMs or used for payment of goods/
services using debit cards and, in some instances, mobile wallets. As of June 2020, there
are 18 banks operating, with approximately 6,508 branches across the country. As per NBE
statistics, there are more than 2,700 operational ATMs and 8,800 POS terminals, owned by
both the state-owned and private sector banks. Overall, 34 percent of bank branches and
50 percent of ATMs are in Addis Ababa where only 3 percent of the population lives. The
POS terminal network in the country is much less extensive compared to other countries in
sub-Saharan Africa.

10
World Bank, Payment Aspects of Financial Inclusion (PAFI) (2017), www.worldbank.org/en/topic/
financialinclusion/brief/pafi-task-force-and-report.

18
Several banks operate their own agent networks; however, these agents operate on an
exclusivity basis. Agents have POS machines, and these can be used for cash withdrawals
including remittances. The overall number of agents provided by the fintech platform
HelloCash is estimated to be around 10,000, but their capacity of delivering remittances
is limited to the scheme to which the banks belong. Considering the large population of
Ethiopia and the flow of remittances, the number, availability and distribution of agent-based
service points is low.

An aspect that works well in Ethiopia is that all banks openly serve customers of other banks
to cash out remittances or request ACH-based transfer to their bank accounts. Even un-
banked individuals can walk up to any bank branch and cash out their remittances. However,
low levels of financial inclusion and the concentration of domestic banking infrastructure in
urban areas limit opportunities to use options other than cash out. In rural and remote areas
where a large majority of the population lives, the banking sector has very limited coverage,
and ICT connectivity challenges can prevent development of digital alternatives.

MTOs can offer their services only through banks or other financial institutions licensed by
the NBE, which act as the distribution network for the MTOs. MTOs are restricted from of-
fering their services directly, through a proprietary network of agencies or from establishing
franchised services in retail stores, supermarkets and other outlets. MFIs are also important
players in the retail payments ecosystem and, despite having a connectivity with the ETS,
they do not have an extensive number of outlets that can be used for remittances, especially
in the rural areas where they would prove to be most useful given the lack of banking op-
tions. Consequently, in rural areas where the majority of population lives, a lack of physical
proximity of the banks and RSPs as well as the access points/channels affects the attitude
and behaviour towards remittances offered through regulated channels. Limited access
to physical access points reduces the usability of transaction accounts, even if these were
available to the rural populations. Digital channels offer the promise to bridge the physical
divide without necessarily expanding the (physical) branch network.

Recommendations
The following recommendations could be considered to improve access points for
remittances.

1. The NBE should establish concrete targets for increasing the number of access points
for remittances (e.g. additional 50,000 access points within the next two to three
years). Expanding the geographic reach of access points, particularly in rural and remote
areas where coverage is low, will improve the last mile distribution channels, as well as
encourage consumers to send and receive remittances through regulated channels. For
this purpose, in addition to targeting growth of bank branches, the NBE should establish
concrete, time-bound targets for increasing the number of ATMs, POS and agent-
based cash-in cash-out agent locations. This effort should be taken in partnership and
consultation with the industry.

2. Related to the above recommendation, the NBE should consider developing an incentive
structure for RSPs to expand distribution of access points beyond urban areas, as well
as to enable ATMs and POS to be leveraged for cross-border remittances. In addition to

19
 establishing concrete targets, in coordination with industry stakeholders, the NBE could
propose the adoption of an incentive plan to increase uptake of digital payments in the
value chain and to mobilize deployment and activation of POS and ATMs.11 Although it is
not recommended that these are funded by the government, such incentives could be
implemented through an agreement between acquiring and issuing banks who agree to
reduce fees or similar measures. The NBE and payment networks could also participate
in covering the costs associated with the incentives. The financial incentives to acquiring
banks to promote POS usage could be a tax break equivalent to a certain percentage of
the value (e.g. 0.5 percent or 1 percent) of the total transactions processed via their POS
over a 3-, 6-, 9- or 12-month period. Banks, in turn, could provide a financial incentive
to the merchants to conduct a payment transaction (a fixed amount or proportion of the
transaction value). The acquiring bank could be required to split that incentive equally with
the issuing bank of the consumer who initiated the transaction. Incentive programmes
must be done in coordination with both issuing and acquiring sides to maximize the
impact. UNCDF can assist the NBE to come up with a timebound execution plan for
improving the access points for remittance as well as an appropriate framework for
incentive structure for the retail payments ecosystem to mobile access points.

