Enabling economic development in Africa – do payment systems matter?
By Chris Hamilton, CEO, BankservAfrica
In June 2018, SWIFT published a white paper on Africa’s transaction flows. Using SWIFT data, we’ve mapped trade flows against financial flows, revealing a unique perspective on Africa’s transaction patterns. We look at how transaction banking has changed in Africa over the last five years and identify potential drivers for change and their impact on banks doing business in Africa.
We also spoke to industry leaders in Africa to hear their thoughts on the future of banking on the continent. Here, Chris Hamilton, CEO of BankservAfrica, talks about who payment systems are so important when it comes to driving economic growth in Africa.
Policy makers focus on payments infrastructure
In over 400 years of global economic engagement in Africa – from slavery through colonialism, primary resource development and ultimately development aid – there has been little focus on payment methods. Payment systems overwhelmingly relied upon cash, reflecting the extractive nature of most relationships. Until now.
Public policymakers know that a healthy, growing economy cannot rely solely on a cash-based payments system. The world’s most advanced economies have the largest proportion of electronic payments in the national payments infrastructure. Attempts to promote national development that ignore the “plumbing” – the way value moves around a national economy and between it and its major trading partners – are likely to be frustrated by costly inefficiencies and large financial risks. Getting this right is not an economic silver bullet, but it is a necessity.
Accordingly, African national governments, regional economic groupings and international aid agencies are all focusing on, and investing in, non-cash payments infrastructure. Lead times are long, but this will ultimately bear fruit for African economies, societies and citizens. The better the payments infrastructure, the more economic opportunity for all.
The better the payments infrastructure, the more economic opportunity for all.
SWIFT’s insights into cross-border flows tell part of the story. We can see from data collected in this white paper that cross-border flows reflect two key vectors:
1. Intercontinental flows remain dominated by US dollar-denominated, US-routed movements, although Europe remains the most likely destination for outward flows. Both of these phenomena are reducing, as the euro and local currencies increase in significance and Asia becomes a more significant payments destination.
2. Regional economic groupings are gradually increasing in importance, reflected in increased payment flows within groupings as the regional payment infrastructures gradually improve.
The more efficient both intercontinental and regional flows become, the better the prospects for economic development across Africa’s 55 national governments. Efforts by the Southern African Development Community (SADC) and its counterparts to improve regional payments, plus international developments like SWIFT’s global payments innovation (gpi) service, need vigorous support.
Cross-border flows are only one part of the total payments ecosystem. Economic benefit could also be obtained by investing in national payments infrastructure. And the time to do it is now. For the first time in history, it is possible for non-cash payment services to reach even the remotest, least developed communities in Africa – through the mobile handset.
In this way, we have the opportunity to reverse a familiar pattern in so many African countries – a small proportion of the population well served by traditional banking services and infrastructure, with a broad mass of underbanked people. Even South Africa, with its sophisticated financial infrastructure, reaches only 77% of its population with banking services. Some other sub-Saharan countries reach only 10%. Yet GSMA estimates that by 2020, more than 50% of the entire African population will have access to mobile services, two thirds of them through a smart phone. It is therefore no surprise that more than 140 African mobile money services have sprung up in recent years.
It is no longer a question of if, but when. As mobile coverage improves, we can expect rapid organic growth in payments services to African communities using the mobile.
Interoperability is key
This is good news, but there is a caveat. Uncoordinated growth of point-to-point mobile remittance services will store up cost and risk for later. There is a direct analogy here with the historic and haphazard development of Africa’s rail infrastructure to meet immediate needs (i.e. ports and mines). Different gauges and bespoke routes mean economic growth has been inhibited by inefficiency. This is expensive to fix.
A better path would be a systematic, international approach to coordinated development of mobile-based payments infrastructure. It is important to encourage competition and innovation, but within a framework of interoperability. This is not just a national issue, but a regional and ultimately continental one. The pilot now under way for providing regional mobile interoperability within the SADC region is an important step in the right direction.
As African nations continue to develop their modern payments infrastructure, the more they do so in a way that allows for seamless national and cross-border interoperability, the better for long-term economic health. The technology is freely available.