Fixing the Pan-African Payment System for start-ups

Judith Mwaya
By Judith Mwaya

Tech Policy Analyst at Tony Blair Institute for Global Change

Posted on Tuesday, 5 July 2022 11:00

Start-ups need a pan-African payment system that is low-cost and inclusive.

The big talk around African economic integration means little without effective ways to send payments across African borders. For start-ups this is a corporate life or death experience.

The latest milestone for the Africa Free Continental Trade Area (AfCFTA) plan is the new interconnected Pan-African Payment and Settlement System (PAPPS) which launched in January this year.

It will facilitate cross-border payments, boost intra-African trade and provide expansion opportunities for businesses. This is sorely needed and will significantly benefit Africa’s start-up ecosystem, but five months from launch it’s clear that more needs to be done to ensure it fulfils its potential.

The situation right now

The current picture is concerning: Africa has more than 171 mobile-money wallets – most of which can’t work with each other – more than 1000 banks and more than 12 card networks in 55 countries with little interoperability. Over 80% of African cross-border payment transactions must be routed offshore for clearing and settlement using third-party banks usually located outside the continent.

African local currencies need to be converted into hard currencies to make cross-border payments, which leads to significant losses through currency conversion fees as well as reducing the volume and frequency of cross-border trade. This also results in inefficiencies including time lags and high foreign currency reserve requirements for banks.

Consequently, Africa’s intercontinental trade remains below its potential – in 2020 the share of intra-Africa trade was just 16%, meanwhile in Asia this figure for the same time period stood at 58.5%.

New and improved infrastructure

This new financial market infrastructure connects African markets, enabling cross-border payment in respective local African currencies. In other words, a buyer in one country can use their local currency to pay a supplier in a second country, who would receive the payment in their own local currency. Removing the need to convert local currencies into intermediary currencies like pounds, dollars, and euros is set to save the continent $5bn in conversion costs annually.

However, much more could be done to help start-ups in African countries and deliver the benefits of this new payment system. Start-ups that operate across different countries have long suffered from uncertain transaction delays caused by limited correspondent bank relations, foreign currency availability, and cross-border payment rail capacity.

During the research phase for our paper on supercharging Africa’s start-ups, we spoke with several of these companies that highlighted cross-border payment as a bottleneck for their growth and expansion.

Unlocking start-ups’ potential to trade and operate across countries through a cheap, fast, and safe cross-border payment infrastructure is crucial for several reasons. These include:

  • increasing the competitiveness of start-ups in the continent;
  • increasing profitability, attracting more investment in start-ups and the African ecosystem;
  • providing African consumers with affordable and high-quality goods and services.

As the AfCFTA continues to reach new milestones such as the upcoming operationalisation of the single digital market, the new payment scheme will enable start-ups to take advantage of the instant payment infrastructure.

So what needs to happen to unlock these benefits? To start with, PAPPS should better promote itself. Although the system is now commercially operational, there is still a significant public knowledge gap about how it can be accessed, and the benefits for banks, start-ups, and individuals. More effort needs to be put into raising awareness and capacity building at national and regional levels to encourage people and organisations across the continent to use it.

Secondly, it needs to increase the number of central banks signing up as they are at the heart of PAPPS, and it won’t work without them. Currently, less than ten have joined the network. Government leaders and central bank governors need to champion and sign up to become members to allow commercial banks, start-ups, and consumers to access the system and the benefits that come with it.

Finally building partnerships and integrating with fintechs is essential as they dominate the payment system in Africa, especially for the unbanked. Bringing more fintechs into the network will be a game-changer for financial inclusion and cross-border trade in Africa.

These recommendations will maximise the benefits of PAPPS, ensure its effectiveness and enable start-ups to participate in the single digital market and get access to a free trade area connecting close to 1.3 billion people, with consumer spending valued at $4trn.

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