3. As part of its Digital Strategy 2025, the NBE should target an increase in the number of
use cases for digital financial services by improving availability and coverage, including
use cases for women. Bill payments as well as POS and quick response (QR) code-
based acceptance for card-based purchase transactions are limited to a small number of
consumers who have access to banking services. Remittance recipients still need to visit a
bank branch or an agent to withdraw the funds in cash so they can use those funds to pay
for the goods and services they need. Further, the exchange rate spread between formal
and regulated channels versus informal channels remains wide and is a disincentive for
recipients to use formal channels. There have been several efforts made to drive usage
of formal and regulated digital channels, including the Ethiopay bill payments platform.
However, usage is low as few banks are connected to the platform, and the services
are available on only a limited basis for the Unites States–Ethiopia remittance corridor.
In addition to providing interoperability (as discussed below), a wider development of
the POS and QR code infrastructure at the merchant and the bank agent levels could
increase the number of distribution points for remittances and improve banking services
for remittances recipients by providing them with access to low-cost electronic payments
and by eliminating the need to withdraw cash. Use of QR-code technology for growing
merchant acceptance can be cost-effective and quick as it requires little or no technical
knowledge by merchants and consumers. To improve its effectiveness, QR code structure
should however be standardized to promote interoperability and usage. Standardization
and its enforcement can be mandated by the NBE or the government. In consultation with
the RSPs, the government could develop a comprehensive plan to incentivize recipients to
use formal and regulated channels, receiving their money directly into bank accounts or
mobile wallets, and to encourage development of different use cases for digital payments
that can be offered to customers at a low cost directly from their accounts (e.g. bill
payments, payment of government services, etc.). As part of incentivization efforts, inward

11
As an example, the Central Bank of Egypt implemented financial incentives related to POS terminalization in
2019–2020 to reach a milestone of 100,000 POS terminals in that time frame.

20
 remittances to bank accounts could be allowed to earn a marginally higher interest
rate (e.g. 0.5 percent), which may be an incentive to retain part of the money in the
bank account. This, in turn, would improve interaction between low-income remittance
recipients and regulated financial institutions. UNCDF can help the NBE to develop an
appropriate incentive framework for recipients to utilize formal channels, including
proposals for initial use cases that could be piloted to start the process.

Access to national payment infrastructures by non-bank remittance

service providers

Context
According to the FSB Stage 2 report,12 “there are clear advantages to promoting direct ac-
cess to the national payment infrastructures by non-bank RSPs as this reduces the costs
for remittances transfers and time it takes to settle these transactions. Lowering barriers to
access improves the possibility for PSPs and infrastructures to become direct members of
multiple payment systems across different jurisdictions. Similar access requirements in dif-
ferent payment systems can encourage PSPs to become global players in payments, serving
many jurisdictions. Lower cost and higher speed in cross-border payments with lower credit
and liquidity risks would be the targeted outcome.”

Situation in Ethiopia
In Ethiopia, under the recently passed NBE PSO Directive, non-bank PSPs, such as mobile
money operators, switch and ATM operators, and payment gateway operators can obtain a
licence and connect to the NPS infrastructure. Ten switch operators and three mobile money
operators have applied for licences, but the applications are still being processed – none
have yet been approved. According to the NBE plans, non-bank players will not have direct
access to the NPS infrastructure through the EATS but will have access through a settlement
bank or ETS who would act as a settlement agent to carry out the clearing function and use
the EATS platform for final settlement.13

As several new PSPs are processors and payment platforms themselves (e.g. Kifiya and
HelloCash), gaining access to NPS infrastructure through ETS makes ETS a critical payment
infrastructure as it acts as the “switch of switches”.14 ETS is connected to the EATS for
interbank clearing and settlement purposes. Direct participants (mainly banks) have a
settlement account with the NBE using the central bank money. Indirect participants can
participate but through a settlement bank. Given the important role played by ETS in the
12
Building Block 10 describes the importance of direct access. Committee on Payments and Market Infrastructures,
Enhancing Cross-Border Payments: Building blocks of a global roadmap (2020), www.bis.org/cpmi/publ/d193.
pdf.
13
Globally, there is no clear precedent on whether access to the NPS infrastructure for non-bank financial
institutions should be done directly or indirectly through settlement banks/agents. The NBE’s approach to
use ETS as a settlement agent is consistent with the CPMI definition, which defines the role of a settlement
agent as one that manages the settlement process for transfer systems or other arrangements that require
settlement.
14
Of the 17 banks using ETS services, 5 are hosted member banks that have direct connectivity to ETS through
their core banking system and use multiple services (ATM, POS, card issuing, card acquiring and other value add
services), 6 have their own switch (for ATM and POS) and connect their switch to ETS for ATM (and in future
POS) interoperability and the remaining 6 banks belong to the premium switching service consortium, which
is interconnected with ETS for ATM/POS interoperability purposes as well (switch-to-switch connectivity).

