Why cross-border payments are next innovation frontier


Market analysts have predicted that cross-border payments are the next frontier where innovative technologies will challenge the existing expensive, clunky business models.

Mobile phone technology, mobile money, digital currencies, distributed ledgers, electronic identification and cloud technology together have the capacity to technically make cross-border payments cost negligible, instant, auditable and accessible to everyone.

In view of this, Financial Services Development Africa (FSD Africa) commissioned a research to assess whether the appropriate application of new technologies could be leveraged to increase formal remittance flows into Africa and cut the cost of sending money home.

The research findings released on Thursday last week in New York, show that existing technologies such as regional automated clearing houses, remittance payment processing hubs and aggregators could all make sending money from the UK to Africa very cheap.

“It is more expensive to send money to Africa than anywhere else in the world. But is doesn’t have to be like that,” said Juliet Munro, director of Inclusive Finance at FSD Africa.

“The way we stay in touch, do our shopping, and even the way in which some of us find love, have all gone digital. Yet, for the vast majority of people sending money home to friends and family in Africa, they are still doing it the way they have always done it: in cash,” says Ms Munro.

Whilst there is no official data on the volume of remittances sent from the UK to Africa, the FSD Africa and Developing Markets Associates teams behind the research estimate that flows totalled £4.1 billion (Sh537.1 billion) in 2015.

Nigeria is the largest African corridor from the UK. Other significant remittance corridors from the UK include Kenya, Zimbabwe and Somalia.

The research showed that, for instance, £334 million (Sh44.4 billion) is sent to Kenya each year by 151,073 Kenyans living in the UK.

Remittance transactions

The average cost of sending £120 (Sh15,960) from the UK to Kenya is seven per cent, but to send it to Tanzania, the cost is 14 per cent.

The research revealed that there are encouraging signs that where remittance transactions are digitised, prices are reducing. Prices are, however, more competitive in markets where the volume of remittance transactions is large.

For instance, the total average cost for sending £120 from the UK into Nigeria, Kenya and Zimbabwe are on average less than seven per cent of the amount sent.

It points out that digital currency market in Africa is dominated by small start-ups and business models are changing frequently to respond to market opportunities.

At present, the regulatory environment in sub-Saharan Africa for crypto currencies — a digital currency in which encryption techniques are used to regulate the generation of currency units and verify the transfer of funds, operating independently of a central bank — is undefined.

In Kenya and Zimbabwe, cryptocurrencies are neither legal tender nor foreign currencies under the Foreign Exchange Act.

The Capital Markets Authority is already employing a regulatory sandbox structure to encourage innovation in the capital markets.

The report noted that it is proposed that the Kenyan sandbox should be extended to include financial innovations in the payments, including those applying cryptocurrency and distributed ledger technology.

“Given the scale of UK-to-Nigeria remittances, this model could also be replicated in Nigeria,” it stated.

A regulatory sandbox is a constructed well-defined space, within which companies can experiment with innovative FinTech solutions in a relaxed regulatory environment.

This is done with support from a national regulator for a limited time while they validate and test their business model.

It allows innovators to experiment and develop FinTech solutions in a safe environment.