Africa’s trade growth depends on its businesses’ ability to make seamless international payments.
The African economic narrative over the past decade has been that of a continent rising, and it is easy to understand why it’s demographics are quite compelling; Africa boasts of a rapidly growing and youthful population that is increasingly being urbanised. However underneath the veneer of this narrative are the obstacles facing businesses that are trying to capitalise on these opportunities, they struggle to access foreign currencies to make payments to trade counterparties and suppliers abroad and when they do it’s typically quite expensive and time-consuming.
According to the SWIFT (the international banking payments platform), cross border payments originating from Africa is growing 10% annually with about 45% of these payments going to North America although 80% of these are to beneficiaries in other regions (mainly Asia-Pacific and Africa).
In practice this means that if a business in Lagos needs to make a payment to a business in Beijing its current route will be to convert its Nigerian Naira to United States Dollars which is then sent by its bank via a correspondent bank in North America from where it is sent to China and then converted to Renminbi. This process is pretty much the same if that business needs to make a payment to a company in Accra as well (a geographical distance of 470km vs the 11,500km to Beijing).
This is why it can sometimes take a few weeks for these businesses to make payments via the existing banking infrastructure. To further compound matters, there has been a significant reduction in the correspondent banking relationships in the region as most foreign correspondent banks have terminated their relationships with smaller African banks that have been unable to demonstrate robust Know Your Customer (KYC), Anti-Money Laundering (AML) and Counter-Terrorist financing controls (CTFC).
Unlike its foreign counterparties, the typical small and medium scale African company trading internationally may not have a functional website or public profile and most likely does not keep proper accounting records or have proof of business address that a compliance officer in a foreign correspondent bank can decipher. This does not mean its source of funds isn’t legitimate, but unfortunately, is unjustly penalised by the existing global financial infrastructure.
This has led some businesses to forgo utilising banks to make these payments and resort to alternative methods such as employing unlicensed local brokers, peer to peer matching, informal networks and private individuals. Needless to say, these solutions are highly fragmented and fraught with significant regulatory and compliance risks.
There is a compelling case for a solution that provides a safe and secure marketplace where these businesses can exchange currencies with each other and have their payments made through a central counterparty that is regulated. Once a certain level of trust is achieved in the ecosystem adoption should be seamless since most of these businesses are already familiar with and use existing marketplaces such as Alibaba and eBay.
Africa will rise if it’s businesses can make seamless international payments!
Ola Oyetayo is a Co-Founder and CEO of VertoFX, a cross-border payments platform and currency exchange for businesses rapidly expanding in Africa.