The race to corner cross-border payments space is tightening and assuming a two horse race with capital stakes so high that African-based firms are forced to make do with fringe positions.
In the absence of local leadership, Chinese startups and US-based payment firms seem locked in a race to the top of the cross-border market which still experiences a lot of friction.
Rather than relying on traditional payment systems that paid off in the past for companies like Western Union, these foreign firms are broadening the space with the help of digital technology.
To be fair, local banks on the continent have been making efforts to break down the barriers but their unwillingness to collaborate amongst themselves, and the tendency to place shareholders’ interest ahead of customer needs have ensured that they are not among the top runners for the top prize.
As mobile money transactions outpaces bank accounts in Africa, the firms are increasing their investments in payment technology and collaborations with the goal of breaking down the barriers to cross-border payments in Africa as the leaders of various countries in the continent work to finalise modalities for the African Continent Free Trade Agreement (AfCFTA).
Prior to now, card payment companies like Visa and Mastercard where the most dominant forces in the market. They were given a head-start by the fact that African financial flows is dominated by payments from North America and the dollar remains the operating currency. However, a report by SWIFT indicates that North American clearing dominance is decreasing from 41.7 percent in 2013 to 39.5 percent.
The report also noted that more than 80 percent of the transactions sent from Africa to the United States have their final beneficiary in another region. The two main regions where the payment will eventually be transferred are Asia Pacific at 35 percent, and Africa at 19.5 percent.
While that shows that payment between African countries is rising, it also means Chinese activities in the payment space is growing and could overtake the US.
Opera, Alibaba and Transsion, backed by seemingly limitless supply of capital are leading the Chinese invasion.
Barely one year of launching OPay, a mobile-based platform for payments, transportation, food, grocery and delivery, Opera has led a funding spree of $200 million from Chinese investors. The investment is expected to pave OPay’s way into Africa’s cross-border payment ecosystem.
“OPay will facilitate the people in Nigeria, Ghana, South Africa, Kenya and other African countries with the best fintech ecosystem that Africa has ever seen, paired with the inclusion of daily use services such as transportation and delivery,” Yahui Zhou, CEO of OPay said in a statement. “We see ourselves as a key contributor to expanding financial inclusion in Africa, and helping local businesses and workforces to thrive from opportunities created by new, digital business models.”
Unlike OPay, AliPay, the world’s largest online and mobile payment platform with more than 1 billion users operated by Ant Financial Services Group, has been making a gradual entry into the market in Africa.
Again unlike OPay which prefer to build solo, AliPay is leveraging local payment providers to make its journey to the summit of the market. In 2017, it collaborated with South African-based mobile payment platform, Zapper to enable Chinese tourists in South Africa to pay via smartphones as AliPay.
In July 2019, AliPay turned to Flutterwave, a San-Francisco-Lagos-based business-to-business (B2B) payments service to address the Nigerian side of digital payments between Africa and China.
Cross-border payments in Africa have a lot of complexities and inflexibility that make transactions prohibitive for the average individual. Cross-border transactions are understandably subjected to more rigorous sanctions screening, anti-money laundering and fraud protections, typically because they involve very high value transactions.
A Brookings report showed that complexities in cross-border payments – like domestic ‘closed loop’ individual currency systems which solve for an exclusive community of participants – is responsible for 80 percent of Africa’s trade that is exported outside the continent. It is the opposite of what occurs in most other parts of the world. Although the AfCFTA is widely expected to overcome these complexities but new policies around open border are pushing back on those expectations.
But prior to the AfCFTA, several African countries have seriously looked into removing the complexities and allowing payments to flow from one system to another and provide pan-regional settlement capability. The Tripartite Free Trade Area between the East Africa Community, the Southern African Development Community and the Common Market for Eastern and Southern Africa are all results of the move to be more flexibility in cross-border payments.
At an Africa-China summit in June, the Cross-Border Interbank Payment System, China, said it hopes to play a more important role in payment by increasing use of the renminbi (RMB) in the China-Africa trade channel. Already, China’s financial institutions have set up more than 10 branches in Africa and eight countries, including South Africa, already have the RMB in their foreign exchange reserves.
Visa, in the meantime, has a lot of cards to play. It has successfully secured a series of high profile collaborations including a 20 percent equity stake in Interswitch, Africa’s first unicorn payment service provider. Visa was also announced as a partner of new payment service, PalmPay, owned by Transsion, the Chinese manufacturer of smartphone brands such as Techno, Infinix and Itel.
There are hopes that the involvement of telecommunications companies in mobile money will balance the competition and perhaps give local players a slice of the market. But regulatory hurdles telecom companies like MTN have faced in countries like Nigeria and others have ensured their progress is slow. Experts also say MTN and the big telecommunication companies will have to collaborate more to make cross-border payments more seamless.