#40 - Cross Border Payments
Evaluating the different players within the space and who's likely to win
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Whenever we talk about payments in Africa, the narrative for a long time has always been about remittances. Indeed remittances are important particularly given that they’re a source of much needed hard currencies. Nonetheless, remittances are only one part of a larger cross-border payment discussion. This cross-border payments discussion is built on both trade and intra-African remittances. When it comes to trade, the share of intra-African exports as a percentage of total exports was only 17% in 2017 compared to 69% in Europe and 59% in Asia. Indeed, further studies have shown that adjusted for commodity exports and informal cross-border trade, the share of intra-African trade is much higher. Indeed, it is estimated that Informal Cross Border Trade (ICBT) makes up for between 30-40% of total cross border trade in Africa.
I have a friend who imports clothes into Bujumbura for sale. He starts with browsing through the Instagram feeds of various Tanzanian fashion outlets, mostly doing e-commerce the African way. He then gets in touch with them and makes an order stating quantity and selection. The sellers then give him a mobile money number to which he’ll send the cash, it’s usually Airtel Money in Tanzania. He then goes to the biggest market in town that also doubles up as a major bus terminal and he finds these off-line mobile money agents. A network of agents who support payments to all major mobile money platforms in East Africa. These agents double up as informal forex dealers as well so they accept local currency and then make the payment in Tanzanian Shillings on Airtel money. The settlement is instant and the seller packs the goods and puts them on a bus bound for Bujumbura.
Source: DFS Observatory
The goods arrive within a few days and he then sells them to shops in town on credit, within a month or so, he receives payments for his goods and starts the cycle all over again. There are many inefficiencies particularly around the duration of the trading cycle and the working capital constraints, but this is the reality of cross-border trade and payments in Africa.
In essence, Cross-border trade in Africa is already much bigger than what’s captured in the statistics and the latent demand is growing significantly. Within Fintech and payments in general, the players that build for this and win will be multi-billion dollar companies. However, the narrative shouldn’t be only about cross-border trade and payments, it should be larger and include the infrastructure that will empower young Africans to be part of the global economy. In parts, one aspect has to do with talent search and discovery and another has to do with payments infrastructure.
The crux of this article will be to discuss the different players tackling cross-border payments in the continent and think about who will likely win and where the most value will be generated.
Drivers for Cross-Border Payments
As has already been discussed, there are a number of factors that are driving the demand for cross-border payments.
Improved communications capabilities powered by technology. These include social media platforms such as Whatsapp, Facebook and Telegram.
According to the IOM, there were over 21 million Africans living in a neighbouring country in 2019, up from 18 million in 2015. This number is growing for sure.
The post-covid remote work era - Covid-19 in my view has changed the nature of work forever. In the USA for instance, there were over 9.6 million unfilled job vacancies in Q2 2021 compared to 5.3 million in a similar period last year according to the St.Louis Fed. This has been called the “Great Resignation” in some quarters. At a macro-level, Covid-19 accelerated a number of trends that were already emerging. Technology was enabling not only remote work but gig-work as well. Given that jobs weren’t tied to physical locations, then talent search did not have to be local. This has been a boon to skilled Africans who can now work in global companies whilst never having to leave the country. African companies that insist on “clocking in” and other management principles birthed by Taylorism will struggle to recruit and retain talent;
The Anatomy of Payments
Having discussed the drivers of future cross-border payment demand. It’s important to understand the heritage of cross-border payments. I wrote a newsletter some time back about SWIFT and the future of remittances where I discussed the history of SWIFT. SWIFT essentially is a messaging protocol that arose from the issues faced with free-form telex message communications. In principle, payments have three core jobs to be done;
The receiving of payments instructions - customer layer;
The communication of payments instructions - infrastructure layer;
The settlements of the above payments instructions - settlements layer;
This is of course a major simplification, but for the purposes of this, it shall suffice. The existing message based payments system traces its heritage to “sedentary” venetian merchants. By sedentary, this means merchants who didn’t travel to trade but rather traded through a system of shipping and correspondent banking. Merchants banks established “correspondent” banks and made settlements through Nostro “ours” and Vostro “yours” accounts. Payment communication would happen through letters with the payment instructions detailing the exact accounting entries to be made e.g. Debit Nostro and Credit Vostro for this final beneficiary.
