Written by Brad Gillis, Head of Payments at Standard Bank Africa Regions
An increasingly interconnected world requires faster and smarter cross-border payment solutions.
The role of commercial banks will become more vital as more optimal payment models are sought in the face of heightened geographical and regulatory complexity.
According to the Global Findex Database, account ownership in Sub-Saharan Africa (SSA) rose from 43% in 2017 to 55% in 2021. While this progress is impressive, it is still substantially lower than the global average of 76%, so there is plenty of work to close this gap.
The African Inter-Regional Payments Integration Task Force says that interoperability and interlinking of infrastructures in the payment landscape will go a long way to establishing a platform for financial transactions. The main challenges, however, are ineffective collaboration and divergent, rigid, or onerous regulatory requirements. Evidently, there are no immediate and logical solutions despite strong moves by central banks across the continent to strive for more integration.
What is undeniable, however, is that Africa’s move to embrace mobile and digital transactions is a trend that is on the up. The 2022 GSMA mobile money report shows a rapid 22% rise in African transaction value to $836.5 billion. International remittances grew significantly in both 2020 and 2021, as many senders favoured mobile money for its efficiency, speed, safety and cost-effectiveness. This trend continued in 2022, albeit at a slower rate.
McKinsey research shows that Africa’s domestic e-payments market is expected to see revenues grow by approximately 20% per year, reaching around $40 billion by 2025. By comparison, global payments revenue is projected to grow at 7% annually over the same period. However, this growth will likely be uneven across the continent and will depend on infrastructure readiness, e-commerce penetration, mobile money penetration, and regulation, among other factors, in each market.
In one respect, the traditional correspondent banking model would never be the best enabler for the volumes in a modern, digitised and fast-paced world – and this is where I believe commercial banks can and must play a greater role. Banks entrenched on the continent have the expertise, network and innovation to help facilitate these flows and the network to advance how data is harnessed in improving outcomes.
The key will be to bridge the gap between the older analogue way of transacting and the digital world.
It is always important to remember that Africa is not one country, but 54 sovereigns with different regulators and all at different stages of economic development. Even aligning SADC exchange controls is proving difficult in practice, so there is no silver bullet to solve the cross-border payments challenge.
The space for disruptive innovation will remain high to find the optimal way of closing gaps and facilitating transaction flow. Expect to see more use cases for regulated crypto or digital currencies, offline payment solutions, cross-border payments, and cash transfers that could be easily directed to specific target populations.
We are seeing a lot of regional and closed-loop solutions, like M-Pesa in Kenya. It is difficult to plug in old payment rails to these new systems easily and expect them to work. This is why no one is really cracking it across all 54 markets, with many new payment avenues ring-fenced into their original founding countries. There is also a lot of clutter in the payments space, and big tech will not be able to do it all.
Digital and e-commerce will certainly predominate in the retail space. Still, the impact of trusted and integrated commercial banks will come to the fore when it comes to commercial and corporate transactions. An improved understanding of the behavioural trends of people who transact across borders as the market moves away from seeking value in the transaction alone to the added value in data and improving client experience. We need to understand better why someone sends money home to a family member in Zimbabwe – this may be to pay for groceries but could also be for a loan. We need to find optimal solutions that support and speed up these flows for more people at affordable rates and by trusted providers.
Ultimately, I believe the payment landscape in Africa is ripe for rationalisation. Startups have a high cash burn rate with little bottom-line growth in the early years, so as the market matures, expect to see greater consolidation and collaboration.
Better technology will ensure scale and reach across traditional and new payment rails with immediate settlement alternatives for real time high volume, low value flows rather than following the more cumbersome pre-funding requirement through a traditional correspondent banking model.
These solutions must also be packaged in such a way that there is something of value offering revenue alternatives to providers experiencing downward pressure on traditional cross border transaction margins.
Achieving seamless payments at the speed of light across the entire African continent is complex given the broad and varied aspects making up cross border transactions into different markets.
Banks, as trusted entities, must play a vital role in helping multinationals, money transfer operators, fintechs and consumer app providers navigate this complexity. The provision of access to liquidity, foreign exchange, settlement and aggregation services are all contributors to bulk and single cross border remittances and payment facilitation. With the help of commercial and corporate banks within the broader payments ecosystem, significant headway will be achieved in overcoming existing barriers and facilitating a smoother ride for individuals and businesses.
The future for payments in Africa is bright.
