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With the valuations of FinTech unicorns in Europe and the United States ballooning to irrational levels over the past two years, we believe investing in emerging markets needs more attention. Compared to the attention that Latin America and Southeast Asia has received, the African FinTech market seems to be ignored in China, and its potential opportunities and actual progress exceed most people’s imagination:
- Growing demographic dividend : By 2025, the continent will have 61,500 mobile internet users, equivalent to half the population; Africa’s total population itself is expected to double by 2050.
- Extremely underbanked : Sub-Saharan Africa has only 6 ATMs and 5 bank branches per 100,000 adults; 50% of Africans are under 20 years old to open a bank account, so they choose digital wallet.
- Cross-border payments that have not been digitized : A large number of Africans live across borders, and it requires a lot of handling fees to exchange foreign currency through the US dollar as an intermediate currency, so they choose offline agents. These black market transactions account for 30-40% of the total cross-border payment volume in Africa .
- Large inflows of VC funding : In 2021, start-ups across the African continent will raise a total of $5 billion, of which FinTech companies will account for $3 billion, double the $1.35 billion in 2020 and triple the amount in 2019.
Crypto exchanges are trying to capture Africa’s dividends, with FTX being the most aggressive head player — it led a $150 million round in Chipper Cash in 2021 at a $2 billion valuation. Chipper Cash is similar to the African version of Venmo, allowing individuals to send money to 7 African countries and the United States. In March 2022, FTX and Kenya’s AZA Finance announced a partnership to introduce digital currency trading pairs for people in Africa.
We compiled this article from our “unicorn overseas” friend Samora Kariuki. He discusses the various players in cross-border payments on the African continent and thinks about the biggest winners in the value chain – our current answer is the payment and acquiring infrastructure, specifically Flutterwave, which is the Stripe of Africa, 3 billion The dollar’s valuation makes it Africa’s most expensive unicorn.
Payment and logistics are the infrastructure for e-commerce development. Samora is now an entrepreneur of B2B e-commerce infrastructure in Africa. Before that, he opened a bank in the Republic of Burundi and has a say in cross-border payment issues in Africa.
But when we chatted with him about the possible role cryptocurrencies could play, he was less optimistic than others: African countries will adopt policies similar to China’s to avoid dollar-pegged stablecoins from destroying their own currencies; despite P2P transactions It is difficult to be banned, institutions and banks in these countries will not be involved in cryptocurrencies.
The following is the content of this article, and it is recommended to read it in combination with the main points.
01 A true story
02 Growth drivers of cross-border payments
03 Cross-border payment pain points in Africa
04 Anatomy of Payments
05 An innovator in cross-border payments in Africa
- User experience improver
- builder of infrastructure
- Regional Payment Plan
- Offline payment agency outlets
- Banks fight back
- Cryptocurrencies and DAOs
06 Summary: Betting Infrastructure
a true story
My friend is in the Republic of Burundi (a “mountain country” by the Great Rift Valley, bordering Rwanda, Tanzania and Congo) and his business is selling imported clothing. He would first go to Instagram to browse information about the Tanzania fashion store, and then contact the seller to place an order. The seller will give him a mobile number to receive money, and the Tanzanians usually use Airtel Money, a digital wallet owned by Indian telecom giant Airtel.
Even though he has a mobile phone and a bank account, my friend still chooses to go to the biggest bazaar in town to find offline mobile payment agents – banks use US dollars as an intermediary currency, and the exchange fee is too expensive, so these offline agents Formed a “foreign exchange black market”.
They acted as informal forex traders, taking my friend’s Burundian francs in cash and then using Airtel Money to instantly pay the seller Tanzanian shillings. When the transaction is over, the seller packs the goods and sends them to a bus bound for Burundi.
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The clothes will arrive within a few days. My friend would sell them on credit to stores in town, receive payment in the following month, and start the cycle above again. This is the current situation of cross-border trade and payments in Africa. There are many inefficiencies in the middle, especially the long trade cycle and the inefficient flow of funds.