Alternative payments such as American Express Money Orders, Western Union and Moneygram with their global agent networks emerged over time to enable cross-border payments. Instead of a central messaging protocol, these were closed loop solutions where a central private intermediary managed the infrastructure and in many cases the customer layer. As technology has improved, the basic assumptions and workings of these payment systems are either being improved dramatically or are being completely reimagined. The players that are emerging are either operating the following types of payments;
Customer layer players who are building the front-end for payments, think Chipper Cash, Eversend and Nala;
Infrastructure plays who are working on the messaging and infrastructure layers whilst connecting to both banks and consumer wallets. These include the likes of Thunes, Terrapay, Flutterwave and Worldpay;
Regional payments initiatives driven by Central Banks such as EAPSS, SIRESS and PAPSS;
Off-line systems such as Hawala and off-line Mobile Money agents;
Bank propositions such as Umoja by Standard Bank, Ecobank and others;
Of course Cryptocurrency particularly Stablecoins and a Decentralised Autonomous Organisation such as MakerDao that enables trade finance and liquidity pooling;
Issues around Cross-Border Payments in Africa;
The end-state of cross-border payments in Africa should be a ubiquitous, real time payments system that has immediate settlement finality. People who are paying are only concerned about the recipient receiving the value and that the costs to make the payment are low enough. Current payment systems are plagued by;
Delayed Settlements - Many intra-African payments still run on SWIFT and are settled in US$. Therefore, settlements can take any time between 2-3 days and in many cases, payments are reversed or get stuck at an intermediary.
Illiquid currency pairs - ideally a payment between someone in Ghana and another one in Botswana should be settled using the Ghanain Cedi and the Botswana Pula. Nonetheless, these trades are done in US$ given its liquidity. Naturally, this drives up the costs. For instance, if I’m a recipient bank, I get the message instruction immediately but the settlement can take a day or two. During this delay, the currency can shift and thus I have to price that into my FX margin. This is ultimately priced into the transaction and the recipient gets a much lower amount. This applies for both SWIFT and card based payments. In some countries, the exchange rate is fixed and the FX margin is dictated by the Central Bank.
In many cases, the customer layer is still very inefficient where customers have to fill multiple forms and memorise or know a lot of information such as “Beneficiary Correspondent Bank, IBAN and SWIFT”. This information overload is often a hindrance to people onboarding given the illiteracy levels in the continent. A customer just wants to send money to his supplier or his sister.
The Payments Innovators;
Front-End Apps - Chipper Cash, Nala, Eversend
In the last few years, a number of propositions have emerged tackling the front-end of cross-border payments. The poster child of this movement in Africa has been Chipper Cash which has been the most deliberate in its work around Cross-border payments. Eversend also has a very useful proposition around this and Nala which has had a start in remittances into Africa is likely to also offer Cross-border payments across the markets in which it operates. These apps have at a basic level, customer wallets, virtual cards, the ability to pay for utilities and buy airtime and at a higher level, the ability to buy crypto as well as wealth products such as stock trading. Nala has started with source markets with recipients receiving payments into their MoMo wallets or bank accounts.
Building a customer-facing app in Africa is a completely different ball game than doing a similar proposition in Europe, Asia or North America. Some of the founders within the space are in my view extremely intelligent and resourceful. In Europe, you can simply connect to a BaaS provider such as Railsbank or Bankable and immediately switch on intra-continental account opening and payments. In Africa, founders within this space are solving for multiple regulatory environments, cultures, payment systems and currency considerations.
Chipper Cash for instance gets licensing in each market, partners with someone for identity verification, opens bank accounts for store of value and negotiates exchange rates for settlements. It then partners with a player such as Flutterwave for centralised liquidity management, reporting for some payment types and payments and collections for some markets. It has to build a deeper stack than say a similar Fintech in Europe or USA.Some of these apps can in the future pivot to the Infrastructure play;
These apps sit in front of the customer thus enabling customers to make and receive payments across the continent or at least across a number of countries within the continent. I’ve come to learn that when we speak of Africa, we tend to speak of only 10 countries.
