Lack of interoperability frustrates cross-border payments in Africa

Cross-border payments across Africa have remained firmly out of reach due to the lack of interoperability among payment systems. ADETOLA BADEMOSI writes on the challenges and African governments’ efforts to bridge the gap.

Never could one imagine that sending funds across borders in Africa may be a really challenging task, especially when the money is for a pressing need.

Nigeria is a country with several banking institutions scattered in various locations across states, cities and towns. Interestingly, these banks also have their branches across some African countries. For instance, the majority of those present in Nigeria also run their subsidiaries in Ghana.

Notable among them are: First Bank, Access Bank, United Bank of Africa (UBA), Guaranty Trust Bank (GT), Ecobank, among others.

With this realisation, it would not be wrong to believe that there should be some level of connectivity that allows cross-border interaction among these banks. Sadly, this is not the case.

Findings showed that as a matter of fact, there is no interoperability among the banks, thus making transactions somewhat difficult for foreigners who want to operate their local bank accounts.

A Nigerian’s payment frustration in Ghana

Yemi Oyewole, a middle-aged Nigerian, had in October 2023 travelled to Accra, Ghana on a work-related trip which was expected to last two months.

Arriving at the Accra Airport enroute his hotel, he sighted some popular banks he is familiar with in his home country.

His joy knew no bounds seeing the popular UBA where he owns a domiciliary account. He had, by this, concluded in his mind to finalise a pending transaction after settling into the city.

Few days after his arrival, he paid a visit to the UBA branch at the East Legon 2, Accra, Ghana.

His aim was to deposit some dollars into his domiciliary account.

Unfortunately, he got his first disappointment when the customer care representative told him this was not possible as there was no way they could access his account despite being domiciled in the same bank.

“No, it is not possible,” the customer care agent said, “There is no link between the UBA in Nigeria and that of Ghana.”

A much hopeful Oyewole then asked if it was possible to send funds to his recipient via Western Union or MoneyGram. The representative responded in the negative saying, “No, we don’t send money to other countries via these channels, we only receive. Ghana is a receiving country.”

Hanging on his last straw of hope, a rather uneasy Oyewole asked how the money could then be sent considering the urgency with which it is needed at the other end.

This time, his last ray of hope gave way to full disappointment when the customer care representative insisted that there was no other way except he gets a Ghanaian with a domiciliary account to make the payment.

With that, the money is deposited into that Ghanaian’s domiciliary account, from which it is then transferred to the recipient. But this may also take a minimum of five days before the money is deposited.

“Better still, you can open another UBA account here in Ghana, but you are a foreigner and you don’t have the Ghana card. So, this is almost not possible,” she said, staring pathetically at Oyewole.

Convinced that there should be a way out, Oyewole strode into three other familiar banks along the same street, hoping to get a solution but the same fate befell him.

At this point, it became crystal clear that there was almost no way out.

“I had an almost similar case recently when I visited Nigeria,” said Dr Ing Kenneth Ashigbey, Chief Executive Officer (CEO) of Ghana Chamber of Telecommunications.

“The hotel I lodged in Nigeria, while I was checking out, the attendant undercharged me but I didn’t know. So, when I got back to Ghana, I received a call from the lady begging me to make the payment.

“I tried all I could from Ghana just to send the money, but nothing worked until I called a friend in Nigeria to help me make the payment.”

Globally, digital transactions are increasing and so are cross-border payments that face various in-transit issues before reaching the recipient.

Cross-border payment is a payment transfer between the payer and the recipient who are respectively based in two different countries.

But sending money across African borders seems to be a very tedious and costly venture.

Lack of cross-border payments interoperability

The reason for this difficulty according to experts is the lack of payments system interoperability.

For clarity, cross-border payments interoperability allows different payment systems and networks to work seamlessly with one another across national borders.

It also enables efficient and secure transfer of funds between individuals, businesses, and financial institutions from different countries.

No doubt, new digital technologies have made a significant impact on payments and financial services in the last three decades, allowing people to perform seamless transactions from their smartphones, shop online and have immediate access to their funds.

For instance, while still in Ghana, Oyewole, regardless, was still able to conduct transactions via his banking app.

But despite the popularity of digital payment solutions, the lack of interoperability between platforms, providers and countries hampers financial inclusion and economic efficiency in Africa’s payments landscape.

Cross-border payments challenges

As accentuated in a report by Kora and Finextra, titled: ‘The Future of Fintech in Africa 2023’, a big obstacle to seamless payments across Africa is the need for interoperability among payment systems.

According to the report, the cost of fragmented payments in Africa are higher transaction costs, limited access and financial inclusion, slowed economic growth and general inefficiencies.

“The value of an interconnected Africa from a payment perspective is immeasurable. Consider a transaction between Nigeria and Ghana, where the money currently flows from Nigeria to the US, then to the UK, and finally to Ghana.

“It would be faster to drive between the two countries physically. Imagine a scenario where Nigeria and Ghana are seamlessly connected, akin to two states within one country, enabling frictionless payments between them,” it added.

Also, a report on ‘The future of payments in Africa,’ published by McKinsey, identified cross-border remittance as a persistent challenge for consumers and businesses across Africa, with an estimated 75 percent of trades happening outside of official channels.

