The Pan African Payment Settlement System (PAPSS) is poised to transform the financial landscape in Africa by unifying regulations across the continent. This initiative comes at a critical time as remittances play a significant role in the economies of several African nations. In 2023, remittances are valued at $54 billion for sub-Saharan Africa, highlighting their importance as an economic lifeline. Countries such as the Gambia, Lesotho, and Comoros see remittances contributing more than a fifth of their GDP, while Liberia, Cape Verde, and Guinea-Bissau receive over a tenth of their GDP from these funds. Despite the substantial inflow, sending money to sub-Saharan Africa remains costly, presenting a challenge for families reliant on this income.
Historically, transferring money to Africa through remittance companies has been a complex process involving numerous intermediaries. This complexity drives up costs, making it the most expensive region to send money globally. However, the digital revolution offers a glimmer of hope. Digital remittances to sub-Saharan Africa cost less than the global average, providing a potential path to reducing expenses.
Enter fintech companies like NALA, Flutterwave, LemFi, Chipper Cash, and Leatherback. These innovative firms are shaking up the market dominated by traditional players by reducing costs and eliminating intermediaries to enable instant payments. However, high fees charged by banks and digital wallets for local deposits remain a significant barrier. According to the UN, the global target for remittance fees is set at 3%, yet the average cost of sending $200 from Tanzania to neighboring countries like Kenya, Uganda, and Rwanda stands at an exorbitant 33% in Q4 of 2023.
“Not only do (remittances to low-and-middle-income countries) exceed foreign direct investment and official development assistance (combined), but it also somehow remains constant,” – Christian Kingombe
The PAPSS aims to address these disparities by streamlining regulatory processes across African nations. This system could harmonize diverse identification requirements that currently increase costs due to varying documentation demands. Andy Jury highlights this variability as a cost driver.
“Very few environments have alignment in terms of what they require; one market might require a passport as proof of identity, another one might take a driver’s license. All of that variability increases the costs,” – Andy Jury
Jury emphasizes the importance of understanding local nuances while utilizing global platforms to seize opportunities in the remittance sector.
“But if you can take a global platform or infrastructure and ensure you appreciate the local idiosyncrasies and invent something that’s relevant to a customer, there’s a massive, massive tidal wave of opportunity coming,” – Andy Jury
The fintech wave also taps into the younger demographic, with those aged 35 and below more inclined to use digital services for remittances. Meanwhile, older generations still prefer traditional cash payments.
“It’s really like 35 (year olds) and below where there’s a huge focus on the digital side of things,” – Nicolai Eddy
Despite technological advances, only 37% of people in sub-Saharan Africa currently use the internet, posing challenges for online remittance receipts. Bridging this digital divide is crucial for broader adoption of fintech solutions.
“Imagine a world in which you’ve grown up in a cash-to-cash ecosystem — it’s a sort of leap of faith to leave your money in this esoteric, intangible thing,” – Andy Jury
Nevertheless, fintech companies are optimistic about overcoming these hurdles. By fostering education and creating user-friendly platforms, they aim to encourage more people to embrace digital transactions.
“(But) if you get somebody to use it, they educate themselves on the benefit, and they can get that ‘aha!’ moment. That’s the most powerful conversion tool,” – Andy Jury
