EVENTS Ready for take-off: Turbo charging African payments Absa | Corporate and Investment Banking > Insights and Events > Ready for take-off: Turbo charging African payments Michael von Fintel and Richard Southey Head: Financial Institutions, AbsaCorporate and Investment BankingChief Digital and Experience Officer,Absa Corporate and Investment Banking SHARE Globally, electronic payments are booming, having attracted more investment than any other financial services sector and delivering the highest returns and growth in the sector over the past decade. Africa has been no exception to this, and is in fact, among those leading the way in specific instances, such as mobile money and real time payments. While Africa is positioning itself as a global leader in real-time payments, only 5-7% of all transactions in Africa are currently made up of online payments. According to McKinsey, online payments will grow in Africa between 30-50% per year across the continent in the coming years, with the continent predicted to experience a total of 150% growth in online payments between 2020-2025. This equates to the online payments market in Africa growing 15% per year faster than the rest of the world. Drivers of African payments growth The Covid-19 pandemic significantly accelerated the use of online payments, with many African countries experiencing record growth over these years. For example, the Central Bank of Nigeria reported that mobile-money transactions doubled to around 800 million in 2020 alone, and e-commerce grew by around 40% in South Africa over 2020 and 2021. Most payments experts expect the trend to not only continue, but accelerate given the latent potential which sits in Africa. However, this growth will be uneven across Africa and depends on infrastructure readiness, e-commerce penetration, mobile money penetration and regulation. It’s expected that five countries will produce half of electronic payments across Africa – Egypt, Ghana, Kenya, Nigeria and South Africa. This growth of payments is being driven by a couple of key factors. First and foremost, Africa’s population is young and urbanising. Mobile phone use is significant with 86% of the population relying on their phone for communication, showing the growth potential of online and mobile payments. The payments infrastructure is developing in line with this expected growth. Real time payment networks and cross border payments development, as well as agent systems (such as SANEF and Mukuru) are addressing the bridge between physical and electronic payments and encouraging this infrastructure development. A great example of this is the Pan-African Payment and Settlement System (PAPSS) which has been developed by the African Continental Free Trade Area to ease payment constraints across more than 50 countries and 40 currencies. This is the first system of its kind and can prove to be a game changer for cross-border payments. The proliferation of payment types, such as mobile money and card linked wallets, mean that people can use a variety of different payment methods, and aren’t just tied to a single method. Helping drive forward this diversification has been vast venture capital investment in African fintechs. Over the past year, this has exploded, in line with global trends which has seen increased VC investment with $1.3 billion invested in 2022 so far. By comparison, $1.6 billion was invested across the entirety of 2021. Finally, digital money such as crypto, Central Bank Digital Currencies (CBDCs) and stablecoins coupled with open banking, are all playing a large part in driving this development. Already, three countries in Africa (Nigeria, Kenya and South Africa) are in the top 10 of Bitcoin trading volumes globally, which will only continue to grow and develop. Areas of development As Africa develops, we predict there will be a couple of core areas that will drive forward the development of African payments. Regulation of digital assets We expect to see regulation play a large role within the adoption of digital payments encouraging the growth of digital assets including crypto, CBDCs and stablecoins. Nigeria’s Securities and Exchange Commission published its regulation guidelines for digital asset offerings and custodians, and Kenya is creating a legal framework to regulate digital payments and assets. Nigeria has also launched CBDCs, and a number of countries across Africa, including South Africa and Ghana are exploring establishing wholesale CBDCs. Cryptocurrencies and digital assets can provide countries with a natural hedge against currency weakness. This will encourage people to be investing in crypto both as an investment in an asset class, and as a cross-border payment method. We’d expect to see more and more banks getting involved in offering digital assets in different ways, providing a safety net for customers that wasn’t there before. Frictionless custody processes When it comes to custody processes, we’d expect to see digitisation keep pace with the shift to online payments. This is particularly important for banks, who are competing with crypto companies such as Binance, which let customers hold their crypto in hosted wallets, as well as fintechs and exchanges, which offer customers a low friction environment that makes it easy to withdraw or deposit money. The custody environment within banks is currently friction-filled, with the process currently relying on both physical and digital methods. However, as there is a significant shift to digital payments, for banks to stay relevant, they need to digitise the entire process, otherwise businesses will look elsewhere for custody services. Challenges within the payments industry However, Africa faces a myriad of unique challenges when it comes to the digitalisation of the payments industry. First, there is the cultural challenge, wherein cash is a deeply embedded part of Africa’s society. 90% of transactions are done in physical format and changing this is going to be a significant challenge. However, there is a business incentive to drive digital payments as it reduces risk and increases efficiency, whilst allowing data to be collected to help drive better business processes, so we could see businesses leading this cultural shift. Secondly, the payments infrastructure on the continent is extremely varied. If Africa is to move towards real time payments, then the correct foundations must exist to support this. People aren’t going to be encouraged to pay digitally if the technology isn’t there to support different methods of payments. Looking ahead: payments industry to stimulate African growth The payments industry will play a significant role in the development of Africa. We expect to see Africa digitalising in relative terms, faster than the rest of the world, and this in turn, will have a positive impact for Africa economies. Recent research has shown that the efficiency of payments can provide up to 3% of GDP growth which contributes to a wider growth story in Africa across individuals and businesses. Further, a developed payments system will remove wastage, effectively putting more money in people's pockets. Africa is a continent on the move. Shifting from cash to digital payments will make a big difference in this environment, fueling economic growth. As key challenges are addressed, we predict the payments industry will turbo-charge growth across the African continent. Michael von Fintel and Richard SoutheyHead: Financial Institutions, Absa Corporate and Investment Banking Chief Digital and Experience Officer, Absa Corporate and Investment Banking https://cib.absa.africa/wp-content/uploads/2020/07/file_example_MP3_700KB.mp3 Related Articles RISK MANAGEMENT Shifting trade networks will impact the future of African trade As the global economic landscape continues to evolve, shifting trade relationships among major economies are set to have profound impacts on African trade. With traditional trade routes being redefined and new alliances forming, Africa finds itself at a crossroads of both opportunities and challenges. 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