Jun 28, 2022

Mawazo Writing Africa

Writing about the main

Instant payment systems are key for cross-Africa commerce

The high cost of sending and receiving payments from one region to another is proving to be one of the biggest challenges to intra-Africa trade, even as the continent expects increased trade and investment from a free trade zone.

< p >The African Continental Free Trade Area (AfCFTA) is expected to increase export volume in Africa by 29 percent and intra-African trade by 81 percent, lift over 60 million Africans out of extreme poverty and increase the continent’s real income by seven percent to $450 billion by 2035 .

In East Africa, AfCFTA will create at least eight million new jobs and generate an estimated $35 billion in welfare gains, according to the United Nations Economic Commission for Africa (UNECA).

p>< p>But the high costs of cross-border transactions may cloud the prospects of the continental trade deal, adding to the nervousness of the tei lwisely implement the terms of the same and persistent non-tariff barriers.

High costs

According to AfricaNenda, a pan-African organization working for financial inclusion, the average cost of cross-border payments in Africa is around 12 to 18 percent of transaction value, compared to a global average of 6 to 7 percent.

Awkward transactions cost Africa about $5 billion in money transfer fees each year, according to Benedict Oramah, president of the African Export-Import Bank.

This is despite the fact that Africa is home to at least 576 financial technology (fintech) companies, according to Statista.

In addition, 11 of the 50 fastest growing companies were in Africa in 2022, according to the Financial Times ranking Fintech and financial services companies,

New startups pop up almost every month, all trying to solve different financial inclusion problems, from high transaction costs to the inaccessibility of credit and digital wallets.

These startups raised between 2017 and September 2021, more than twice as much as budding companies in any other sector during that period.< /p>

But interoperability – the ability of payment systems in different regions to share and use information – has remained a seemingly impossible puzzle for these fintechs.

< p>Why is it difficult for African fintechs to come up with a solution for the interoperability problem that threatens Africa’s trade integration?

“Fintech companies alone cannot solve this problem without the regulatory framework that creates an interoperable payment system layer they can plug in,” said Robert Ochola, CEO of AfricaNenda, to The EastAfrican.

Interoperability

Dr. Ochola said that while Africa is making significant strides in creating a continent-wide interoperable payments system, there are still major challenges in the regions that are hampering those efforts.

Papps, the pan-African payments and settlement system, is trying to To enable payment transactions in local currencies between countries across Africa, and nearly Ins promises payments for cross-border transactions without the need for currency conversion and increasing transparency in cross-border trade activities.

“There are security and currency risks that are effective have to be reduced. Also, high costs and limited human capacities and knowledge sharing are slowing down the process,” he said Giving fintech companies a layer to enable lower-cost cross-regional payments,” he added.

The East African Community, West African Economic and Monetary Union, South African Development Community and the Common East and South Market Africa is currently working on an inclusive instant payment system.

According to AfricaNenda, low average GDP per capita – which means lower value of transactions – makes instant payments more expensive per dollar and among the biggest threats to the development of interoperable instant payment systems. Systems on the continent.

“Ideally should transaction costs are less than one percent to make cross-border trade even easier and promote financial inclusion,” said Dr Ochola.

Other challenges include relatively low adoption of smartphones, data prohibitiveness , low access to electricity and comparatively smaller markets.

There is also a preference for payment for goods/services upon receipt.