African Cross-border Payments: Are Regional Currencies an Answer? (Ecommerce Forum Africa)

Arguments

There is a need for fast, effective, and affordable payment mechanisms, especially in the face of increasing e-commerce activities.

Supporting facts:

• Africa has experienced increasing e-commerce activities post-COVID-19 era.

• increase in transactions necessitates robust payment mechanisms.

Topics: e-commerce, cross-border payments, payment mechanisms

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There are several cross-border payment solutions in Africa.

Supporting facts:

• There are about 42 different currencies in Africa.

• There are cost issues associated with transactions and fluctuations in currencies.

• There are also regional initiatives for cross-border payments.

Topics: cross-border payments, intra-Africa trade, AFCFTA

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There is a plan to integrate other regions into the trade and payment systems

Supporting facts:

• Mentioned by Cassie that there’s a plan to integrate other regions

Topics: Global Trade, Regional Integration, Payment Systems

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Making global trade and payments affordable is important

Supporting facts:

• With the EFCFDA, there will be an increase in trade traffic

• This needs to be paired with affordability

Topics: Global Trade, Payment Systems, Affordability

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Trust is fundamental in global trade and finance

Topics: Global Trade, Trust, Finance

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Different strengths and vulnerabilities of various currencies need to be considered

Supporting facts:

• Some currencies are weaker than others

• Some are very vulnerable to the dollar

Topics: Currency, Global Trade

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There is a need for financial inclusion and support for unbanked people and SMEs in Africa

Supporting facts:

• The World Bank, IMF and other institutions like IFAD and FinCIS are already providing financial support

• TCRB started with World Bank and Bill and Melinda Gates funding

Topics: financial inclusion, SMEs, unbanked people, African continent

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Report

Africa has experienced a surge in e-commerce activities since the onset of the COVID-19 pandemic, underscoring the need for efficient, affordable, and speedy payment solutions. The rising number of online transactions necessitates reliable payment mechanisms to ensure smooth operations. Africa, with its 42 diverse currencies, faces challenges and costs associated with currency fluctuations during cross-border transactions.

However, the region already boasts several cross-border payment solutions, which help address these concerns. Additionally, regional initiatives are in place to strengthen cross-border payments, highlighting the importance of efficient payment systems in Africa. There is growing advocacy for the development of robust and affordable cross-border payment systems, in response to the increasing trend of e-commerce in Africa.

With the continent’s shift towards the digital economy, the demand for payment solutions that can accommodate seamless transactions is apparent. Moreover, plans are underway to integrate other regions into Africa’s trade and payment systems, fostering global trade opportunities and stimulating economic growth.

Ensuring affordability in global trade and payments is crucial for inclusive and equitable commerce, considering the varying strengths and vulnerabilities of different currencies, particularly against the US dollar. Addressing financial inclusion and supporting unbanked individuals and SMEs are pivotal for sustainable economic development in Africa.

Institutions like the World Bank, IMF, IFAD, and FinCIS are already providing financial support to address this need. Notably, the Technical Committee for Regional Banking (TCRB) has received funding from the World Bank and the Bill and Melinda Gates Foundation to advance its initiatives.

Trust is a fundamental pillar of global trade and finance. Establishing trust among stakeholders is essential to ensure transparency and security in transactions, fostering economic growth and bolstering institutional strength. Overall, the surge in e-commerce activities in Africa has underscored the urgency for affordable, efficient, and reliable payment mechanisms.

The region already has existing cross-border payment solutions, complemented by regional initiatives. Advocacy for robust payment systems aligns with the rising e-commerce trend. Integration plans with other regions prioritize affordability in global trade and payments. The strengths and vulnerabilities of various currencies, financial inclusion, and stakeholder collaboration play crucial roles in ensuring sustainable economic growth.

Trust is a vital element in global trade and finance, necessitating strong partnerships for transparent and secure transactions.

Arguments

The East African Community (EAC) has a regional payment system called the East African Payment System (EAPS) that facilitates cross-border traffic in the EAC region.

Supporting facts:

• The EAC comprises seven countries: Tanzania, Uganda, Kenya, Rwanda, Burundi, South Sudan, and DRC.

• Somalia is expected to join the EAC soon.