Since the above trade behaviors are insensitive to customs, the volume of cross-border payments in Africa has far exceeded the statistics on paper, and the potential demand is also growing substantially. We can observe a set of trade data: In 2017, intra-African exports accounted for only 17% of its total global exports, compared with 69% in Europe and 59% in Asia. Informal cross-border trade (low-value, high-frequency trade like my friend’s purchases is usually not regulated by customs) accounts for 30-40% of overall cross-border payments in Africa.
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In the FinTech and payments arena, players who seize this opportunity will become multi-billion dollar companies. At the same time, once we build a better payment infrastructure, more young Africans will become active participants in the global economy.
This article wishes to discuss the various players in cross-border payments on the African continent and to consider who will be the winners and which link in the chain can generate the most value.
Growth drivers of cross-border payments
A number of factors are driving the growth of the cross-border payments industry in Africa:
- Advances in technology have improved Africa’s communication capabilities . Not only operators, but also social media platforms such as Whatsapp, Facebook and Telegram are behind this.
- Large numbers of Africans live across borders . According to the International Organization for Migration, more than 21 million Africans lived in neighbouring countries in 2019, up from 18 million in 2015, so living or working across borders is a continuing trend.
- Africa will retain more scientific and technological talents and adopt more advanced management methods . Covid-19 has accelerated some trends around work collaboration. Online technology has made remote work possible, and it has made gig jobs more frequent across borders. Those Africans with production and research capabilities can stay in their home countries and work in global companies at the same time. And those African companies that insist on clocking in will be eliminated from the competition.
Cross-border payment pain points in Africa
Cross-border transactions in Africa should eventually have a payment system that is ubiquitous, available in real time, and instantly settled. Under this system, the payer cares about whether the payee can receive the money in a timely manner and whether the cost of payment is low enough. And the payment system we currently have has the following problems:
- Delayed settlement of T+2 . Many African countries still use the SWIFT network and settle in US dollars. Therefore, settlement usually takes 2-3 days. Payments are often bounced back or stuck with intermediaries due to miscommunication.
- Insufficient liquidity in currency trading pairs across countries . Ideally, transactions between Ghana (a western African country with a GDP close to my country’s Kunming) and Botswana (a landlocked southern African country with a GDP close to Xining) should be conducted in two national currencies, the Ghanaian cedi and the Botswana pula. settlement. However, the US dollar is far more liquid than them, so these transactions are settled in US dollars.
This adds a lot of cost: the acquirer may receive the message quickly, but final settlement may take a day or two. In a day or two, the two currencies will change against the US dollar. Fluctuations in exchange rates are factored into the transaction, so the recipient is likely to receive a lower amount. Countries that use SWIFT and Visa/MasterCard networks to pay face this problem.
- Most of the time, the customer experience is very poor . A person may just want to send a living allowance to his sister, but he has to fill out a lot of forms and understand what the payee correspondent bank, IBAN (International Bank Account Number) and SWIFT refer to. Given the continent’s “level of illiteracy”, this information overload hinders people’s access to banking and financial services.
Anatomy of Payments
I mentioned SWIFT above, the antiquated infrastructure for cross-border payments in Africa. It is essentially a messaging protocol used to standardize the transmission of financial transaction information such as payment instructions.
Abstracting and simplifying payment, it needs to complete three core steps:
- Receive payment instructions from user/client – user layer
- Delivery and Communication of Payment Instructions – Infrastructure Layer
- Final Actual Settlement of Funds – Settlement Layer
Instruction-based payment systems can be traced back to “the Venetian merchants sitting at the office” – they no longer traveled, but traded directly through shipping and correspondent banks. Commercial banks create correspondent banks (special branches of domestic banks overseas) for them to settle settlements through Nostro (our) and Vostro (your) accounts. Payment instructions are sent by letter, and the payer will detail the amount to be debited from the Nostro account and received from Vostro.
