Instant Payments Set to Boost Intra-African Trade by $5B Annually

There’s a huge economic opportunity available to grasp, but Africa will need to be able to trade with itself to tap into it. Until now, however, that has been extremely difficult.

For many years, settlements across the region not only required a third currency such as dollars, euros or pounds and euros), but nearly half (48%) of all bank payments involved foreign banks, resulting in an estimated loss of close to $5 billion annually in intra-African trade.

Read more: Afreximbank’s Payment System Goes Live With 12 African Banks

That significant amount of money is what a newly-launched instant payment system, the pan-African payment settlement system (PAPSS), is looking to save the continent moving forward, facilitating cross-border trade transactions in a fragmented continent with high trade costs that have hampered its growth for far too long.

Developed by African Export-Import Bank (Afreximbank) in collaboration with the African Union (AU) and the African Continental Free Trade Area (AfCFTA) Secretariat, the introduction of the system is set to overhaul the continent’s payments infrastructure by creating a cross-border network to eliminate soliciting for hard currency and reduce the delays in transacting.

“For a trader across the border, it means that the [individual] will be able to get goods very quickly, as well as trade them and recover funds very quickly which will increase the velocity of money and ensures that businesses move quickly,” PAPSS Deputy CEO John Bosco Sebabi told PYMNTS in a recent interview.

There are also cost elements that cannot be taken for granted, he pointed out, particularly the huge opportunity costs that will be minimized as people will no longer have to wait for money, in addition to the low cost in charges PAPSS offers.

Read also: From Startups to Institutions: Solving X-Border Challenges in Africa to Facilitate Remittance Flows

“Those two [factors] will enable people across African borders to be able to trade [effectively] and ultimately [drive down] the cost or the pricing of goods and services, which always includes the cost of operations [and] the cost of transferring money,” he added.

Using PAPSS’ settlement process, a trader can now make payments in one local currency while the recipient recovers the funds in their local currency. This means that a buyer in Ghana can pay in cedis while a seller in South Africa receives the payment in rand.

“Along the way, we’re working on an exchange rate mechanism to ensure this happens seamlessly without the need of hard currencies,” he explained as part of their plan to formalize the informal trade taking place across countries and reduce the amount of cash circulating in cross-border trade.

“PAPSS will formalize that trade, and once people [start transacting] in the financial sector, information will be available — and that means they can access financing. So, there are a whole host of positive externalities that will be derived from having transactions going through PAPSS and the financial system,” he noted.

Standard Framework Helpful, But Not Necessary

Even though the PAPSS platform can support both low and high value transactions, from $1 to $100 million and over according to Sebabi, setting transaction limits will remain at the discretion of individual central banks.

This has raised some concerns over the lack of a standard framework across countries, without which critics say the initiative would not be effective.

Read interview with MFS Africa CEO: Repairing Regulatory Fragmentation Will Spur Cross-Border Payments Across Africa

Sebabi said PAPSS had no intention of interfering in national jurisdictional rules set by central banks, but acknowledged, however, that standards are important and there is a minimum required to ensure the payments system can run smoothly.

It is the reason why the council of ministers of trade has directed PAPSS, the Association of African Central Banks and the African Continental Free Trade Area (AfCFTA) secretariat to work together on harmonizing some standards and some rules to facilitate the continent-wide implementation of the project.

He also acknowledged that having a single currency, like the Eco currency that West African leaders have been working on implementing for years, would greatly facilitate the rollout process.

But until that becomes a reality, he stressed that the lack of a single standard framework or single currency “cannot stop PAPSS from operating or from being effective” in easing payments and increasing the volume and value of existing trade on the continent.

Central Banks Signups Are Key

Before the commercial launch in January, PAPSS was piloted in West Africa, a region that is representative of the complexities common within the African region, Sebabi explained, due to the different languages used — English and French — as well as having multiple currencies — five of 40-plus in total on the continent — and central banks in operation.

Sebabi said that being able to successfully pilot the initiative in that fragmented and complex sub-region is proof that PAPSS can deliver the same results at the continental level.

He also added supporting virtual currencies is a consideration, but largely depends on when central bank digital currencies (CBDCs) are launched in various countries — “we will be ready to support its settlements as soon as central banks are ready to issue them,” he remarked.

Their main goal now is to focus on advancing intra-African trade, which currently stands at 16% and is the lowest worldwide. Once they can get that percentage to a significant level, they will expand to focus on extra-African trade, he shared.

But to achieve that, they will need as many central banks, commercial banks and FinTechs as possible on board moving forward.

“Our priority now is to have at least two central banks in each and every region in Africa joining [PAPSS]. That will give us a very good platform to be able to have an impact on the [entire] continent,” Sebabi said.