21
NPS, the NBE does not appear to have a proper procedure in place to address the risks if
the infrastructure was disrupted by information technology failures, cybersecurity threats
or other risk factors.15

Some banks are integrated into ETS’ Ethiopay bill payment platform along with direct billers
Ethiopian Airlines, the Ministry of Transport and others. Some other banks have their own
platforms for pension payments, whereas others focus on utilities, airlines, etc. (the most
common ones).

ICT and power failures are frequent in Ethiopia and can cause frequent disruptions for ATM/
POS availability. With the increasing levels of participation by non-bank PSPs in the NPS in-
frastructure, there are serious capacity implications for ETS to handle increased transaction
volumes. The ability of ETS to effectively service the growing number of access points is
also something that should be monitored, and proper upgrades should be implemented to
address this growth.

ETS is upgrading its payments and remittance platform (called the RTRP platform) to provide
several new services to banks and non-banks. This is expected to go live in mid-2023 and will
be a boost to national-level retail payments infrastructure. Services offered under the RTRP
platform include real-time payment clearing and settlement services that will allow banks
and non-bank RSPs to use different channels (mobile, web, bank teller and agents) to pro-
vide account-to-account remittance transfers and payment services. Additionally, the RTRP
platform will provide value-added services such as fraud management, dispute management
and directory services to enhance the capability of RSPs to extend different types of digital
payment services to their customers. Once developed, ETS intends to deploy a 3D secure
payment gateway and application programming interfaces (APIs) for participants to connect
to its platform and other customizable tools for RSPs to develop their own customer-facing
apps and solutions for payment initiation or receipt. For this purpose, ETS will deploy QR
code technology and a shared wallet platform to enable unstructured supplementary service
data (USSD)-based mobile payments.

Digital ID and e-KYC platforms are still to be developed in Ethiopia. However, as noted
above, the digital ID project was recently launched and, once implemented, it is likely to
improve efficiency in remittances services. In compliance with Financial Action Task Force
(FATF) standards, both remittance senders and receivers should be identified by RSPs, and
the remittance flows must be traceable. Facilitating this process using digital ID, e-KYC and
credit-scoring platforms could help to promote financial access, reduce costs for RSPs and
address issues related to de-risking. Incorporation of digital ID, e-KYC and credit-scoring plat-
forms by bank and non-bank RSPs could help to facilitate account opening, authentication
and development and issuance of alternative digital products and channels, which are much
needed in the Ethiopian environment to promote digital remittances. For directory services
to work (aliases) in support of instant payments, as envisioned in the ETS RTRP road map, an
upgrade to a properly functioning ID platform or even digital ID is needed. Unlike countries
where phone numbers can be used for this purpose, this is not possible in Ethiopia as many

15
It should be noted that ETS is Payment Card Industry Data Security Standard (PCI DSS)-certified and its security
standards are comparable with international standards.

22
people do not have mobile phones. The roll-out of modern digital payment solutions will
be interdependent on the roll-out of the digital ID project.

Recommendations
The following recommendations could be considered to improve the quality of access to
NPS infrastructures.

1. As activities of ETS expand to provide switching and settlement services for non-bank
PSPs and MFIs, the NBE should upgrade its supervision and oversight framework for
monitoring ETS and address any additional operational risks arising from its heightened
role in the NPS. As noted above, the NBE is leveraging ETS to expand access to NPS
infrastructure to non-bank PSPs and MFIs. In this regard, in addition to providing direct
ATM and POS switching services to the banks, ETS services would be considerably
stretched to include switching and settlement services for MFIs and non-bank PSPs. The
status of “switch of switches”, and as a gateway to the EATS, makes ETS a “critical payment
infrastructure” that requires a more rigorous supervision and oversight framework to
monitor operational, security and other risks that can be incurred in the financial system.
Operational capacity issues should also be monitored in the light of expected growth
resulting from implementation of the RTRP platform.