• The EAPS operates on a real-time gross settlement basis using the SWIFT messaging network.

• The EAPS is a multi-currency system that allows settlement in local EAC currencies.

• The EAPS started operation in 2014.

Topics: EAC, EAPS, Cross-border payments

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The current challenges faced by the EAPS include inconsistent legislation among EAC countries and low uptake among commercial banks.

Supporting facts:

• Many commercial banks in the EAC region still rely on foreign correspondent banks for cross-border payments.

• The EAPS has so far been mainly used for high value transactions.

Topics: EAC, EAPS, Challenges

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Kessy Pantaleo discusses efforts to integrate the ESC payment system with other regional systems

Supporting facts:

• Initiated discussion with SADC and Commessa for payment systems integration

• A technical working group was formed to focus on this integration

• The discussion between ESC and PAPS is ongoing

• East African Central Banks have a Monetary Alliance Committee to make regional decisions

Topics: Payment Systems Integration, ESC, SADC, Commessa

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Report

The East African Community (EAC) has implemented the East African Payment System (EAPS) to facilitate cross-border transactions within the EAC region. The EAPS operates in real-time gross settlement using the SWIFT messaging network and allows for settlement in local EAC currencies.

It commenced operations in 2014 and has played a crucial role in promoting trade and economic integration within the EAC. The EAPS has proven effective in reducing transaction costs and decreasing the reliance on hard currencies in the region. Charges for cross-border transactions through the EAPS are equivalent to those for local transactions, thereby encouraging businesses to utilize the system.

Consequently, the use of US dollars and other hard currencies for cross-border transactions in the EAC region has significantly declined. Despite its success, the EAPS faces certain challenges that need to be addressed. Commercial banks in the region still heavily rely on foreign correspondent banks for cross-border payments.

Additionally, the EAPS has not been widely adopted for low-value transactions, as it has predominantly catered to high-value transactions. To overcome these challenges, various efforts are underway. These include promoting cross-border retail payment systems, harmonizing payment system policies within the EAC, and integrating with other regional and pan-African payment systems.

An initiative is being developed to establish a regional switch that will connect national switches in EAC countries. Moreover, the EAC is actively supporting its partner states in establishing their national switches. The EAC is also engaging in dialogue with the Pan-African Payment System (PAPS) to explore synergies and collaboration in payment system initiatives.

Furthermore, the EAC is actively collaborating with other regional systems such as the Southern African Development Community (SADC) and Commessa to discuss the integration of payment systems. A technical working group has been formed to focus on this integration, and the East African Central Banks have established a Monetary Alliance Committee to collectively make decisions for the region.

In this context, Kessy Pantaleo, an influential advocate, supports a regional approach in engaging with PAPS. Instead of pursuing bilateral engagement, the governors of EAC countries have decided to approach PAPS as a unified region. This strategic move aims to leverage collective strength and address concerns raised by the EAC Central Banks.

Multiple meetings have already taken place with PAPS management to explore available options, and the concerns of the EAC Central Banks are being actively addressed. Overall, the implementation of the EAPS has brought significant benefits to the EAC region, reducing transaction costs and decreasing reliance on hard currencies.

However, challenges remain, and ongoing efforts are being made to promote cross-border payment systems, harmonize policies, and integrate with other regional and pan-African systems. The regional approach in engaging with PAPS is seen as a strategic move to foster collaboration and collectively address concerns.

Arguments

Kim Dancy is a lawyer with a history on the regulatory side of payments

Supporting facts:

• She has been deeply embedded in blockchain and CBDC work

• Worked on payments across Africa for FNB

Topics: Payments, Law

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Kim Dancy is particularly interested in emerging technologies and the role that emerging technologies play

Supporting facts:

• She has spent the last two and bit years deeply embedded in blockchain and CBDC work

Topics: Emerging Technologies

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Kim Dancy used to work for a financial inclusion think tank

Supporting facts:

• She looks at financial services through the lens of payments, emerging technologies and financial inclusion

Topics: Financial Inclusion

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Cryptocurrencies are already feasible and working solutions for cross-border payments on the African continent because formal markets, central bankers and commercial bankers have failed to provide a solution.

Supporting facts:

• A lot of payment systems, big global payment systems are US-based companies like SWIFT or the card associations.

