Millions of people in sub-Saharan Africa rely on money sent to them by relatives living abroad.<\/p>\n\n\n\n
But it costs more to send this money \u2014 known as remittances \u2014 to sub-Saharan Africa than any other region in the world,\u00a0according to the World Bank.<\/p>\n\n\n\n
In recent years, a number of African-founded financial technology (fintech) companies have emerged, with the aim of bringing down costs and carving into the dominant market share of traditional players like Western Union and MoneyGram.<\/p>\n\n\n\n
The potential benefits are huge; the less it costs to send money to Africa, the more money is likely to be sent. An increased flow of foreign currency can act as a lifeline for both individuals and national economies.<\/p>\n\n\n\n
Worth $54 billion to sub-Saharan Africa in 2023,\u00a0<\/strong>remittances account for more than a fifth of GDP of the Gambia, Lesotho, and Comoros, and more than a tenth of Liberia, Cape Verde, and Guinea-Bissau. They are more valuable to Kenya\u00a0than its key exports.<\/p>\n\n\n\n And estimates are generally assumed to be lower than the real figure due to the prevalence of unrecorded payments made through informal networks.<\/p>\n\n\n\n \u201cNot only do (remittances to low-and-middle income countries) exceed foreign direct investment and official development assistance (combined), but it also somehow remains constant,\u201d said Christian Kingombe, managing partner of \u201cimpact investment\u201d advisor 4IP group, and formerly with the African Development Bank. \u201cSo it is really a very important source of development,\u201d <\/strong>he added.<\/p>\n\n\n\n Sending money to sub-Saharan Africa costs the sender an average of 8.37% of the total value of the transaction, as of Q2 2024,\u00a0according to the World Bank, compared to 5.53% in South Asia. How can fintechs bring that number down?<\/p>\n\n\n\n The first challenge is to move customers away from making cash payments.<\/strong><\/p>\n\n\n\n A survey by Visa found that 12% of global consumers still send remittances by mail as cash, checks or money orders.<\/p>\n\n\n\n Processing cash is more expensive than digital money, explained Andy Jury, CEO of Mukuru, a big remittance player serving Africa and founded by a Zimbabwean entrepreneur, that processes both cash and digital payments, because cash <\/strong>requires a large physical infrastructure, including booths, tellers, and supplies of cash.<\/p>\n\n\n\n While the average cost of sending money to sub-Saharan Africa is the highest in the world, the cost of\u00a0digital<\/em>\u00a0remittances to the region is\u00a0less than the global average. If more Africans sent money home via digital services rather than cash, average remittance fees should fall, but receiving money online requires the internet, which is used in sub-Saharan Africa by only 37% of people,\u00a0according to the World Bank.<\/p>\n\n\n\n Even when users have access to mobile apps, it\u2019s not always easy to <\/strong>persuade them to move over from the tried and trusted cash model.<\/em><\/p>\n\n\n\n \u201cImagine a world in which you\u2019ve grown up in a cash-to-cash ecosystem \u2014 it\u2019s a sort of leap of faith to leave your money in this esoteric, intangible thing,\u201d explained Jury. \u201c(But) if you get somebody to use it, they educate themselves on the benefit, and they can get that \u2018aha!\u2019 moment. That\u2019s the most powerful conversion tool.\u201d<\/p>\n\n\n\n It\u2019s mainly young people who are making the switch, said Nicolai Eddy, COO of NALA, a remittance fintech founded in Tanzania that facilitates payments to 11 African countries and last year raised $40 million from investors. \u201cIt\u2019s really like 35 (year olds) and below where there\u2019s a huge focus on the digital side of things,\u201d he said. \u201cPeople in their fifties and sixties, they\u2019re used to the person at the shop who they know, and they just continue to go there.\u201d<\/p>\n\n\n\n Building trust is a challenge, but with a growing youth population and a steady flow of migrants moving abroad, the potential user base is expanding.<\/p>\n\n\n\n Luring customers over from cash is one piece of the puzzle. But digital payments have their own costs.<\/p>\n\n\n\n Historically, sending money to Africa via a remittance company has been a complex process involving many different parties. \u201cIt\u2019s so bloody difficult to move money around,\u201d said Jury.