The key advantages these companies have are;
An engineering heritage and start-up culture that helps in terms of product innovation;
In some cases, patient VC capital allows them to take long-term bets. Chipper Cash is one example, where the founder has spoken often about their long-term play. One thing to consider is that the median age in Africa is 19/20 and thus most accounts are yet to be opened. A 16 year old will likely either open a wallet with a Fintech such as Chipper Cash or a crypto wallet;
Intuitive user experiences due to the fact that they’re building for the customer and simplifying the journey for them;
The powerful ability powered by their product teams to build into where they see customer value. These could be future use cases such as tax registration, SME banking, invoicing etc;
Of course there are a number of downsides;
Most of these apps share users and thus their LTV per user or even just their overall user numbers need to be taken with a pinch of salt. Given the ease at which it takes to open an account, most users of these apps tend to open multiple wallets across different Fintechs and just max out benefits whilst barely transacting;
Monetisation strategies are far from being mature. VC funding is still driving user acquisition but the path to monetisation for many of these apps is unclear. For cross-border payments, most of the economics is shared with infrastructure partners such as banks (for FX), mobile money for payments and the likes of Flutterwave for specific payments and services.
Ease of entry given that licensing around payments service providers or e-money licenses are not as strict as bank licenses. It just takes a talented team and VC money to enter the market and threaten your dominance, given the ease at which customers can switch and their low affinity to a brand, this is a major issue;
Minimal off-line capabilities where the market is mostly offline. Stephen Deng of DFS Lab tweeted below how despite increased 3G coverage, only 23% of Africans are connected showing how off-line capabilities still matter;
Overall, this space seems to be a VC driven battle where the companies with the biggest pockets i.e. VC funding will have the time to prove out their business cases.
Back-End Infrastructure Players;
Back-end Infrastructure is proving to be one of the most valuable spaces in African Fintech. If you look at African Unicorns, infrastructure seems to be a key theme with the poster child being Flutterwave. Back-end payment infrastructure players provide the technology to enable payments across multiple platforms to happen. Flutterwave for instance enables businesses to accept and make payments across different platforms. A business on Flutterwave can accept payments across all the card networks and now through most mobile money platforms. Recent deals with M-Pesa, Airtel and MTN show that it’s well on its way to becoming the core payments infrastructure provider in Africa.
Interview with Flutterwave CEO - Olugbenga Agboola - Source Kenyan Wallstreet
Global companies such as Thunes and Terrapay are also playing in this space by offering the connections across global wallets. Thunes for instance powers the connection between M-Pesa and Paypal where M-Pesa customers can move money between their M-Pesa and Paypal wallets. They also power a lot of connections between Alipay and African wallet providers.
Infrastructure players go to each market and build out the whole stack from connecting to local payment schemes, deal with licensing and regulations, build out the fraud and KYC capabilities as well as any idiosyncratic local factors. I use Flutterwave for instance for my newsletter where I use the invoicing capability enabling me to accept any type of payment with settlement reaching my local bank account.
MFS Africa is another key player within this space. Starting with building out the technology to connect African MoMo wallets, MFS has extended its product offering to off-line cash payment systems. Recently, MFS acquired the Nigerian Super-Agent network Baxi with a view of enabling cash payments. A use case could be a Nigerian making payments to an M-Pesa wallet by depositing cash at a Baxi agent.
The acquisition of Paystack by Stripe as well as the recent fund-raise by Flutterwave show the value the market attaches to infrastructure. The logic is simple: in payments, given the complexity of launching in a single market, growth by global players is often done through M&A. Flutterwave and the likes of MFS then become very attractive targets to players such as Paypal, Visa or Mastercard given that they’ve already built out continental money movement infrastructure. Flutterwave and Paystack have gone further to build out value propositions such as storefronts, consumer apps, invoicing capabilities and payment links. These infra players are front-end agnostic and thus are likely to power new use cases thus just like Stripe, they will act as an enabler.
Regional Payment Schemes
In principle, solving for cross-border payments would require a number of regional Central Banks creating the settlement infrastructure for cross-border payments. Attempts have been made in the past. In East Africa, there’s the East African Payments and Settlements System that runs on SWIFT communication infrastructure with settlement being done within the region without having to go to off-shore correspondent banks. In Comesa, this is done through REPSS and in SADC, this is done through SIRESS.
