Africa plays a significant role in global finance and trade, with the movement of capital to and from the continent tied to economic activity from citizens and investors resident in African countries or sending capital from foreign destinations to the motherland. All this activity is what makes up the multi-billion dollar market for African remittances and payments.
Due to the string of complications that accompany the movement of money across borders, a number of service providers have emerged to serve different market segments. Cryptocurrency exchanges like Golix are also part of the list of service providers for problems in this space. However, they are only the latest in a long line of solutions that have been adopted by people.
This article lists the different categories of traditional service providers for international payments made from African countries and African remittances; which are funds sent to African countries, usually by individual migrant workers. Each category has pros and cons listed.
INTERNATIONAL PAYMENT CHANNELS
This refers to the payments made from one African country to an entity or individual in another country either on the continent or overseas. This market, often bundled under the import market category in global trade, has a massive impression on capital outflows and has always been closely monitored by various parties in international commerce such as regulators and investors.
These are the de facto service providers for all things related to payments not just in Africa but across the globe. Through extensive investments in infrastructure, a hand-in-glove relationship with regulatory bodies and an integration with banks in other jurisdictions, banks are easy to zero in for the execution of any sort of payment.
- They generally offer an image and impression of stability, though this has been rocked by cases like the string of bank closures in countries like Zimbabwe.
- Their extensive networks ensure that they can process a payment with subsidiaries or partner banks just about anywhere you can find a recognised government.
- They can also meet the requirements to complete a transaction, relying on extensive liquidity which is often guaranteed by regulatory oversight (another advantage in its own right).
- The extensive network and premium experience come at a cost. Banks have steep charges that are often hard to meet for small transactions that are typical of low to middle-income countries that make up Africa.
- In Africa banks also struggle to provide a seamless integration with global payments alternatives.
- When it comes to the use of generally weaker local African currencies to make international payments another problem also exists feeding into the parallel markets that characterise African countries.
- There is also the huge problem of delayed payments – banks have processing requirements that will hold up money in the system before it makes its way to a destination across the border.
- They have fixed working (banking) hours – payments cannot be made at any given time
International card systems (VISA, MasterCard)
These are the poster children of easy payments around the world and are actually part of a mega sub-industry. Some African banks and institutions have partnerships and agreements with some of these players and depending on whether an entity or individual has an account with a relevant institution (and qualify for the card) they can also use this route to make an international payment.
- Global footprint ensures that cardholders are almost guaranteed to be able to make some form of payment anywhere around the world
- bestow a sense of trust on card systems because of mega brand names and global presence
- have embraced payments over the internet, playing a supporting role in the growth of e-commerce
- Are available 24/7
- Generally, have an issue with accepting fiat currencies leaving partnering financial institutions the challenge of handling exchange rate hiccups. Other institutions end up just close off all local fiat processing, insisting on foreign currency for international cards.
- As affiliate services of formal institutions usually have prerequisites for getting a card, which excludes most of Africa’s unbanked population.
Cash (also represented by “courier services” like buses and individuals)
What’s a payment discussion without a talk about cash, right? This is the most common representation of value there is in the world right now and as such, some people and entities trying to make international payments have used it from time to time.
- Has an immediate delivery of value once it arrives at its destination.
- Free of requirements tied to other formal channels like account particulars.
- Is the universal language of value
- The exchange rate issue requires the one making the payment to secure foreign currency which might have to be done illegally
- Carries enormous amounts of risk – theft, robbery, misplacement, counterfeit currencies
- Generally, a slow option – the time taken by the form of transport correlates to payment duration
In this context, these are funds sent to home countries by migrant workers or temporary resident in foreign countries repatriating value to their countries of origin.
Money transfer agencies (MTAs)
These are the leading provider of formal African remittances, often viewed as the face of the billion dollar industry. They operate either as individual service providers or through partnerships with third-party service providers in retailing and finance.
- Have established extensive networks through partnerships which work well with their own brand names.
- Offer instant cashouts for people collecting the funds
- Have limited risks
- Provide cash payouts, which can be in foreign currency which is stronger than recipient country’s fiat
- The charges, though lower than banks, are still steep – higher than UN targets
- Usually require the recipients to visit the MTA office/depot to collect the money in person
- They have cashout limits
- Their services usually require the sender to produce documentation which excludes the high number of undocumentd migrants
In Country Settlement (Hawala)
Hawala is an alternative remittance channel that exists outside of traditional banking systems. It uses a network of sender and receiver agents who guarantee delivery of funds to a recipient, money which is picked up by the recipient from a partner agency in the recipient’s country. In Africa, the term Hawala is not as common, though the same principles have been adopted by various communities.
- There are no limits to what can be sent
- Delivery is quick and mostly instant
- Service can be 24/7
- Trust can be very fragile, works best where there is an existing relationship
- There is an immeasurable risk factor
Bus (Cash system)
A common route for intra-region remittances. Senders entrust unofficial couriers that include bus drivers and informal delivery methods, called Malaicha in Southern Africa. The money is passed on either to the recipient directly at the destination bus station or passed down a chain of third and fourth parties who bring it as close to the final destination as possible.
- Accommodates non-documented immigrants that cannot use formal systems
- Is generally viewed as a reliable system, especially with popular/common drivers with a fair track record
- The payout is in cash, recipients don’t need a bank account
- There is a high risk associated with drivers losing some of the money or the funds getting stolen
- Service hours for collection from the terminus means there is a set window that has to be observed.
- Can be inconvenient to collect the money, even when third and fourth parties are added to a relay to deliver the funds.
What other service providers in the African remittances and payments space can you think of? How do you make international payments or receive remittances?