The pivotal role of digital accessibility for goods and services has become abundantly clear over the past few years. The global economy, now more than ever, relies on the seamless flow of transactions across borders.
Whether it involves individuals, businesses, or financial institutions spanning different countries, the realm of cross-border payments has taken center stage in our interconnected world. The surge in e-commerce businesses and marketplaces has resulted in an increased volume of cross-border payments.
As the demand for efficient, secure, and inclusive cross-border financial transactions grows, exploring the advancements and challenges in this dynamic landscape becomes increasingly essential.
Growing market
Africa stands out as a focal point for cross-border payments anticipating a growth rate of 10% alongside Asia. This is supported by the growing internet penetration that is expected to reach an average of 70%.
Currently, around 90% of the population is covered by mobile networks. Remittance inflows into sub-Saharan Africa amount to $47 billion and Africa’s merchandise imports grew to US$706 billion in 2022 while exports grew to US$724.1 billion. Mobile money transaction volumes in Nigeria doubled to around 800 million in 2020, according to the Central Bank of Nigeria, while data from South Africa shows that online commerce grew by around 40% during lockdowns in 2020 and 2021.
Payments play a crucial role in unlocking the potential of this continental market, linking digital entities to a market comprising 1 billion people. Digital payments in Africa have achieved a notable level of adoption, justifying, and necessitating the integration of merchants into the system.
In essence, the movement of money translates to economic activity. African nations witnessing payments in their local currency experience a direct impact on both the digital economy and the broader economic landscape.
Enabling consumers
Consumer preference is quite straightforward. Individuals and businesses would like to be enabled with cost-effective options and the ability to send money near real-time. The existing platforms do not necessarily address these challenges resulting in high costs, delays, and limited accessibility.
The average cost of sending $200 to the receiving region
Sources: BIS African and EMEs 2022 surveys on central bank digital currencies; World Bank (2022)
Correspondent banking continues to be the primary approach for large-value B2B payments, intercompany transfers, and global settlement flows. Nevertheless, both banks and technology firms are actively innovating to offer faster and more cost-effective alternatives to the conventional correspondent banking model.
Emerging technologies
The development of new technologies is key to enabling individuals and businesses to participate in cross-border consumerism.
The establishment of open banking standards and APIs is fostering interoperability among banks and technology providers. Open banking, designed to encourage competition and innovation in the banking sector, leverages technology and new business models.
The integration of cross-border payments as a product offering could be the next frontier for embedded finance solutions. For example, while shopping for international products or services, a payee could have the option to choose the best foreign exchange rate embedded in their shopping experience resulting in efficient payment.
The creation of Central Bank Digital Currencies (CBDCs) has been described as a valuable tool for promoting financial inclusion and tackling remittance challenges in Africa. The adoption of Money Transfer Operators (MTOs) and Mobile Network Operators (MNOs) have significantly increased. Digital wallets connected to diverse payment methods such as cards, accounts, and mobile money are experiencing increased availability and adoption.
Distributed Ledger Technology (DLT) with block chain is challenging the traditional operating model of cross-border payments and has proved to be faster, more efficient, cheaper, transparent, and secure.
Future trends
Consumers and businesses have seen the benefits of domestic real-time payments offering 24/7 year-round availability. It’s no wonder they are expecting the same experience with international payments. Therefore, it is essential to offer similar solutions that will increase interoperability.
This can be achieved by:
- Linking domestic real-time payment systems;
- Aligning operating hours of RTGS systems;
- Allowing instant payment schemes to become the channel for incoming international payments; and
- Increased traceability of transactions and transparency of fees.
The implementation of the Transactions Cleared on an Immediate Basis (TCIB) scheme is gaining popularity in the Southern African Development Community (SADC) region with participation from both banks and non-banks. Successful adoption of this scheme in all countries will result in low cost and faster remittances to end-users.
