How Fintechs Can Build Efficient Solutions for Intra-African Remittance

In the financial technology (fintech) ecosystem, we have seen many activities and innovations in and around Africa. We do expect one of these innovations to drive the acceleration of intra-trade in Africa, making it possible for African countries to trade among themselves, more efficiently. Today, it is estimated that the total African intra-trade as a percentage of total African trade is mere 11%.

There are many challenges why this has been the case – i.e., this low intra-trade. One is logistics, African ports and transportation routes are wired right to the domains of the old colonial masters. This makes it easier to move goods from Gabon to France than from there to Nigeria, despite the proximity of the African neighbors. In short, to travel from Lagos to Libreville, you may have to fly into Paris before returning into Africa.

Another problem is that Africa does not have much to trade among themselves since we do not have factories to process our raw materials. The list goes on, on why this low intra-trade volume, has not improved despite efforts by the African Union to boost it.

Nevertheless, something can be done about it. A key element is finding a way for money to move from one African country to another in the most cost-efficient way. Because the volume of trade is low, the typical way to settle trade balances and by extension foreign currencies is hard.

For example, if Nigeria trades with South Sudan, there may be huge problems to find offsetting and counter-balance Nigerian currency and South Sudan currency which will make it possible for the two countries to transfer money at equilibrium. One country will likely have more movement in one direction. That position will immediately create a problem.

What Can Be Done

It turns out that technology cannot easily solve this problem since apparent lack of the above equilibrium point will create a problem. If an entity has so much Nigerian Naira to move to South Sudan and cannot find enough South Sudan pound to move to Nigeria, equilibrium cannot be attained. The implication is that transfers will be expensive and also take days. The hope of making the transfer fast and cheap will not easily come, using the contemporary technique deployed by banks.

In the way it is done today, the money has to move across boundary from say Nigeria to South Sudan with all the forex losses and associated delay. This makes the cost of business very high. The sender of the money will surely lose value when the money is likely covered to US dollars or Euro or British pounds and back to the destination African currency.

Based on these challenges, we are not experiencing efficient intra-African remittance. While the volume of participants on the America, Europe and Asia axes to Africa continues to increase, we cannot say there is much traction serving intra-African remittance.

We propose a new solution that works this way for any fintech that will like to boost its African business:

• A fintech will register in each of the countries in Africa where it wants to do business. It can just take say the top interesting 25 countries. A good plan will be to be in all countries, though. It will open bank accounts in the respective countries
• It will deposit money in the bank accounts. For example, in Nigeria, it can have $100,000 in local currency. In South Sudan, $10,000 and in Kenya $30,000 – all in local currencies. It will do this across the continent understanding that some countries, based on size, will need to have more stock of local currencies. Largely, the fintech can look for local partners but that will remove its capacity to manage the local currency – foreign currency risk as the local partner will likely push the risk into the exchange rate. For us, we think having these accounts, despite the operational challenges, will do the magic.
• The fintech will have its technology to match people that want to transfer money across the continent. Once it matches sender and receiver, say someone in Ghana with Cedi that wants to pay a merchant in Nigeria in the local Nigerian Naira, with another person in Nigeria with Naira but wants to pay in someone in Ghana on Cedi, it can execute a transfer deal fast. This is the best case scenario. But it rarely happens because of the heterogeneous structures of African economies. This also has transfer latency which is not good.
• Note that in the present banking order, the typical thing is for the person to wire that Cedi from Ghana to cross boundary and then land into Nigeria where the bank will pay the merchant in Naira. The reverse happens.
• Instead of doing that which is expensive, the fintech will simply credit the Nigerian merchant from its account maintained in Nigeria which is already in Naira. It keeps the Cedi in Ghana. Making this work does not require if there is anyone sending money from Nigeria to Ghana. Provided the fintech has enough stock of local cash to meet demand, it can effectively meet all obligations at better speed and cost.
• With this, no money has moved across the boundary. This means the risk of forex has been abated and certainly the transfer can happen very fast, instead of days.

Banks may not easily do this because of many factors on what they do with money and how they keep it. But a typical fintech with good asset base can execute this model. It can also work even from Europe and North America to Africa, if they have local operating accounts for settlements. This will mitigate the challenges when they cannot pair senders and receivers effectively which happens a lot thereby slowing the process; Transferwise, a cross border money transfer firm, does experience this issue.

To ensure the risk of local currency is managed where the fintech might have raised money in US dollars and converted to local currency, its pricing of products to customers may be tied to the exchange rate. That it is not wasting that money via SWIFT does not mean it cannot bill customers on it.  A pricing model to handle the domiciled money forex risk is not a huge problem. The reality is that most customers will not mind. Someone sending money from Sudan to Nigeria may not mind since by default this process will be cheaper than the present bank model and will also be faster.

Will be happy to explain more how this system will work to improve the remittance process. I have looked at this from all the angles – taxation, local fees etc –  and the conclusion is that this will boost intra-trade and also create a niche for any firm that does it,

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