• 70% to 80% of transactions on the African continent are routed by the US or the EU in dollars and euros.

Topics: Cryptocurrencies, African continent, Cross-border payments

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Acceleration of payments in regional areas is inevitable

Topics: CBDC, Payment system, Regional areas

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Settlement is a major challenge in the TCRB world

Topics: TCRB, CBDC, Settlement

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There’s a need to understand different ecosystems and how they can complement each other

Supporting facts:

• All pools of funds from different systems meet at a point and are ultimately in the hands of central banks

• RLN is looking at how to make all channels talk to each other and not have siloed ecosystems

Topics: Regulated Liabilities Network, Interoperability, Cross-border transactions, Ecosystem

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Global trade must deliver on its promise under the African Free Trade Agreement by improving global payments

Supporting facts:

• If payments do not flow better, trade does not progress

Topics: Global Trade, Payments, African Free Trade Agreement

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Kim Dancy emphasizes the importance of intra-African trade and regional payments systems

Supporting facts:

• Kim Dancy suggests that increased intra-African trade can make African currencies more attractive to each other.

• She mentions projects like TCIB that are driving the regional and continental payments

Topics: Intra-African trade, Regional payment systems

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Digital identity is crucial for enabling a digital economy

Supporting facts:

• Kim maintains that establishing digital identities gives people the opportunity to be part of the system

Topics: Digital economy, Financial inclusion, Digital identity

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Report

Kim Dancy, a lawyer with a background in payments regulation, has extensive experience in the field of blockchain and central bank digital currency (CBDC) work. She is particularly interested in emerging technologies and their role in the financial industry. Additionally, Dancy has focused on financial inclusion and has previously worked for a financial inclusion think tank.

Dancy believes that cryptocurrencies can provide viable solutions for cross-border payments on the African continent. She highlights the fact that many payment systems in Africa are currently dominated by US-based companies like SWIFT or the card associations. A significant percentage of transactions on the African continent are routed by the US or the EU in dollars and euros.

Dancy suggests that cryptocurrencies offer an alternative solution in cases where formal markets, central bankers, and commercial bankers have failed to provide a reliable cross-border payment system. Regarding CBDCs, Dancy underscores their potential advantages, including safety, interoperability, innovation, transparency, and rules-based governance.

CBDCs are digital versions of cash that are regulated and issued by central banks. They serve as a store of value, a medium of exchange, and units of account. Unlike cryptocurrencies, CBDCs are pegged to a specific currency issued by the central bank, making them less volatile.

However, Dancy acknowledges that the launch and adoption of CBDCs may be a time-consuming process due to various complexities. Dancy supports the idea of central banks coordinating and regulating cross-border transactions. She mentions the Regulated Liabilities Network (RLN) as an example, which aims to make different payment ecosystems communicate with each other seamlessly.

Dancy argues that understanding and promoting the complementarity of various ecosystems are essential in this regard. Furthermore, Dancy emphasizes the importance of intra-African trade and regional payment systems. She asserts that increasing intra-African trade can make African currencies more attractive to each other.

Dancy addresses the vulnerability of African economies to shocks and volatilities of global hard currencies, suggesting that promoting regional payments systems can provide a solution and reduce reliance on external currencies. Dancy also stresses the significance of digital identity for economic inclusion and the establishment of a digital economy.

She explains that having digital identities enables individuals to participate in the financial system. Dancy believes that digital identity is key to economic inclusion, allowing more people to access the benefits and opportunities provided by the digital economy. In conclusion, Kim Dancy, with her expertise in payments regulation and blockchain, advocates for the use of cryptocurrencies for cross-border payments, highlights the potential benefits of CBDCs, emphasizes the importance of coordinating and regulating cross-border transactions, and underlines the significance of intra-African trade, regional payment systems, and digital identity for economic inclusion and the development of a digital economy.

Her insights offer valuable perspectives on the current challenges and opportunities in the financial industry.

