Demystifying payment systems in sub-Saharan Africa Demystifying payment systems in sub-Saharan Africa

Demystifying payment systems in sub-Saharan Africa
30 Sep 2017

More than perhaps any other continent, Africa suffers from a reputation based on civil wars, under-development and poor governance. Decades of instability in some countries in the region have led many organisations to shy away from conducting business there.

As a result, those faced with their initial foray into the world of African cross-border payments often have misgivings and assume that adequate transactional systems will not be in place to facilitate economic development and growth.

But it is important to recognise that, while the continent may face certain obstacles, it does have modern payment infrastructure in place.

Despite the unique challenges of making payments in local African currencies, many economies throughout the region are growing. In fact, Africa is a hotbed of business and financial activity, which includes work on infrastructure projects such as Tanzania’s Bagamoyo Port, Kenya’s Konza Tech City, South Africa’s Jasper Solar Project and Nigeria’s Coastal Railway.

Organisations that can successfully navigate cross-border payments, foreign exchange and local market conditions will be well positioned to benefit from Africa’s many opportunities. In order to enhance domestic, regional and international trade, all of the countries in the region have access to, or are planning to implement, Real Time Gross Settlement (RTGS) systems for transferring funds. Automated clearinghouses to process transactions are also available to the majority.

Effective regional systems for undertaking cross-border payments have likewise been introduced, led by the West African Economic and Monetary Union in the 1990s and more recently followed by the East African Payment System and the Southern African Development Community’s Integrated Regional Settlement System.

The African payments landscape is also evolving rapidly in terms of adopting mobile technology. In fact, some countries in the East - most notably Kenya - have emerged as leaders in the consumer mobile payments space. But throughout the continent, nations continue to develop key financial infrastructure and require that their banks are better capitalised and governed.

Obstacles to overcome

However, there are obstacles to overcome. Payment costs vary widely from country to country, primarily due to limited transparency in relation to local exchange rates and, to a lesser extent, an inefficient interbank market.

Furthermore, with only a fraction of local banks using straight-through processing when accessing RTGS systems, payments can end up being subject to additional fees. Because of the manual intervention that most RTGS transactions require, they are also vulnerable to human error.

Another challenge to note is the limited number of financial institutions that operate throughout the continent as correspondent banks. Whether as a result of compliance issues, flawed government policies, low volumes or specific risk factors, many international banks have opted to avoid Africa, creating a large void in the marketplace.

As a result, the most important consideration when dealing with payments in the region is to partner with a financial institution that has a comprehensive understanding of local market conditions and maintains a trusted network of local banks. Local banking relationships ensure that secure payments are made at competitive exchange rates and transactions are protected against exorbitant and unregulated fees.

Africa is a land of opportunities and challenges. Navigating those challenges from afar can be a complicated process and so choosing the correct partner to make cross-border payments is essential if organisations are to operate successfully in the region.

 

Carsten Hils is global head of INTL FCStone Ltd’s global payments division, which he co-founded in 2003 and which under his leadership has grown significantly.

He leads an international team that specialises in facilitating the transfer of funds in local currencies to the developing world and is an industry expert in institutional cross-border payments, international currencies and foreign exchange trading. Carsten also possesses deep knowledge of local money markets in developing world countries.

 

More than perhaps any other continent, Africa suffers from a reputation based on civil wars, under-development and poor governance. Decades of instability in some countries in the region have led many organisations to shy away from conducting business there.

As a result, those faced with their initial foray into the world of African cross-border payments often have misgivings and assume that adequate transactional systems will not be in place to facilitate economic development and growth.

But it is important to recognise that, while the continent may face certain obstacles, it does have modern payment infrastructure in place.

Despite the unique challenges of making payments in local African currencies, many economies throughout the region are growing. In fact, Africa is a hotbed of business and financial activity, which includes work on infrastructure projects such as Tanzania’s Bagamoyo Port, Kenya’s Konza Tech City, South Africa’s Jasper Solar Project and Nigeria’s Coastal Railway.

Organisations that can successfully navigate cross-border payments, foreign exchange and local market conditions will be well positioned to benefit from Africa’s many opportunities. In order to enhance domestic, regional and international trade, all of the countries in the region have access to, or are planning to implement, Real Time Gross Settlement (RTGS) systems for transferring funds. Automated clearinghouses to process transactions are also available to the majority.

Effective regional systems for undertaking cross-border payments have likewise been introduced, led by the West African Economic and Monetary Union in the 1990s and more recently followed by the East African Payment System and the Southern African Development Community’s Integrated Regional Settlement System.

The African payments landscape is also evolving rapidly in terms of adopting mobile technology. In fact, some countries in the East - most notably Kenya - have emerged as leaders in the consumer mobile payments space. But throughout the continent, nations continue to develop key financial infrastructure and require that their banks are better capitalised and governed.

Obstacles to overcome

However, there are obstacles to overcome. Payment costs vary widely from country to country, primarily due to limited transparency in relation to local exchange rates and, to a lesser extent, an inefficient interbank market.

Furthermore, with only a fraction of local banks using straight-through processing when accessing RTGS systems, payments can end up being subject to additional fees. Because of the manual intervention that most RTGS transactions require, they are also vulnerable to human error.

Another challenge to note is the limited number of financial institutions that operate throughout the continent as correspondent banks. Whether as a result of compliance issues, flawed government policies, low volumes or specific risk factors, many international banks have opted to avoid Africa, creating a large void in the marketplace.

As a result, the most important consideration when dealing with payments in the region is to partner with a financial institution that has a comprehensive understanding of local market conditions and maintains a trusted network of local banks. Local banking relationships ensure that secure payments are made at competitive exchange rates and transactions are protected against exorbitant and unregulated fees.

Africa is a land of opportunities and challenges. Navigating those challenges from afar can be a complicated process and so choosing the correct partner to make cross-border payments is essential if organisations are to operate successfully in the region.

 

Carsten Hils is global head of INTL FCStone Ltd’s global payments division, which he co-founded in 2003 and which under his leadership has grown significantly.

He leads an international team that specialises in facilitating the transfer of funds in local currencies to the developing world and is an industry expert in institutional cross-border payments, international currencies and foreign exchange trading. Carsten also possesses deep knowledge of local money markets in developing world countries.