Financial Crime World

Challenges in Cross-Border Payments: The African Perspective

Introduction

The landscape of cross-border payments in Africa is marred by numerous challenges that hinder the efficiency and cost-effectiveness of transactions. This article delves into the key obstacles faced by Payment Service Providers (PSPs) in Africa, including different standards and integration layers, stringent requirements from correspondent banks, expensive liquidity management, and costly and opaque foreign exchange pricing.

Challenges Faced by PSPs

Different Standards and Integration Layers

  • The varying requirements of correspondent banks add new points of failure, operational challenges, and costs to PSPs.
  • This results in a complex and fragmented ecosystem that is difficult to navigate.

Stringent Requirements from Correspondent Banks

  • Regulatory changes, economic sanctions, AML/CFT/CPF concerns, and compliance costs have made it increasingly difficult for African PSPs to access correspondent banks.
  • These requirements can be costly and time-consuming to comply with, further straining the resources of PSPs.

Expensive Liquidity Management

  • The need for pre-funding of correspondent accounts and competition for liquidity between domestic and cross-border payment systems contribute to high operational costs.
  • This results in unproductive use of capital, further eroding the profitability of PSPs.

Costly and Opaque Foreign Exchange Pricing

  • Currency exchange rates contribute significantly to high remittance prices due to limited demand and trade between illiquid African currencies.
  • Fixed exchange rates and foreign exchange controls exacerbate these issues, making it difficult for PSPs to offer competitive exchange rates.

Benefits of Regulatory Harmonization

Regulatory harmonization can generate significant gains for the entire cross-border payment value chain in Africa by:

  • Promoting competition
  • Reducing costs
  • Increasing transaction speed

Key Areas for Regulation and Legislation to be Harmonized

To achieve this, several key pieces of regulation and legislation should be harmonized, including those related to:

  • PSP licensing regimes: Ensuring compatible licensing requirements across countries can facilitate the growth of PSPs.
  • Reporting requirements: Standardizing reporting requirements can reduce compliance costs and increase transparency.
  • Consumer protection: Harmonizing consumer protection regulations can enhance trust in the payment system.
  • Foreign exchange pricing practices: Regulating foreign exchange pricing practices can ensure more transparent and competitive exchange rates.
  • Correspondent bank relationships: Improving correspondent bank relationships can reduce operational challenges and costs for PSPs.

Conclusion

The challenges faced by PSPs in Africa are multifaceted and require a comprehensive approach to address. Regulatory harmonization offers a promising solution, but it requires the cooperation of governments, regulatory bodies, and industry stakeholders. By working together, we can create a more efficient, cost-effective, and competitive cross-border payment system that benefits everyone involved.