2. Implement digital ID, e-KYC and credit-scoring infrastructures to speed up digitalization

of remittance services. Currently, Ethiopia has a basic ID system, and it lacks the necessary
infrastructures such as digital ID, e-KYC platform and credit-scoring systems that facilitate
account opening, authentication and development and issuance of alternative digital
products and channels. These infrastructures can be promising solutions to enhance the
efficiency in remittances services by promoting greater access to digital products and
services, reducing costs for RSPs and addressing the potential challenges related to de-
risking. As part of the evaluation process, in addition to the ease of access and management
control, a cost-benefit analysis may be needed to determine if these systems are
developed as stand-alone centralized systems or as systems with a common, centralized
database to ensure authenticity and uniqueness and to avoid duplication of effort. UNCDF
can provide assistance in conducting an initial assessment for implementation of e-KYC
and credit-scoring platforms in conjunction with the Government of Ethiopia’s proposed
digital ID system.

3. Build resilience in critical retail NPS infrastructures such as ETS. The impact of operational
incidents could be mitigated, in principle, by building resilience that withstands service
disruptions and supports effective business continuity plans. Related to recommendation
1 above, ETS could be required to: (i) adopt rigorous risk management procedures, in
line with global best practices for the identification and mitigation of operational risk,
including cyber resilience; (ii) incorporate appropriate redundancy and business continuity
arrangements to ensure the timely recovery of the services in the event of a major
disruption; and (iii) establish procedures for timely communication to stakeholders of
operational incidents. In addition to ETS, the NBE could consider conducting periodic,
regular disaster recovery drills (both announced and unscheduled) to ensure effectiveness
and resilience of the systems operated by the NBE and the other PSOs. Based on guidance
developed by the Committee on Payments and Market Infrastructures (CPMI) on cyber

23
 resilience16 and other global best practices, UNCDF can assist the NBE in developing a
framework for monitoring such risks in the system and developing a framework for ETS
and its system participants to enhance their resilience in the event of cyberattacks and
operational failures.

4. In parallel to the development of the RTRP platform for ETS, the NBE should enhance
its oversight capacity for new types of payment services. With the imminent roll-out
of payment services through the RTRP platform (e.g. real-time clearing and settlement,
use of aliases, etc.), Ethiopia will have a basic instant payment system operational in the
market. This has oversight implications for the NBE and should be handled in accordance
with new developments in the market.

Interoperability and interconnectivity of domestic and regional payment

infrastructures

Context
Interoperability is one of the most desirable characteristics of payments and financial markets
infrastructures to ensure infrastructure sharing and widespread availability of digital financial
services access points. Whereas the widespread availability of digital solutions for remittances,
payments, savings and credit provides people with access to financial services, payments
interoperability enables these targeted people to transfer their money to any other individual,
without a requirement for multiple transaction accounts, thereby increasing the importance
of transaction accounts and their usability.

Situation in Ethiopia
In Ethiopia, ATM interoperability has been fully achieved at the domestic level; however, it is
not fully reliable as there are technical connectivity problems between the banks and ETS,
according to the NBE. The POS interoperability project is currently in pilot. It was launched
in February 2020, and there is a dedicated task force overseeing the project. So far, 16 banks
have joined the pilot for POS interoperability and one other bank is in the testing phase.
During the pilot phase, ETS is observing 13,000 transactions monthly.

Despite the progress made, some critical challenges remain in making POS interoperability
fully operational, and this has an impact on adoption of retail payments at the merchant and
consumer levels. First, the messaging format used for debit cards is a dual message system
(DMS), which generates a clearing file followed by settlement of the amount dues two to
three days after the transaction date. Merchants often have ICT connectivity issues with POS
because of power failures and other reasons, impacting their ability to send clearing files
to ETS on time, which in turn results in delays in settlement processes and final payments
from consumer to merchant. During the entire lifecycle of the transaction, the consumer’s
account has an authorization hold. As Ethiopia is a predominantly debit card environment, an
authorization hold prevents consumers spending funds elsewhere. ETS is looking to replace
this DMS with a single message system (SMS), such as the ATM environment, which allows

16
Bank for International Settlements and International Organization of Securities Commissions, Guidance on
Cyber Resilience for Financial Market Infrastructures (2016),www.bis.org/cpmi/publ/d146.pdf.

