For PayPal and Flutterwave, road to unite Africa’s payment system opens

Lekan Olaseni, a Nigerian-based web designer, began life as a freelancer in 2012 and has witnessed firsthand how people in other continents make cross-border payments with ease.

As a foreign student living in the Republic of Georgia, with a PayPal account registered in Estonia, he would often get freelance jobs from clients in the US. His service charge ranged from $300, $500 to $1000 which will be paid into his PayPal account with no hassles.

It was the best time of his life working as a freelance, he recalls.

But all that has changed since he moved back to Nigeria for the National Youth Service Corps (NYSC) program. The jobs he was getting from the US, have mostly ceased coming. Why? Nigeria and some African countries were among the places PayPal blacklisted. The payment company only allows a select number of countries on the continent to deposit money and never to receive money.

As a way of explanation on the restriction placed on Nigeria and other countries, PayPal said governing bodies often have regulations and financial sanctions in place that prohibit transactions with certain high-risk countries. By high-risk, it means Nigeria and other countries are seen as fraud-prone regions.

“In most cases, the processing bank will decline transactions that originate from these countries. In the rare instance that the processing bank authorises the transaction, the funding bank will prevent it from settling, and Braintree will let you know,” PayPal said.

With PayPal unavailable, young creatives like Olaseni and small businesses in Nigeria and other African countries had to find a means to get paid by consumers, vendors, and service providers outside the continent. Getting paid in foreign currency is a very big deal for someone living in a country where persistent currency fluctuations and high inflation is a way of life. The naira, for instance, has been devalued about three times in the past year and inflation keeps rising, reaching 17 percent in February.

Banks on the continent and other players – old and new – have tried to fill the remittance gap. But no matter the efforts they make, merchants and individuals still complain about the stress they have to undergo to get their money.

Service providers like Transferwise had to cozy up with Flutterwave as part of an attempt to address the problem and break into the market in Africa, but regulatory barriers would not let the partnership survive. Transferwise finally threw in the towel in December 2020 after the Central Bank of Nigeria (CBN) changed a 2013 rule that allowed payment in naira after the currency fell to a 3-½ year low of N500 on the black market, widening the gap with the official market quoted at N381 since July. Transferwise, thereafter, announced it will no longer send remittances to Nigeria.

But PayPal coming back to the continent it has shunned for years, on the back of Flutterwave, a company founded by two Nigerians, same country it would not touch with a long stick in the past, has many people buzzing with excitement rather than anger.

Flutterwave is not necessarily a Nigerian company given it was incorporated in San Francisco and its headquarters is also in the US. So PayPal, it can be argued, did not necessarily embrace a Nigerian company with Nigeria’s DNA, its partnership is with a US company founded by two Nigerians who have lived most of their lives outside Africa.

However, the past stays confined to the past for many young African entrepreneurs pillaged by devaluation, inflation, acute dollar scarcity, and rent-seeking business environments. Not even a 2013 petition pushed by tech entrepreneurs to “bring PayPal to Nigeria,” stands in the way of the excitement the Flutterwave partnership brings. The partnership is the future.

“The PayPal and Flutterwave deal is the biggest thing that has happened to creatives and freelancers since Google Search,” says Olaseni who is now a Senior Business Analyst at De Sync.

For Andrew Alli, partner and Group CEO of Southbridge Group, an investment banking corporation, “This is excellent. One of my growth theses for a 21st (as opposed to 19th) century growth trajectory for Nigeria and Africa, is the sale of services globally via the internet. Allowing one to be paid from offshore via PayPal is a great leap forward.”

Flutterwave payment services reach about 11 countries in Africa and they have so far processed over 140 million transactions worth $9 billion. PayPal on the other hand is one of the largest digital payment companies in the world with 377 million customers in more than 200 countries. In 2020, the company reported a $936 billion transaction volume.

“As we build the largest payment infrastructure in Africa at Flutterwave, we also know that Africa does not exist in isolation, we need to connect Africa to the world, when it comes to payments and we took a closer step to that today,” Olugbenga Agboola, CEO, Flutterwave said.

The payment problem

Despite the growing push in cashless payments by financial authorities and several moves to migrate the continent’s economic systems under one platform, there still exist several hurdles in making payments from one country to another or region to another.

The continent, for instance, ranks highest at 9 percent in the world for the highest cost of sending $200, according to the World Bank. The world’s average is 7 percent.

A report by GSMA found that the cost of sending money to Africa reaches 12.4 percent of the face value of the transaction on average – much higher than the global average of 8.6 percent. Transaction fees can even reach 20 percent for remittances sent within Africa. The World Bank also found that the 10 most expensive remittance corridors in the world are all intra-African and estimates that if remittance fees across Africa were brought down to 5 percent (the average rate for G8 countries), $4 billion could be put back into the hands of Africans.

There are also currency problems as cross-border payments both intra-Africa and between Africa and the rest of the world, are still skewed towards the US dollar usage and dollar clearing via North American banks. Due to the currency problem, over 70 percent of all cross-border financial flows from Africa are first routed to North America or Europe before getting to their final destination. Only 20 percent of all intra-Africa cross-border payments are settled within Africa, data from Swift showed.

