Liquidity Management Key to Taming FX Volatility in Emerging Markets

Compared to the global standard of five to six hubs, moving money between Nigeria and China or Singapore can require navigating through up to 16 hubs before the payment reaches the last mile, said Jess Anuna, founder and CEO of Klasha, a global cross-border payments company.

This example illustrates the persistently sluggish, costly and fragmented nature of cross-border payments within Africa and between the region and the rest of the world, Anuna pointed out in an interview with PYMNTS.

“Many transactions still have a form of manual intervention at some part of the value chain, whether it’s sourcing for [foreign exchange (FX)], sending the payment cross-border or attempting to terminate it,” Anuna said, adding that the use of outdated technology and fragmented systems within banks also poses an obstacle to ensuring seamless money transfers out of Africa.

On a country level, Nigeria — one of Africa’s biggest economies and Klasha’s biggest market by transaction volume — has struggled to stabilize FX since the June devaluation of the local currency, leading to persistent shortages and volatility in the FX market.

To mitigate these risks, Anuna stressed the need for increased investment in currency-matching infrastructure to effectively manage and align inflows and outflows in rate-sensitive markets like Nigeria. The approach differs from stable markets like Kenya in East Africa, she explained, where sourcing affordable FX directly from banks with excess U.S. dollar liquidity poses no significant challenge.

While Nigeria presents a unique market with its own challenges, Anuna said there’s a key lesson to be learned from the country’s predicament: the significance of infrastructure and controlling one’s destiny in the FX space.

For cross-border businesses, including B2B wholesalers and retailers, this entails a shift from relying on third-party liquidity providers when entering the FX market to engaging directly with buyers and sellers. Per Anuna, this is critical to achieving scalability and critical mass, especially in sectors like payments, where profit margins are slim.

Stablecoins and AI

For many years, blockchain technologies have seamlessly moved money from exotic currencies — less familiar currencies belonging to emerging economies in Africa, Asia and the Middle East — to hard currencies or G20 currencies. Per Anuna, “That is only going to develop as our ecosystem develops.”

However, despite the regulatory hurdles involved, particularly in countries that are not cryptocurrency-friendly, she explained that tapping into a decentralized system is the most cost-effective and the fastest way to settle African merchants and move money seamlessly from exotic currencies into hard currencies.

“Crypto settlements, USDC or USCT, are instant,” she noted. “You just need a wallet and don’t have to wait for the SWIFT or SEPA network to kick in or even wait for the corresponding banks to confirm the payment. There’s no back and forth, so it’s really beneficial in that respect.”

Regarding artificial intelligence (AI), Anuna said the technology can play a crucial role in streamlining internal processes, ensuring timely payments, and tracking revenue and gross margins. Klasha is also exploring leveraging AI to predict potential FX rates and cheaper fiat assessments.

“If we can use AI [to assess] what’s been going on in the markets and predict some of the volatilities, we can make smarter decisions about where to put our money and when and at what rates,” Anuna said.

Tackling FX Volatility With Financial Planning

Looking ahead, Anuna said there is increased investment in digital disruption in cross-border payments in Africa, particularly as the number of FinTechs investing in instant settlements is growing, which holds great promise for Africa’s cross-border ecosystem.

Take an example of an international money transfer operator (IMTO) in the U.S. or U.K. aiming to send a real-time payment transfer to Africa. Typically, transferring funds from these countries doesn’t happen instantly, Anuna noted. However, FinTechs like Klasha, which hold liquidity in the local African currency, are developing payout APIs that facilitate immediate settlement from a business abroad into Nigeria, after which the IMTO might settle Klasha in just a few days.

Furthermore, she said innovations around know-your-customer (KYC) procedures, compliance and anti-money laundering will improve cross-border payment flows from Africa and prevent payment delays caused by unresolved KYC or compliance issues.

Finally, when asked to offer advice to a merchant or small business looking to improve their cross-border processes, she said the key is to avoid sourcing for FX on the spot and pre-plan the liquidity needed to make payments at a future date.

“Financial planning is key to cross-border payments today,” Anuna said. “It might seem like a lot of money upfront initially, but you’re saving money given how volatile the market is.”