<\/p>\n\n\n\n The middlemen \u2014 mainly the third parties used to move money between banks, and the foreign exchange <\/strong>traders who find and negotiate the best rates \u2014 all want a cut, and they can drive up costs and cause delays.<\/p>\n\n\n\n In recent years, fintechs \u2014 like NALA, Flutterwave, LemFi, Chipper Cash, Leatherback, and many more \u2014 have emerged with a model of cutting out the middlemen and enabling instant payments.<\/p>\n\n\n\n Many of these new fintechs hold liquidity in every country in which they operate, explained Eddy. This allows them to deposit funds directly into the local bank account or digital wallet of the receiver instantly. Often, these companies use their own software wherever possible to move money around, as well as having their own teams to negotiate on the foreign exchange market, removing the reliance on third parties.<\/p>\n\n\n\n \u201cWe\u2019re cutting out two steps, in some cases it\u2019s like five or six steps,\u201d explained Eddy.<\/p>\n\n\n\n But bypassing the middlemen is not easy. As well as developing in-house software, it means working directly with banks and governments to acquire licenses to transfer money internally within African countries, each of which has different requirements.<\/p>\n\n\n\n Sending money between African countries can be especially costly; in Q4 of 2023, fees were\u00a0an average of 33%\u00a0for remittances of $200 from Tanzania to neighboring Kenya, Uganda, and Rwanda.<\/p>\n\n\n\n \u201cWe\u2019ve got 50 different payment use case licenses in 15 different territories, and that\u2019s taken nearly two decades to build up,\u201d said Jury. \u201cVery 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\u2019s license. All of that variability increases the costs.\u201d<\/p>\n\n\n\n Although still in its infancy, the <\/strong>Pan African Payment Settlement System (PAPSS) is designed to unify regulation across different African countries.<\/p>\n\n\n\n \u201cI love that sort of stuff because it creates harmony,\u201d said Jury. \u201cWhether it\u2019s centrally dictated, whether it\u2019s ourselves creatively integrating (with other fintechs), we\u2019re constantly on the lookout for those things.\u201d<\/p>\n\n\n\n The UN has targeted a\u00a0global average of 3% for remittance fees. According to Eddy, the biggest inhibitor for fintechs in Africa to lower their costs is the fees charged by banks and digital wallets for locally depositing money to receivers. He wants governments to limit fees for things like sending money to family. \u201cIf they cap those fees for those types of transactions, we could be processing at 1% (total fees),\u201d he said.<\/p>\n\n\n\n But according to Dr Joseph Antwi Baafi, senior lecturer at Akentien Appiah-Menka University of Skills Training and Entrepreneurial Development in Kumasi, Ghana, governments should focus on helping to reduce operating costs for remittance fintechs and the companies that operate digital wallets in Africa.<\/p>\n\n\n\n \u201cGovernments (can play) a huge role in terms of infrastructure support, in terms of tax support, to help these network operators to operate at their full capacity and full efficiency. And that will bring down charges,\u201d he said.<\/p>\n\n\n\n For Jury, the key to success is to tailor the product to the user\u2019s needs.<\/p>\n\n\n\n \u201cIf you come at this with a Silicon Valley mind(set) where you\u2019re going to take a small proposition, throw lots of money (at it) and scale it up, you come unstuck very quickly,\u201d Jury said.<\/p>\n\n\n\n \u201cBut if you can take a global platform or infrastructure and ensure you appreciate the local idiosyncrasies and invent something that\u2019s relevant to a customer, there\u2019s a massive, massive tidal wave of opportunity coming.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":" Millions of people in sub-Saharan Africa rely on money sent to them by relatives living abroad. But it costs more to send this money \u2014 known as remittances \u2014 to sub-Saharan Africa than any other region in the world,\u00a0according to the World Bank. In recent years, a number of African-founded financial technology (fintech) companies have […]<\/p>\n","protected":false},"author":1,"featured_media":40211,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[248,244],"tags":[7,249,245],"class_list":{"0":"post-40210","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-economy","8":"category-finance","9":"tag-apie-project","10":"tag-economy","11":"tag-finance"},"yoast_head":"\nThe problem with cash<\/h2>\n\n\n\n
Bypassing the middlemen<\/h2>\n\n\n\n
Regulation<\/h2>\n\n\n\n