Even though it is not perfect, PayPal has had a significant level of success enabling seamless transactions in over 200 countries and Flutterwave and users in over 50 countries in Africa would be hoping to deploy this expertise on the continent.

However, Paul Onobhayed, head, Department of Computer and Information Systems at Pan-African University (PAU) Lagos, says PayPal’s choice of Flutterwave could have had more to do with its wide reach across Africa. He does not think the deal will necessarily remove the bottlenecks in making payments from within African countries.

How PayPal on Flutterwave works

Basically, PayPal enables small businesses to send electronic payments and receive electronic payments without a merchant account. PayPal essentially simplifies the payment process making it easier for individuals and merchants to receive money.

However, PayPal on Flutterwave will only work for businesses with already existing PayPal accounts. But as a Flutterwave user, you do not need to open an account with PayPal to make payment to someone abroad, so long as they have a PayPal account. The deal does not include a PayPal account opening, a sour point for many people.

“I suspect that with this latest development, it’s more a question of Nigerian regulations and foreign exchange policy than PayPal rules,” says Alli.

It could also be a problem that the Africa Continental Free Trade Area (AfCFTA) can address should all member Central banks agree to work together. The free trade agreement will give global operators like PayPal the confidence to approach financial regulators on the continent with the goal of opening every aspect of its service to people living within the continent.

Importantly, addressing the payment challenges the continent faces will potentially increase the GDP of countries on the continent. This could significantly push up the income per capita of people particularly the growing middle-class population who are driving the digital economy in many of the countries.

According to the African Development Bank, there are over 350 million middle-class people in Africa. Excluding South Africa, a growing middle class in Sub-Saharan Africa is spending over $400 million per day. Household spending rose to $1.6 trillion in 2017 after crossing the $1 trillion mark in 2010, indicating an expanding consumer class. Between 2011 and 2016, the income or consumption of the median individuals grew in most countries.

For the time being, Victor Asemota, Africa Partner, Alta Global Ventures, and an investor in Flutterwave says the payment company focuses on what works in Africa the most while still trying to take people into the future.

“The African market is currently very fickle, and its relationship with digital has to be built on solid trust. Flutterwave keeps building this trust one customer, one merchant, and one partner at a time. Hopefully, it will soon become one investor at a time with a public listing,” Asemota said.

The biggest winners of the partnership

Pius Onobhayed easily identifies e-commerce as the biggest winner of the partnership. Flutterwave is not a newcomer to the e-commerce market in Africa. In 2020, the company launched the Flutterwave Store, a virtual marketplace that allows merchants using its payment service to display their goods and collect payment in real-time.

E-commerce in Africa estimated at $27 billion before the COVID-19 pandemic is being driven by rapid internet penetration through smartphones. The share of the population using the internet has grown significantly from 2.1 percent in 2005 to 24.4 percent in 2018, data from the International Telecommunication Union shows. At the same time, Africa’s payments services architecture is evolving in response to changing customer expectations and technology, offering a range of disruptive payment models enabling more people, even without a bank account, to take part in online shopping.

Countries like Nigeria with a large internet population have seen a surge in investment in e-commerce in recent times. Between February and April of 2020, the market welcomed new players like Remita, Flutterwave, and OPay. Paystack, Facebook, and Interswitch have since launched e-commerce platforms.

The integration with PayPal represents an opportunity for Nigerian vendors to showcase their products to buyers in other countries and earn foreign exchange with little problems. It is predicted that globally, 2.14 billion people will be shopping online in 2021. Nigerian sellers now have an opportunity to plug into this market.

Invariably, the partnership means an inflow of money for merchants, financial institutions, and countries involved. A vendor who receives payment from abroad will necessarily remit the 7.5 percent VAT from the transaction. This money goes to the government. Originating banks also make money from the commission they receive from the entire transaction.

The partnership would also ease the conversion worries merchants in Africa used to have from transacting with buyers from abroad.

“This partnership makes the conversion easier for the buyers. Some UK-based shops can quote in pounds but the US buyer doesn’t worry about how to convert it into pounds. Something similar will happen here,” says Onobhayed.

The local currency would also benefit from the partnership. As more naira denominated card is used to purchase goods abroad and being converted, Onobhayed believes this could boost the confidence in the naira.

The what-ifs

The partnership will be sorely tested in different ways. One of them is logistics. Amazon, DHL, and other global companies may have addressed the logistics bottlenecks for goods coming from outside Africa, the movement from the continent is not so efficient.

On many occasions, merchants sending goods abroad have experienced weeks of delays causing strain between them and the buyers. Apart from the delays, formal routes like DHL, TNT, etc are considered expensive by many merchants.

“I often have to look for someone travelling abroad to pay them to ensure that my goods reached their final destinations. That is the best affordable method to get the goods delivered on time,” says a vendor.

It is also a risky route that has seen many vendors duped.

“Hopefully there should be some other entrepreneurs that will take advantage to form courier services that will ride on this. Flutterwave is doing well with the payment opening up but we need businesses that can deliver the goods to foreign buyers,” Onobhayed said.

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