Regional payments systems are now at the heart of the discussion around Africa’s economic growth story. Across the continent, new systems are being successfully deployed in a sign of the increasing maturity of Africa’s financial services architecture. In turn, these developments are transforming the way that business and trade is conducted throughout the region.
For the private sector, this represents a significant opportunity to cut costs and achieve greater efficiency, while gaining easier access to the booming consumer demand across Africa’s sub-regions. More significantly, the introduction of effective payments systems is altering the way in which African states are trading with each other, as well as the rest of the world.
Driving growth
“Within the broader theme of financial deepening, I suspect that regional payments systems will be both a beneficiary and driver of Africa’s economic growth. They will act as a propeller for the continent’s ascent along with urbanisation, the demographic dividend and technological innovation,” says Goolam Ballim, chief economist and head of research at Standard Bank.
The progress achieved to date – particularly in terms of the launch of newer systems – has been swift. The first stage of the Southern African Development Community (SADC) Integrated Regional Electronic Settlement System (Siress), which settles payments in South African rand, was initiated in July 2013, quickly followed by the launch of the East African Payments System (EAPS) later that year, catering to members of the East African Community (EAC) through local multi-currency settlements.
Similarly, the Common Market for Eastern and Southern Africa (Comesa) has been expanding its Regional Payment and Settlement System (REPSS) since going live in late 2012 through same-day US dollar and euro settlements. While these projects vary greatly in terms of their structure, procedures and services, as well as their maturity, they all share a common operational success.
System savings
Since the launch of Siress, 43% of payments in the SADC region are now executed through the system. Meanwhile, a report published by the Overseas Development Institute this year noted that prior to the implementation of EAPS, transferring funds from the UK to east Africa was three times cheaper than conducting the same transaction from one EAC member state to another. With a total of $5.5bn of funds transferred within the EAC annually, largely in the form of remittances, significant savings are expected in the years ahead.
These developments in the south and east of the continent build on earlier successes achieved in west Africa, where the West African Economic and Monetary Union has developed a modern regional payments infrastructure for real-time gross settlements, automated clearing houses and card transactions since the early 2000s.
This push to both deploy and enhance regional payments architecture is partly the product of a political drive to boost regional integration. It has also emerged as a consequence of Africa’s rapidly progressing commercial landscape, as local corporates and financial services firms agitate for more advanced cross-border facilities and services.
“There is a lot of emphasis being placed on greater regional coordination and co-operation, both from a commercial and political perspective,” says Patrick Gutmann, group head of transaction services at Ecobank. “There is definitely a greater demand by the corporate community to have easier and more robust regional cross-border financial services. More and more clients are broadening their commercial space beyond a single country, and starting to look for regional or pan-African banking solutions.”
Absence felt
Despite these recent gains, the lack of effective intra-African payment systems has historically impeded economic growth across the continent. The traditional model of correspondent banking, whereby regional transactions have typically been cleared in dollars by US-based institutions, has added significant costs to trade, business development, as well as to the end consumer.
“The absence of effective payments systems significantly increases transaction costs. This cost is ultimately transmitted to the consumer. There is another cost in terms of trade as this contributes to production costs and reduces the competitiveness of Africa’s private sector,” says Moono Mupotola, acting director of the New Partnership for Africa’s Development with the African Development Bank.
This dynamic remains a problem today. Data from the African Development Bank indicates that about 48% of settlement processes taking place within Africa involve lenders outside of the continent. Meanwhile, research from the Society for Worldwide Interbank Financial Telecommunication (Swift) has found that the relative importance of US dollar clearing banks has increased in recent years, particularly as trade flows with Asia, which are typically denominated in dollars, have grown.
The numbers behind Africa’s current commercial and financial flows reflect this problem. According to Swift, North American lenders receive about 40% of payments originating from Africa, but only 9% of the actual commercial flows. To put these numbers into context, the Asia-Pacific region receives 22% of the commercial payments from Africa but only 5% of financial flows are sent directly between the two regions.
Nevertheless, as these new regional payments systems mature, these trends are expected to diminish over time, particularly as trade within the continent begins to flourish. “New regional payments systems are facilitating greater levels of intra-African trade. Though the impetus for trade on the continent has been cyclically slower, there is a growing structural vibrancy in this market,” says Mr Ballim. “Intra-African trade offers a second wave of promise given the increasing recognition that Africa’s continued ascendency requires industrial endeavour.”
Intra-trade hopes
Indeed, this vibrancy in intra-African trade has been one of the many structural drivers advancing the cause of regional payments systems development. “Without a functioning payment system, the vision of increased intra-regional trade will not materialise. It’s a fundamental prerequisite,” says Hugo Smit, head of sub-Saharan Africa for Swift.