24
trading +1-day settlement for POS transactions. Second, ICT issues can impact the autho-
rization holds causing transactions to be dropped entirely, creating a bad user experience
for both consumers and merchants. Lastly, low levels of merchant awareness on how to
handle such issues creates an environment in which, despite availability, there is no desire
to use the POS terminals.

Mobile money interoperability is the next priority after completion of the POS interoperability
project. The mobile money interoperability project has had a preliminary launch, with a few
banks allowing customers to carry out domestic person-to-person transactions between
mobile money accounts. At the banking agent level, however, there is no interoperability
between bank agents, with each having their own exclusive agents to service their customers.
Reform of the agent access network was included as part of Ethiopia’s National Financial
Inclusion Strategy (NFIS); however, little progress has been made to address this major con-
straint. According to ETS, the issue of banking agent interoperability will be resolved when
full POS interoperability is achieved countrywide. The NBE should monitor this aspect over
time and take necessary actions. As for merchant locations, many have multiple POS ma-
chines (e.g. supermarkets, large retailers). Customers/cardholders of a bank must use the
POS terminals from the same bank.

Different banks and switches are also introducing QR codes and are following their own stan-
dards. However, these are closed-loop systems, that is, QR codes developed and deployed
by these providers can be scanned and paid using their consumer apps only; therefore, these
are non-interoperable. If a customer wants to use their phone to pay at different merchants,
who are acquired by different providers, they need to download and manage separate apps,
an inconvenience to the customer. As the NPS ecosystem matures and the number of pay-
ments systems operators/providers proliferate, there is an increasing threat of an imbalance in
the ecosystem, which could create the same types of inefficiencies as previously seen in the
POS environment. It therefore becomes necessary to develop standards to bring in uniformity
and provide equal opportunity for all players in the NPS ecosystem. With the roll-out of the
RTRP platform, a QR code standardization framework would improve interoperability and
uptake of digital channels. According to the NBE, QR code standardization and interopera-
bility are part of its digital strategy; however, no firm timeline has been given on when such
a standardization framework will be implemented.

At the regional level, limited regional payment systems interoperability and lack of uniformity
in codes for cross-border remittances contribute to the high cost for conducting low-value,
high-volume payments, and to delays in payment processing times. However, integration
between these systems is under way, and the NBE is an active participant including other
regional central banks to establish interconnectivity with regional payment systems.

The NBE is a member of the working group of the African Central Bank Association and the
Common Market for Eastern and Southern Africa (COMESA) Business Council. They have
participated in regional integration efforts for mobile money as well as other payments in-
frastructure. Under the COMESA, the NBE also participated in the recently concluded survey
in nine countries on regional integration efforts of an NPS, mobile money platforms and
cross-border trade for small and medium enterprises. The survey is the preceding step to
the process that outlines the integration efforts.

25
Work on regional integration is in its early stages but has been presented to the respective
central bank governors. The next step will be to draft regulations for regional integration of
payment systems, which could take three to five years. No definite timeline has been made
available. The survey will help COMESA members to determine to what extent the existing
payments and financial markets infrastructures can be used or whether customizations will
be needed for integration efforts. Thus far, no action has been taken to partner with foreign
banks in the main sending countries on infrastructure or remittance services development.
To date, the regional payment systems created via the COMESA Clearing House have not
had very valuable input to the remittances market.

Recommendations
The following recommendations could be considered to improve the interoperability
environment.

1. The NBE should prioritize completion of POS and mobile money interoperability by
2022 over the launch of the RTRP platform to ensure that the NPS ecosystem is fully
ready for deployment of digital remittance products. Establishing a fully interoperable
environment for POS and mobile money is critical for a well-functioning retail payment
ecosystem, which is the basis for an efficient environment for digitally enabled remittance
inflows. ATM interoperability has not been finalized as there are existing technical
challenges between banks and ETS. POS and mobile money interoperability are in different
stages of pilots. The NBE should establish a clear timeline of when full interoperability
will be achieved (for ATM, POS and mobile money), including roles and responsibilities
of various stakeholders, and communicate this to industry stakeholders who have the
responsibility to resolve their infrastructure and connectivity issues based on timeline
and expectations established by the NBE. To streamline this process, the NBE could also
consider establishing a working group of banks and ETS to monitor key milestones related
to full interoperability. Lastly, using the stakeholder coordination mechanism as the basis,
the NBE should encourage banks to develop appropriate financial literacy campaigns or
measures to address their pain points to accept digital payments. UNCDF can assist the
NBE to develop stakeholder coordination and monitoring and evaluation plans to establish
full interoperability, including measures that can be taken by the acquiring banks to assist
merchants with education and deployment of POS.