One problem from my experience that occurs is that larger banks don’t promote these payment systems. In East Africa for instance, a bank like KCB is in every market. This multi-country strategy is based on supporting your customers throughout the region for payments in particular. It makes more sense for KCB to push its customers to make payments through its internal systems. The same applies for Ecobank across its network and I’m sure for GT Bank as well within West Africa. Regional payments systems have thus not taken off. SIRESS struggled at first because it was based on Rand settlements whereas customers wanted dollar settlements.
To solve all these issues, currency liquidity and widespread adoption, the Pan African Payments and Settlements System (PAPSS) was launched by AfTCA and Afreximbank as the liquidity provider. PAPSS will run on ISO 20022 thus powering richer messaging and more standardised messaging that allows instant settlements. It’s an interesting innovation particularly given it’s Pan-African nature, big regional banks will be incentivised to promote it given that none of them cover the whole continent.
These regional payment schemes are likely to do well for larger value payments that require the KYC and balance sheets provided by banks. However, for smaller value payments I don’t see much of a value proposition.
Just because there’s no app for something, doesn’t mean that that activity is not going on. East African mobile money is the best example of this with a distributed system of mobile money agents across the region who power informal trade. The introductory story was the best example. The main benefit of these off-line payments is that they give people settlement finality as well as the reliability that comes with cash. Cash is never off-line and MoMo is the most reliable electronic payments system in East Africa. It’s a match made in heaven.
Of course, most of these activities are underground, unregulated and informal but so is most of Africa. Africa is efficient in a very “inefficient” way. A perfect example is the structured “log-book” based trade finance that happens in markets such as Gikomba in Kenya. Apps won’t solve customer problems, off-line systems have already done this.
The problem of course is that customer data is off-line and thus propositions such as working capital finance for traders are difficult to build. This then reduces the long-term value to a merchant. Given that they’re unregulated, they become subject to sporadic crackdowns. This also exposes the customers in the event that anything goes wrong, they won’t have recourse.
Banks such as Standard Bank have come up with propositions such as Unayo with Ecobank having their “Rapidtransfer” app. The basis of these payments is that the bank offers the full-stack capabilities where they manage settlements, FX, customer store of value and the customer interface. In some instances, they partner with the likes of Thunes, Flutterwave and Terrapay for specific payment corridors. If well priced, this can be a very attractive proposition given the ability to layer working capital solutions as well as enabling higher value payments.
One issue that emerges is that banks may not have the technical expertise and culture to execute the customer value side as well as Fintechs where constant iteration is key. Additionally, the infrastructure players are abstracting away all the complexity of these bank propositions thus democratising the space. It will be interesting to see how Umoja executes and how it evolves.
Crypto is the only paradigm shift in payments technology to emerge in the recent past. Every other payments paradigm is an efficient play on the original Venetian nostro/vostro payments system. Crypto combines instant settlement and instant communication, powered by a single currency.
One way this can be done is through a DAO where liquidity providers power payments and receive a percentage of each payment. Of course this is many years away given that Crypto is banned in many African countries and the ecosystem is yet to mature to offer easy on/off ramps into Crypto as well as the kind of KYC that comes with regulation. It’s an area to observe.
Wrapping it Up
If I was a betting man, I’d bet on the infrastructure plays. My view is that with the kind of funding being raised and the tech principles, the likes of Flutterwave and Paystack will create very useful products. I recommend anyone to set up a Flutterwave or Paystack account as a merchant. It’s so easy and intuitive. What then will likely happen is the following;
Open Banking will enable these players to be your primary banking relationship as you won’t have to put your banking details, but rather you will open an account on these platforms. For context, most of Africa is yet to open an account;
Offline capabilities will be built. One of the biggest opportunities is Flutterwave building a product for third party financiers e.g. a trade finance company in Lagos that will provide working capital and customer management whilst managing payments on Flutterwave’s rails;
Banks will likely struggle. I speak as a banker, the issue within our industry is largely too much domain knowledge. We know too much about current systems and the constraints and thus often we cannot think around the problem. Flutterwave for instance was a mix of ex bankers and tech people plus Iyin who had zero domain expertise. For banks to win, they need to onboard outsiders who have a fresh lens;
The front-end will likely have a winner take all dynamic or alternatively will be segmented based on use case with infrastructure bets winning the economics.
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