Research from the African Development Bank indicates that in 2010, 16% of the continent's’ exports were directed internally to other African states. In addition, between 2000 and 2010 exports directed outside of Africa grew at two-thirds the pace of intra-African exports. “As Africa’s sub-regions open up to new trading agreements we are seeing increased economic activity. As intra-trade develops, it makes sense to settle payments within that region,” says Ms Mupotola.
In conjunction with this deepening of intra-Africa trade, the continent's flourishing private sector has been a further catalyst for the successful roll out of regional payments systems. The development of large multinational corporates in areas including telecommunications and oil and gas, among many others, is being followed by the emergence of a burgeoning small and medium-sized enterprise sector in some of Africa’s most dynamic economies. In partnership with their international peers, these actors have played a significant role in promoting the development of regional payments systems.
“We are seeing huge growth in demand for improved payment systems from both international corporates entering Africa, as well as local corporates expanding across Africa. African corporates that are expanding across the continent illustrates the growth of intra-regional business and we expect this to remain a strong source of demand growth,” says Mr Smit.
Encouragingly, the private sector is beginning to play a more robust role in the formation of the continent’s payments architecture. “What we are seeing now from the financial services sector is a lot of private and financial sector actors coming together to see how they can enhance integration. The financial sector has played a significant role in the development of regional payments systems,” says Ms Mupotola.
The Siress factor
Systems such as Siress are therefore facilitating a structural shift in the way that the economies of Africa’s sub-regions trade, while introducing new cost efficiencies for local and regional businesses. “The advent of Siress means that there’s an alternative model [to correspondent banking] available. The benefits [for the private sector] include greater cost efficiency in terms of pure exchange rate risk as well as the cost associated with correspondent banking,” says Mr Smit.
With nine countries and more than 70 commercial banks now participating in Siress, it stands apart among the continent’s newer payments systems in terms of its success. Speaking at Swift’s African Regional Conference 2015, the governor of the South African Reserve Bank, Lesetje Kganyago, noted that in April 2015 Siress had reached the R1000bn ($85.1bn) settlement mark. Nevertheless, further work is needed to ensure that the benefits of this system are felt across the financial spectrum.
“At the moment, the Siress system is used in high-value payments which are typically trade related. As such, the benefits aren’t yet reaching the end consumer. Siress is already capable of handling low-value retail payments, however, and the next step is to generate consumer demand for such services,” says Mr Smit.
Regulatory compliance
Moreover, the introduction of a regional payments architecture also has profound implications in terms of regulatory compliance. While correspondent banking relationships currently dominate the continent’s payments space, these relationships are also under pressure as a result of know your customer and anti-money laundering regulations. For large international lenders, the expense of dealing with unknown counterparties is mounting.
“Global regulations are having a significant impact on transaction patterns. As a result, larger international institutions are reviewing their correspondent banking relationships and de-risking. This, together with the costs to meet international regulatory requirements, may ultimately result in smaller domestic banks in Africa being excluded from international banking relationships,” says Mr Smit.
Systems such as Siress will provide these smaller lenders with access to regional payments systems and to capabilities they may have been excluded from in the past, according to Mr Smit.
Phased out?
Nevertheless, challenges remain. A common execution problem relates to the varying stages of financial technical and technological development to be found at the national level. With some members of a regional organisation further along the development curve than others, regional payments systems are being introduced through a phased process. In terms of operational use, EAPS, for example, is currently missing Burundi in part because it is still developing the necessary financial infrastructure to achieve successful integration.
“There are still countries where the local clearing environment isn’t fully automated, even though that number is quickly shrinking. As such, there is still scope for improving the payment clearing infrastructure across Africa,” says Mr Gutmann.
Overcoming this challenge – and others – will take time. With the phased roll out of these systems expected to extend over the next few years, there is still considerable scope for maturation to occur. Nevertheless, an eye is being kept to the future and the possibility of achieving the next level of integration in terms of meshing these systems together.
The recent signing of the Tripartite Free Trade Area (TFTA) on June 10, 2015, is an encouraging first step in that process. The new 26-member free-trade bloc was formed through the integration of SADC, Comesa and the EAC, and is one of the most promising examples of economic integration in recent years.
“The signing of the TFTA was truly momentous as it covers half the continent. The vision of a single trading bloc from Cape Town to Cairo is being realised,” says Ms Mupotola. “If we can use the experience gained at the regional level, including in the Economic Community of West African States, SADC and EAC, we can use these systems as building blocks in order to interconnect payment systems across Africa in the near future.”