2. Provide clear guidance to the market on the NBE’s future plans for standardization and
interoperability framework for QR codes. While the NBE has included the standardization
as part of the Digital Strategy 2025, the individual players in the market are already
developing their QR code standards. It is recommended that clear guidance to the
banks, PSOs and PSPs (entities responsible for developing their proprietary QR code
standards) is provided on what they should be doing now in terms of harmonization
efforts. This communication should be issued either in the form of a NBE guidance
note or through bilateral conversations with the providers. This process will lay out the
importance of establishing interoperability and will outline the intended framework for the
standardization process17 for QR codes to bring uniformity and provide equal opportunity
for all players in the payment space. UNCDF can use examples from South Asia and

17
Based on EMVCo and international standards.

26
 other countries that have used similar processes to help create the initial standardization
framework, which would then be further developed under the Digital Strategy 2025.

3. Provide capacity-building support to the NBE and ETS to scale retail payment services.
With a number of critical technology intensive projects under way in Ethiopia, there is a
need for capacity-building, both at the NBE and ETS. UNCDF can assist with development
and implementation of a capacity-building plan using global best practices.

Interconnectivity with local, regional and international hubs, gateways

and multilateral payment platforms

Context
Cross-border payments through the correspondent banking model often involve long trans-
action chains that lead to fragmented and truncated data standards, high costs of capital and
weak competition, all of which negatively affect payment speed, cost and transparency. In-
terlinking of retail payment systems (including fast payment systems) and wholesale payment
systems (such as RTGS) allows PSPs to interact directly through the linked infrastructures and
reduces their reliance on traditional correspondent banking. Interlinking arrangements can
range from simple agreements on cross-participation to full technical integration of systems.18

Situation in Ethiopia
In Ethiopia, several local processing platforms and switches have emerged. Through direct
and indirect partnerships, these entities have also established connectivity with international
payment companies and remittances hubs.

Kifiya, through its subsidiary Melapay, is a payment operator for POS terminalization and
payment gateway and a local hub for payment switching, and has submitted the first busi-
ness plan to obtain a licence for the remittance solution in partnership with Visa. HelloCash
is also building a partnership with Visa using Visa Direct and CyberSource platforms. For this
purpose, they need a sponsor bank for settlement purposes at the NBE. Melapay’s mobile
wallet-based remittance product is already deployed with the United States, Europe, GCC
and Israel as key corridors on their platform. Currently, their volumes are very low, and they
are witnessing only 300–400 transactions per day. The lack of full licences for remittances
is preventing the solution of both platforms from properly scaling up.

Under their licence, Melapay intends to provide a remittance hub platform with multiple
services as revenues from a stand-alone payment switch will not be sustainable because of
competition from ETS. Visa is also looking at Melapay to be a gateway/aggregator of services
for other providers in Ethiopia (role of a local hub for payment services for Visa to provide
value-added services to Visa member banks). Melapay is looking at enhancing its platform
for digital disbursement of salaries, government aid and other types of payment services.

18
Building Block 13 describes the importance of interlinking of different payment systems. Committee on
Payments and Market Infrastructures, Enhancing Cross-Border Payments: Building blocks of a global roadmap
(2020), www.bis.org/cpmi/publ/d193.pdf.

27
The use of international hubs is not common practice by Ethiopian banks, MTOs or non-
banks. Outside of Visa partnership, some banks are working on a partnership with MFS Africa.
Once the relationship goes live, they intend to use the hub for corridors in GCC, Europe and
North America. Many banks are also pursuing different types of fintech relationships; however,
they lack a full understanding of how these fintech services can be integrated into their core
banking systems. When they buy their own solutions for mobile platform or QR code, they
treat these like core banking solutions and fail in their integration efforts with other platforms.

Some fintechs such as Belcash (HelloCash’s parent) are providing value-added services in-
cluding enablement of small and medium-size merchants to become a digital payment ac-
ceptance point or e-commerce provider. In this sense, they are playing the role of merchant
aggregator of small and medium-size merchants and pay-as-you-go service providers. Their
services are useful for small banks and MFIs that cannot develop these services in-house
because of resource constraints or capacity challenges.

Recommendations
The following recommendations could be considered to improve the interconnectivity with
local and regional multilateral platforms.