Speaking to the challenges in cross-border payments, Dr Yemi Akiyode, an economist, identified exorbitant transaction costs, slow processing time, as well as security risks as major bottlenecks.

His words: “There are so many intermediaries involved in the process of making the payment get to the recipient. The intermediaries generally involve the payer, the payer’s payment service provider, the payment infrastructure and the corresponding bank.

“So, when this payment passes through all these intermediaries with their respective fees, it makes cross-border payments ridiculously costly.

“Apart from that, there are regulatory costs, compliance costs and currency exchange costs too.”

Can Nigeria lead the way in payment interoperability?

Nigeria, Africa’s most populous country, has witnessed significant growth in its payment service industry in recent years with multiple payment ecosystems.

This can be attributed to a combination of factors such as increasing smartphone penetration, growing e-commerce market, government initiatives to promote digital payments, and the emergence of fintech companies.

Independent findings showed that the payment ecosystem in Nigeria is highly competitive, with several established players, like Paystack, Flutterwave, Interswitch, Paga, among others.

However, despite the growth, payment services providers (PSPs) in Nigeria face a number of challenges that can hinder their success.

According to Payday, a financial technology company, the lack of a reliable and robust infrastructure which often leads to frequent power outages, poor network connectivity and transaction failures is one of the challenges of cross-border payments.

“Without reliable connectivity and access to digital platforms, individuals and businesses face difficulties initiating and completing transactions,” it said.

For instance, Nigeria’s infrastructure inadequacies were exposed during the 2023 cash scarcity saga where transactions made by citizens were delayed while many lost their monies to unreversed transactions.

“During that period, I sent N5,000 from my GT Bank app to an Access Bank account recipient. Up till today, the person never received the money nor was it reversed. I made complaints at my bank but they claimed the money was sent,” said Ayobami Musulimi, a commercial driver.

Another factor identified by the firm is regulatory hurdles, saying: “Varying regulations, compliance requirements, and anti-money laundering measures can delay transactions and increase costs, creating barriers to efficient cross-border payments.”

These are just a few of the factors hindering an interoperable payment system.

Affirming the challenges, the Central Bank of Nigeria (CBN) in its Nigeria Payments System Vision 2025, recognised the need for further enhancements to payment system regulation and infrastructure to align with fast paced innovation in the global payment ecosystem.

The report revealed that the country has made a blueprint to improve its payment ecosystem across board by 2025.

Achieving payment without borders

“Nigeria, for instance, has a lot of payment options and we have fintechs coming up and are doing a great job at it.

“So, I think the banking system in Nigeria should look inward, look at the technology infrastructure of these fintechs and adopt their systems. I must also mention the Pan-African Payment and Settlement System (PAPSS) that was established to bring payment integration,” said Akiyode.

For Oyewole, a friend eventually introduced him to a fintech application, with which he was able to perform a seamless transaction within the confines of his hotel room, but at a high cost.

According to him, “I had to convert the dollar with me to cedis. I then deposited the sum in my Ghana Vodafone mobile money. With this, I was able to transfer the money into the fintech account. They have their own exchange rate. So, I was forced to go by the rate.

“It was a whole lot of clumsy process, but the goal was what matters.”

No doubt, fintechs have made the cross-border payment system simpler, effective, and efficient. Traditional banking systems involved in international payments should also adopt the tech-friendly innovations of the fintech industry.

With this, they can help businesses and customers minimise the challenges of cross-border payments.

African Union’s intervention

Aside from fintech solutions, the African Union (AU) in 2023, launched the Pan-African Payment and Settlement System (PAPSS) developed by the African Continental Free Trade Area (ACFTA) to ease payments constraints across Africa.

It is a centralised financial market infrastructure that enables the efficient flow of money securely across African borders, minimising risk and contributing to financial integration across the regions.

“We cannot promote investment and growth on our continent without integrating our capital markets and our securities market. The role of PAPSS is critical in helping to achieve this,” said Professor Benedict Oramah, President of Afreximbank at the signing of a Memorandum of Understanding (MoU) between the Nigerian Exchange Limited and the PAPSS in 2023.

As more central banks and financial institutions join this network, PAPSS will enhance inter-Africa trade, promote financial inclusion, and contribute to the objectives of the ACFTA.

Meanwhile, Chief Executive Officer, Nigerian Exchange Limited (NGXL), Temi Popoola, during the signing, said, “There are not several mechanisms by which investors can carry out cross-border capital market investments on the African continent.”

According to him, one challenge that all of these mechanisms face is local currency non-compatibility across African countries and, by extension, African exchanges.

“It is important to efficiently settle transactions in local currencies and this is where the collaboration between NGX and PAPSS comes in,” he added.

So, with Instant payment offered by PAPSS, participants no longer need to convert local currencies into hard currencies which then entailed the funds leaving Africa to be converted before being sent back again to the beneficiary bank.

Like in the case of Oyewole, who had to first convert his dollars to cedis, then send to his Vodafone mobile money, before linking the same to the fintech application among other processes before the transaction was eventually completed.

This, one would agree, is a whole lot of clumsy processes.

But with PAPSS, commercial banks, payment service providers and other financial intermediaries connecting to the network will foster a simplified process that reduces the costs and complexities of foreign exchange for cross-border transactions between African markets.

This report is produced under the DPI Africa Journalism Fellowship Programme of the  Media Foundation for West Africa and Co-Develop