Despite the huge potential of cross-border payments in Africa, people still struggle to send money to one another within the continent due to problems such as the lack of interoperable payment systems, diverse currencies, and more.
By Michael Akuchie
A friend of mine based in Ghana, a West African country, recently shared his experience of receiving prize winnings from an essay competition hosted by a Nigerian organisation.
Each time the organisation attempted to send the money in his local currency (Cedis), it hesitated to proceed with the transaction due to the high transaction fee or the need to add a few extra Nairas because of currency fluctuations that lowered the value of the Naira.
My friend’s experience is just one of many unfortunate stories concerning cross-border payments in Africa. Many Africans encounter this same issue daily when sending money within the continent. Ironically, sending money from the United Kingdom to Nigeria, or vice versa, is less complicated than someone in Nigeria attempting to pay for an item sold by a merchant in Uganda.
Popular payment processing company, Stripe, which acquired Nigerian fintech Paystack in 2020 to advance commerce in Africa defines cross-border payments as “financial transactions that occur between parties located in different countries”. Some characteristics of cross-border payments include the use of currency conversion, individuals and businesses alike can initiate transactions, and senders can use multiple payment providers.
Payment across borders can occur for various purposes including international trade, remittances which refers to family and friends sending money to one another, and foreign investments.
Cross-border payments are crucial for economic growth as they enable local businesses to expand their operations beyond their home country. Last year, the World Bank released a report that predicted Sub-Saharan Africa’s remittances flows to be worth $54 billion by the end of 2023, representing a 1.9% increase.
The report also spotlighted Mozambique (48.5% of total remittances), Rwanda (16.8% of total remittances), and Ethiopia (16% of total remittances) as the major drivers of remittances in the region.
Despite the huge potential of cross-border payments in Africa, people still struggle to send money to one another within the continent due to problems such as the lack of interoperable payment systems, diverse currencies, and more.
This means that a country’s payment system is not designed to work with others. For instance, a payment platform in Madagascar cannot function in Guinea-Bissau. As a result, a third-party payment provider is required to process the transaction, often at significantly higher rates.
Since African countries use different payment infrastructures, sending money in one currency to be received by another is tough. What’s more, the lack of a single universal currency complicates matters.
Unlike the Euro, which is accepted in 20 European countries and can be considered a regional currency, the Naira, Cedi, Liberian Dollar, Leone, and others are limited to their respective home countries—Nigeria, Ghana, Liberia, and Sierra Leone. Although currencies like the West African Franc (XOF) and Central African Franc (XAF) are used by several countries, this has not significantly improved the situation.
Due to the lack of interoperability of payment providers in Africa, merchants and other people are forced to explore alternatives which causes the transaction costs to skyrocket. This causes businesses to pass the extra costs on to customers by hiking the price of goods imported from neighbouring or distant countries.
However, not all businesses can afford the exorbitant transaction costs. As such, some small businesses that can not afford the increased costs of sending money to acquire new stock are forced to close down.
Fortunately, technology is playing a significant role in easing the burden of cross-border payments in Africa. Through the efforts of fintechs such as Flutterwave, Grey, and Chipper Cash, people can send money through more simplistic and cost-effective means.
Aside from offering speedy processing times for transactions, fintechs also offer payment integration with major banks within and across a market. This allows for slightly better exchange rates, and flexible payment methods, among other benefits.
Blockchain technology is another innovation that has a great potential for success in Africa’s cross-border payments. One thing to know about payments made on the Blockchain is that they are secure, cost-effective, and most importantly—faster to process.
Cryptocurrency adoption in Africa is still an ongoing process, though select countries such as South Africa, Kenya, and Zimbabwe have taken a major stop by allowing the usage of digital currency in their markets. Hopefully, more countries will tilt towards adoption and reap the benefits of that decision.
Another innovation that can eliminate the burden of cross-border payments is the use of a single digital currency. This would share a similar model as the eNaira which is a digital version of the Naira but would be on a continental scale.
Doing this should eliminate the obstacle of currency conversion fees when sending money from Ghana to Morocco and other African countries. Since the extra transaction fees would be lower than usual, businesses would find it easier to ship goods from other countries and sell said goods at a reasonable price. This also benefits the people as it would cause their purchasing power to rise as they would no longer need to spend so much on a single item.
Despite the potential for success in Africa, the aforementioned technology-driven solutions still have some hurdles to cross. For instance, fintechs have been the subject of increased levies as part of revenue generation efforts.
While this could give governments more money to embark on capital projects, it also poses a serious risk to their future especially when operating in a heavily regulated market. Last month, the Nigerian government announced that fintechs like Opay, Moniepoint, and Paga would be mandated to remit N50 as a transfer levy on every credit inflow of N10,000 and above.
Seeing as fintechs are viewed as a welcome alternative to traditional banks in Nigeria and the rest of Africa due to their speedy processing times and network stability, this may taint their reputation and force customers to reconsider their continued patronage.
Another challenge in using technology to solve Africa’s cross-border payment problem is that it may take African countries a long time to adopt a single currency. As it concerns more than one country, a ton of deliberations would be required and there is no telling when a resolution would be attained.
Currency devaluation is another issue that may persist despite the adoption of technology-led solutions. Even if these solutions make it easier to send money from one point in Africa to another point, having to pay double or triple the amount due to a steady devaluation of the local currency may discourage such transactions.
Cross-border payments are steadily growing in Africa despite the hurdles that exist today. The World Bank expects remittances into the continent to increase by the end of 2024. To ensure that the World Bank’s prediction comes true, African governments must collaborate with fintechs, banks, and other stakeholders to explore ways of integrating technology into cross-border payments.
If properly adopted, it translates to an increased ease of sending and receiving money within the region which would stimulate business expansion and economic growth as well.
Michael Akuchie is a tech journalist with five years of experience covering cybersecurity, AI, automotive trends, and startups. He reads human-angle stories in his spare time. He’s on X (fka Twitter) as @Michael_Akuchie & michael_akuchie on Instagram.
Cover photo credit: Reloadly