1. The NBE should expedite the licensing process for non-bank PSPs and RSPs to create
more efficiencies in the market. Because of capacity limitations at the NBE, the current
process for approval of licences can take several months, which jeopardizes the business
partnerships that PSPs have established with their international and domestic partners.
Moreover, a delay in implementing the planned technological solutions by several months
can make them obsolete and can create an environment where international companies
that are planning investments in Ethiopia withdraw or limit their investments because of a
lack of progress. UNCDF can provide capacity-building assistance to the NBE that is aimed
at creating a strategic plan to expedite the licensing process for new PSPs and PSOs, with
a focus on streamlining and implementing a structured and transparent approach for the
review and approval of new business plans submitted by PSPs/PSOs or for extension of
services submitted by existing PSPs/PSOs. In both instances, transparency of process
and clarity in communication are key to build trust in the system and for private sector
entities to plan long-term investments.

2. The NBE should promote connectivity of the NPS with local, regional and international
hubs and payment gateways. Establishing connectivity with international hubs
and gateways will facilitate greater access to digital payment channels. Such service
aggregation platforms and remittance hubs allow RSPs to scale quicker and not incur
disproportional operational and regulatory costs. These platforms and remittance hubs
also have the potential to reduce the distance to access points and the cost of transaction
by facilitating a high number of low-value/low-fee transactions through a large number
of access points (or accessible remotely through the Internet or mobile networks). For this
purpose, the NBE should streamline the licence/business plan approval process for PSPs
and PSOs that are seeking specific partnerships to integrate with international platforms,
such as Visa Direct and MFS Africa. Additionally, UNCDF can map out the process whereby
the NBE can establish a road map to establish connectivity with preferred hubs and
gateways.

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3. The NBE should consider implementing a fintech regulatory sandbox approach to
promote long-term inclusive innovation in digital payments, financial and banking
services. While the regulatory environment for digital payments is still evolving in Ethiopia,
and as part of the implementation of the Digital Strategy 2025, the NBE should consider
implementing a fintech regulatory sandbox that will enable banks and emerging fintech
players to experiment with innovative financial products or services in a live environment
but within a well-defined space and duration. Depending on the experiment, the NBE
could provide the appropriate regulatory support by relaxing specific legal and regulatory
requirements prescribed by the NBE, to which the sandbox entity will otherwise be
subjected, for the duration of the sandbox. The sandbox would include appropriate
safeguards to contain the consequences of failure and maintain the overall safety and
soundness of the financial system. Upon successful experimentation and on exiting the
sandbox, the sandbox entity must fully comply with the relevant legal and regulatory
requirements. UNCDF can provide an initial assessment and an approach paper for the
development of the regulatory sandbox.

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LEAVING NO ONE BEHIND IN THE DIGITAL ERA
The UNCDF Strategy ‘Leaving no one behind in the digital era’ is based on over a decade of
experience in digital finance in Africa, Asia, and the Pacific. UNCDF recognizes that reaching the
full potential of digital financial inclusion in support of the Sustainable Development Goals (SDGs)
aligns with the vision of promoting digital economies that leave no one behind. The vision of
UNCDF is to empower millions of people by 2024 to use services daily that leverage innovation and
technology and contribute to the SDGs. UNCDF will apply a market development approach and
continuously seek to address underlying market dysfunctions

THE UNITED NATIONS CAPITAL DEVELOPMENT FUND

The United Nations Capital Development Fund makes public and private finance work for the poor
in the world’s 46 least developed countries (LDCs).

UNCDF offers “last mile” finance models that unlock public and private resources, especially at the
domestic level, to reduce poverty and support local economic development.

UNCDF’s financing models work through three channels: (1) inclusive digital economies, which
connects individuals, households, and small businesses with financial eco-systems that catalyze
participation in the local economy, and provide tools to climb out of poverty and manage financial
lives; (2) local development finance, which capacitates localities through fiscal decentralization,
innovative municipal finance, and structured project finance to drive local economic expansion and
sustainable development; and (3) investment finance, which provides catalytic financial structuring,
de-risking, and capital deployment to drive SDG impact and domestic resource mobilization.

UNITED NATIONS CAPITAL DEVELOPMENT FUND

Two United Nations Plaza, +1-212-906-6565 @ UNCDF
New York, NY 10017, www.uncdf.org @ UNCDF
United States info@uncdf.org @ UNCDF