Arguments

CCIB is a cross-border payments rail aiming for low cost and high transparency to drive financial inclusion

Supporting facts:

• CCIB was originated from the thought process in 2013 and put into play in 2015

• CCIB went live in November 2021 and has been operational for two years with three corridors: South Africa, Zimbabwe and Zambia

• CCIB is working on a hybrid model for digital adoption, alongside with the regulators

Topics: cross-border payments, financial inclusion, digital adoption

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CBDCs and PEPs could be tools TCIB could use

Supporting facts:

• CBDCs on a wholesale level could help in enabling better or faster settlements. This has implications for cross-border payments, which currently often need to do a ‘world tour’ before reaching their destination.

• PEPs, or major transnational corporations, may also be a tool in this field. The challenge is the current siloed environment where everyone is solving for one element or section.

Topics: CBDCs, PEPs, TCIB, Cross-border Payments

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It’s important to understand what’s been done in terms of instant payment connections in global financial services

Supporting facts:

• There are various payment initiatives happening globally but they are not connected

• Singapore and the Philippines have developed instant payment systems quite quickly

Topics: Instant Payments, Financial Services, CBDCs

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Digital identity is the starting point for an inclusive digital economy

Supporting facts:

• Digital identity is a prerequisite for individuals to participate in the digital economy

Topics: Digital Identity, Inclusive digital economy

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Organizations like the World Bank and IMF can be approached by its member countries for financial assistance and guidance

Supporting facts:

• TCRB started with World Bank and Bill and Melinda Gates funding

Topics: World Bank, IMF, Financial Assistance

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Report

The analysis highlights several key points regarding cross-border payments and financial inclusion in Africa. The Cross-Border Interbank Payment System (CCIB) is a rail system that aims to drive financial inclusion by providing low-cost and transparent cross-border payment solutions. CCIB originated from the thought process in 2013 and was put into play in 2015.

It went live in November 2021 and has been operational for two years, facilitating transactions in three corridors: South Africa, Zimbabwe, and Zambia. CCIB is also working on a hybrid model for digital adoption, alongside regulators. Banks of Africa advocates for strong collaboration between different ecologies to enhance cross-border transactions.

They view themselves as non-competitive and aim to collaborate with all participants in the financial ecosystem for better payment solutions. Their stance is reflected in the slogan “if you want to go fast, go alone; if you want to go far, go together.” However, one of the challenges faced in the African context is the lack of regulatory alignment among different countries.

There is currently no alignment in regulation among the 16 countries in the Southern African Development Community (SADC) region. Most of the regulations were written in the early 1900s, but efforts are being made to update them for future relevance. Central Bank Digital Currencies (CBDCs) and major transnational corporations (PEPs) are seen as potential tools that the Cross-Border Interbank Payment System (CCIB) could use.

CBDCs on a wholesale level could enable better and faster settlements, which would have implications for cross-border payments. PEPs can also play a role in this field, but the challenge lies in the current siloed environment where everyone is solving for one element or section.

Cooperation and trust within the African context are crucial for solving cross-border payment challenges. Organizations like the Southern African Development Community (SADC), Common Market for Eastern and Southern Africa (COMESA), and the Infrastructure Advisory Committee (IAC) need to work together to solve this problem.

A successful example of trust and cooperation leading to an expansion is seen in Tanzania, where an increase in trust and cooperation between three telcos resulted in an expansion of 50% and above. The importance of instant payment connections in global financial services is highlighted.

Although various payment initiatives are happening globally, they are not connected. Singapore and the Philippines have quickly developed instant payment systems, showcasing the significance of understanding what has been done in terms of instant payment connections in global financial services.

Successful implementation of cross-border payment systems requires a change of mindset and collaboration with regulators. Working with regulators to build a centralized environment is important. Trust and understanding are key in this process. Digital identity is considered the starting point for an inclusive digital economy.

It is recognized that digital identity is a prerequisite for individuals to participate in the digital economy. Finding a solution to cross-border payment challenges requires starting from the beginning and adding elements progressively. Interoperability is a critical baseline in the development of a digital economy solution.

Organizations like the World Bank and the International Monetary Fund (IMF) can be approached by member countries for financial assistance and guidance. The analysis highlights that the Cross-Border Interbank Payment System (CCIB) initially started with funding from the World Bank and the Bill and Melinda Gates Foundation.

The World Bank plays an instrumental role in promoting financial inclusion and establishing trade. They are viewed as advocates for financial inclusion and trade, aligning with the Sustainable Development Goals (SDGs) of decent work and economic growth, and reduced inequalities.