Cross-border payments are still costing businesses in Africa too much.
Africa is a continent brimming with potential, making it an attractive prospect for countries, trade ministers, and business owners seeking growth. According to the latest macroeconomic report by the African Development Bank, Africa is poised to maintain its status as the second-fastest growing region globally, just after Asia. The report forecasts that next year, up to 41 countries across Africa will achieve an economic growth rate of 3.8%, with 13 of these nations experiencing growth rates more than one percentage point higher than in 2023. This data underscores the immense growth opportunities across Africa, driven by a burgeoning population and robust GDP growth. Indeed, Africa is projected to outpace global growth averages throughout 2024.
Economic Growth and Population Boom
The report highlights that 11 African nations are among the world’s twenty fastest-growing economies this year, a remarkable achievement that North America and Europe envy. According to the International Monetary Fund’s GDP growth tracker, Africa’s GDP growth rate of 3.5% significantly surpasses South America’s 1.4%. Although Africa trails Asia’s 4.4%, the continent’s forecasted population boom, with an estimated 2.5 billion inhabitants by 2050, will likely narrow this gap. As population growth often correlates with GDP growth, Africa’s economic expansion is set to accelerate.
Not only will population growth surge, but so will foreign direct investment, employment opportunities, and purchasing power. Many African nations currently labeled as “commodity-dependent” will diversify into services that cater to their young, digitally-savvy populations.
Perception vs. Reality in African Investment
However, the perception of Africa as a complex, corrupt, and volatile market deters many businesses from investing. This perception is unfounded when considering that markets in Asia and South America also face high barriers to entry and challenging operational environments. Consequently, the largest new entrants to Africa over the last decade have primarily come from Asia and South America, where investors see similarities rather than difficulties.
The Role of Fintech in Bridging Gaps
The diversity of currencies, varying regional regulations, and lack of legacy financial infrastructure pose challenges for pan-African business operations. Nevertheless, fintech companies have been addressing these issues for the past 15 years. These fintech firms, with their deep market knowledge and experience, have made it easier to conduct business across Africa. They view Africa’s currency diversity as a strength and recognize that African fintech infrastructure rivals, if not surpasses, many other markets. Professional services providers, banks, and other partners are also plentiful, facilitating business scaling in Africa.
The Cost of Cross-Border Payments
Despite these advancements, cross-border payments still cost African businesses excessively. Companies shouldn’t face high costs (in time or fees) to transact in other African or G20 currencies or make transfers across the continent or into Europe. Yet, they do. At a recent gathering of corporate treasurers operating in Africa, the most significant complaint was the restrictive internal policies that only allowed partnerships with a single bank, reflecting an outdated approach to financial services.
These costs often surprise businesses entering African markets. However, the issue is not due to currency diversity, financial infrastructure, or service quality. Instead, the problem stems from the historical lack of prioritization of African businesses by non-African partners. Limited choices in foreign exchange, cross-border transfers, and international market access contribute to the higher costs of doing business in Africa today.
Innovating Through Necessity
Africa’s fintech sector has become the most inventive out of necessity. The tradition of financial innovation, dating back to mobile money, is a direct response to challenging and dismantling high-cost systems. This ecosystem of fintech and alternative financing has provided more and better choices, mirroring solutions seen in Asia and Latin America.
The Need for More Choices and International Liquidity
African businesses need more options. Increased international liquidity should drive this change, but it must benefit African businesses. This involves partnering with companies that facilitate direct African-to-African currency exchanges, ensuring fast capital access, and investing equally in African success. Companies entering the African market should hire locally, partner with African companies, use African banks, and route payments through African-licensed payment service providers.
Africa is already a benchmark for fintech innovation and is rapidly becoming a standard for economic growth. In the next decade, Africa is poised to become a global hub of international talent and a vital consumer market. Cutting costs for African businesses while maintaining high expectations for international partners will accelerate this bright future. By addressing the high costs of cross-border payments, Africa can unlock its full economic potential and solidify its position as a leading global market.
