East Africa is witnessing rapid growth in digital and online work platforms, transforming how the country’s workforce accesses job opportunities. At the moment, these platforms are opening new markets, building trust between clients and gig workers, and providing workers with a broader range of job opportunities. As cross-border payments service provides customers with the convenience and access they need to reach their loved ones across the globe, promoting financial empowerment and contributing to the economic growth of the continent. But why cross-border payments remain inadequate in the region despite new and innovative technologies enabling easier consumer and merchant transactions and new business models and offerings.
In Africa, estimated $95.6 billion a year flows into the continent, making remittances a major source of foreign currency in Africa. Meanwhile, remittances are a key economic driver in Sub-Saharan Africa with a reported $53 billion flowing into the region in 2022. In Kenya, the Central Bank of Kenya reported $5.77 billion worth of foreign currency inflows in 2022. Experts say, cross border remittances unlock financial inclusion by empowering individuals to access formal financial services, ultimately fostering economic growth and stability in the region. Given the rise of cross-border deals, in the six months to March 2023, M-PESA Global transactions grew YoY in volume & value by 2.2% & 5.6%, respectively. Many observers have indicated that there are many reasons why the cross-border payment industry is growing. For one, many major economies are investing in trade and infrastructure projects like the African Continental Free Trade Area and China’s Belt and Road Initiative. These contribute over 10% of the annual growth in cross-border payments from emerging economies.
Similarly, the adoption of mobile money payments in Kenya has been increasing following the Central Bank’s push for the service, in recent times. According to GSMA, globally registered mobile-money accounts stood at 1.2 billion in 2020, roughly equal to the population of the continent, with more than $2 billion in daily processed transactions, equivalent to more than 40 percent of the GDP of sub-Saharan Africa. Our findings show that international remittances terminating in mobile-money wallets grew by 65 percent year over year in 2020 to around $1 billion, with no signs of slowing. While 5% of Kenya’s adult population, around 1.2 million people, now participate in some form of the gig economy, which can include businesses on social media, a study by the Kenya Private Sector Alliance (KEPSA) estimated.
Why Cross-Border Payments Remain Costly?
However, East Africans are still struggling to find cheap options to send money from one country to another within the region, making it one of the greatest barriers to trade and slowing the implementation of the Common Market Protocol. Digging further, as the International Monetary Fund (IMF) stated, sending money between Tanzania and her East African neighbors incurs more than 30% in transaction costs, hindering regional economic growth. For instance, Tanzanian remittances to Uganda, Kenya, and Rwanda incur transactional fees at 34%, 30%, and 29% respectively.
Correspondingly, the IMF has also pointed out that these figures can be attributed to costly bank-to-bank money transfers across the region. IMF also states that the global average cost of cross-border payments stands at 6.25%. About $12.50 was charged for every $200 sent from one country to another in the first quarter of 2023. Another challenge causing high cross-border payment costs in the region is the existence of peer-to-peer (P2P) transfer restrictions in both the sender and destination jurisdictions, and floating exchange rate regimes, which are the ones used across the region.
Enriching the Payment Experience with Innovation
Analyst says, as technology has advanced, so too has innovation. Consumers in Africa continue to benefit from an increase in the proliferation of alternative payment methods across the continent, offered by local and international fintech players and telecom companies. Such as digital wallets that are linked to a variety of payment methods, including cards, accounts, and mobile money, also are growing in availability and adoption. Card-linked digital wallets, for instance, are a significant driver of growth in the issuance and usage of cards, including virtual cards.
Though cash is still king in Africa, experts noted that its supremacy is likely to be challenged in the coming years as e-payments gain momentum. With banks and nonbank players alike innovating to reduce friction in domestic and cross-border payments and deliver much-needed new solutions to consumers and businesses, Africa’s domestic e-payments market is expected to see revenues grow by approximately 20 percent per year, reaching around $40 billion by 2025, compared with about $200 billion in Latin America. By comparison, global payments revenue is projected to grow at 7 percent annually over the same period.
Temporarily, trends in payment volumes across East Africa show significant growth in real-time payments, crypto and blockchain use, cross-border flows, and remittances. Despite its volume in bank transfers, Africa’s digital B2B market suffers from a handful of issues like cybersecurity threats, limited infrastructure, poor internet connectivity, and unreliable systems. These challenges affect transaction speed and businesses’ growth potential. However, digital payments are seeing strong growth with three-quarters of consumers who send and receive cross-border payments doing so through mobile apps. This growth in cross border mobile transactions has created a genuine need to make cross border remittances easy and secure for both banked and unbanked consumers, experts added.
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