Further, there are potential integration points into other African regions including the East African Community (EAC) the Common Market for Eastern and Southern Africa, and East African Community (COMESA).
To alleviate payment challenges within Africa’s intricate network of over 50 countries and around 40 different currencies, The Pan-African Payment and Settlement System (PAPSS) was developed by the African Continental Free Trade Area. This represents a potentially transformative advancement for cross-border payments.
Developments such as this will leverage the unique competitive strengths of banks, financial institutions, MNOs, MTOs, and FinTechs to build effective payment infrastructure and ecosystems through partnerships and collaborations.
Tokenization Technology is another trend that can streamline financial processes and foster financial inclusion.
In conclusion
Africa’s first CBDC was issued by the Central Bank of Nigeria and South Africa and Ghana are currently running pilot projects.
Finally, effective adoption of ISO20022 messaging standards can result in improved payment exceptions and investigations, simplify regulatory reporting, enhance customer insights, build vertical value propositions, and strengthen corporate treasury activities.
These are just a few of the opportunities and trends available to improve cross-border commerce. If your business would like to take advantage of these opportunities, speak to us to find out how we can partner with you to help grow your business further.
Arthi Narayanan | Lead Payments Consultant | Synthesis | mail me |
Related FAQS: Cross-border payments in Africa
Q: What is the current state of cross-border payments in Africa?
A: The state of cross-border payments in Africa is evolving rapidly, with many African countries seeking to advance their payment landscapes. Efforts are being made to facilitate seamless cross-border transactions and improve the efficiency of financial systems, which is crucial for economic growth and financial inclusion.
Q: How can digital payment methods accelerate cross-border payments in Africa?
A: Digital payment methods can significantly accelerate cross-border payments in Africa by providing faster, more efficient and cost-effective solutions for businesses and consumers. These methods help address challenges related to regulatory environments and compliance standards that often hinder traditional payment methods.
Q: What are the primary challenges in making cross-border payments in Africa?
A: Key challenges in making cross-border payments in Africa include varying regulatory landscapes, interoperability issues among payment service providers and a lack of infrastructure in some regions. Addressing these challenges is essential for enhancing the payment space and facilitating seamless cross-border transactions.
Q: How do regulatory environments affect cross-border payments in Africa?
A: Regulatory environments play a crucial role in shaping the cross-border payment landscape. Regulations that enable instant payments and promote compliance standards can enhance the efficiency of cross-border transactions, while restrictive regulations may hinder progress and limit access to financial services for consumers and small businesses.
Q: What role do remittances play in cross-border payments across Africa?
A: Cross-border remittances are a significant aspect of cross-border payments in Africa, as they provide essential financial support to families and communities. Enhancing the efficiency of remittance services can contribute to greater financial inclusion and support local economies, making them a key focus in advancing cross-border payments.
Q: What is the future of cross-border payments in Africa?
A: The future of cross-border payments in Africa is promising, with ongoing innovations and developments in digital payment solutions. As African countries continue to collaborate and integrate their financial systems, there will likely be increased opportunities for new markets, improved payment methods, and greater financial inclusion.
Q: How can businesses benefit from efficient cross-border payment solutions?
A: Businesses can greatly benefit from efficient cross-border payment solutions by reducing transaction costs, speeding up payment processing times and expanding their reach to new markets. These solutions enable businesses to make payments across borders more seamlessly, facilitating trade and economic growth.
Q: What impact does the advancement of cross-border payments have on consumers?
A: Advancing cross-border payments positively impacts consumers by providing them with more accessible and affordable financial services. Improved payment methods enable consumers to make cross-border payments more easily, enhancing their ability to engage with global markets and access essential goods and services.
Q: What are some alternative payment methods being explored in Africa?
A: Various alternative payment methods are being explored in Africa, including mobile money solutions, blockchain technology and peer-to-peer payment platforms. These innovations aim to enhance the efficiency of domestic and cross-border payments, ultimately contributing to a more inclusive financial ecosystem.
