Financial institutions, including banks and payment service providers (PSPs) are facing several obstacles when opening new payment rails in Africa, such as high transaction costs, lack of banking partners willing to cooperate and currency volatility. Developing reliable payment rails is crucial to supporting remittances. In this guide, we’ll explore key challenges and practical solutions to opening payment rails in Africa.
Building Partnerships For Payment Rails In Africa
Collaborating with digital banks and fintech providers is essential for financial institutions aiming to open new payment rails across Africa. These technology-driven partners specialize in fast, affordable, and transparent payment solutions.
Digital banks offer integrated platforms that combine currency exchange, account detail issuance and local payments.
Criteria for Choosing the Right Partners
1. Regulatory Alignment:
Partners must operate in compliance with local regulations and demonstrate strong knowledge of cross-border regulatory frameworks.
2. Technological Capabilities:
A good banking partner should offer a robust API integration that can streamline payments, currency exchange and overall automation.
3. Market Presence and Local Expertise:
Institutions with local licenses and established payment networks are invaluable. They can also facilitate faster onboarding processes and help build trust among customers.
4. Foreign Currency Access:
Given the currency volatility in African markets, it’s crucial to partner with institutions that provide access to foreign currencies and offer reliable liquidity management services.
If you would like to get a list of African banking players with robust API’s, fill out our contact form with your details and we will send it to you by email.
Key Benefits of Strong Partnerships
Forming alliances with the right banking partners unlocks several advantages, such as:
- Cost Reduction: Digital-first partners can reduce costs by eliminating redundant intermediaries.
- Expanded Reach: Partnerships provide access to multiple markets and new customer segments via a single integartion.
- Regulatory Risk Mitigation: With experienced partners, institutions can reduce the risk of non-compliance in certain jurisdictions.
- Increased Customer Trust: Collaborating with trusted local and digital banks boosts credibility and encourages customer adoption of cross-border services.
Overcoming High Transaction Costs in Africa
High transaction costs are a major barrier to establishing payment infrastructure. On average, remittance costs in Sub-Saharan Africa exceed 8%, significantly higher than the global average of 6.5%. These costs can result from:
- Inefficient Correspondent Banking Networks: African banks often depend on multiple intermediaries to facilitate cross-border payments, driving up fees.
- Opaque Fee Structures: Lack of transparency in intermediary fees leads to unexpected costs for users.
- High Operational Expenses: SWIFT messaging fees and correspondent bank relationships are costly, particularly for smaller banks.
To reduce transaction costs, financial institutions can partner with establioshed financial players and fintech providers that offer direct, technology-enabled payment rails. These solutions eliminate unnecessary intermediaries, providing faster and more affordable cross-border payments.
Addressing Currency Volatility and Liquidity Constraints
Currency volatility is a common issue in African markets, where exchange rates can fluctuate by a big margin. For instance, during Argentina's currency crisis, rapid devaluation disrupted cross-border transactions. In Africa, similar volatility can impact balance sheets, especially for banks reliant on foreign currency holdings.
Limited access to foreign currencies further complicates liquidity management, delaying transactions and increasing operational risks. This can discourage trade and remittances, creating additional challenges for institutions operating in multiple markets.
Financial institutions can mitigate currency volatility through partnerships with specialised FX risk management platforms that offer access to multiple currency hedges and real-time exchange rates. If you would like to get a list of prominent FX risk managers in Africa, drop us a message using our contact form.
Future Prospects and Conclusion
Opening payment rails across Africa is essential for financial institutions looking to expand and serve their clients with payments to and out of Africa. By reducing transaction costs, streamlining regulatory compliance, and managing currency risks, banks and PSPs can create robust payment infrastructures that drive long-term development.