Over time, the advent of other payment methods such as American Express, Western Union and MoneyGram and their global network of agents has made a wider range of cross-border payments possible. Based on SWIFT, they create closed-loop solutions with a centralized intermediary to manage the infrastructure layer and the user layer.
Yet technological evolution is upending these payment systems, with a series of disruptors emerging across the continent:
- Chipper Cash, Eversend, and Nala are creating a better payment experience for users through front-end innovation.
- Companies like Thunes, Terrapay, Flutterwave, and Worldpay are improving their infrastructure, building an infrastructure layer for information transmission while connecting banks to user wallets.
- EAPSS, SIRESS and PAPSS are regional payment schemes driven by central banks.
- Offline informal payment systems (or “black markets”) still function, such as the hawala remittance system (hawala) and offline mobile payment agents.
- Umoja card payment transfer organization proposed by banks such as Standard Bank (the largest commercial bank in South Africa and the whole of Africa) and Ecobank (the largest commercial bank in Ghana).
- Finally there are cryptocurrencies, especially stablecoins and the DAOs behind them, such as MakerDao. Not only do they make payments, but they also provide liquidity.
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An innovator in cross-border payments in Africa
User experience improver
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Product and user-level innovations in cross-border payments have emerged over the past few years. Africa is represented by Chipper Cash, which has built its business around cross-border payments. Eversend started out as a multi-currency wallet in Uganda, and it will cut into cross-border payments in East Africa in 2021. Tanzania’s Nala started out with transfers in East Africa in 2019 and has now expanded into international remittances to the UK.
The basic capabilities of these apps are digital wallets, virtual cards, utility bills, and mobile phone recharge, where digital wallets can help users make payments and receive payments in major countries on the African continent (usually the top 10 countries in GDP). The high-level function is to purchase investment and financial products such as cryptocurrencies and stocks.
Building a consumer-facing FinTech product in Africa is very different than in Europe or North America, the founders have to be very competent – in Europe, you can easily find a Banking-as-a-Service provider and launch an e-account immediately Account opening, deposit and withdrawal and payment functions; while in Africa, FinTech founders need to simultaneously address regulatory, cultural differences, payment systems and currencies.
Chipper Cash will have a deeper stack than FinTech in Europe or the US. Of course, this also means opportunities for embedded finance and infrastructure construction such as Banking-as-a-Service on the African continent. For example, Chipper Cash has begun to cooperate with Flutterwave.
The competitive advantages of these companies are:
- Engineering development capabilities and entrepreneurial culture, which contribute to product innovation.
- Patient VC funding could make them win in the future. Chipper Cash received an investment from FTX, and his founder often talks about long-termism. It’s worth noting that the median age in Africa is 19 or 20, so most people don’t have a bank account yet. A 16-year-old’s first exposure to financial services was by creating a digital wallet or cryptocurrency wallet at Chipper Cash.
- Significantly better user experience, they built the product around the user and simplified many processes.
- Their product teams are insightful and have many best times to learn around financial services. Conceivable future expansion scenarios include tax registration, provision of cash management and credit for SMBs, expense control reimbursement, etc.
Of course, there are also some downsides:
- These consumer FinTech companies don’t monopolize users – it’s too easy to open an account, so users open digital wallets on multiple apps to get subsidies. Therefore, investment institutions need to be careful about their total number of users and the LTV of individual users.
- The monetization strategy is far from mature. VC funding is still driving user acquisition, but the monetization path for many apps is unclear. For cross-border payments themselves, the revenue of these apps needs to be shared with their infrastructure partners, such as banks (foreign exchange) and Flutterwave.
- The license barriers in the industry are not deep, and the difficulty of obtaining a payment service license or an electronic currency license is much lower than that of a bank license. Migration costs for users are not very high, so another Stanford and Facebook-backed team plus VC funding could quickly threaten the status of existing players. Users in Africa are not yet at the point where they feel an emotional connection to an app.
- They lack offline combat capabilities and cannot actively promote the penetration rate of online payment. Stephen Deng of DFS Labs pointed out on Twitter: Although 3G coverage has increased significantly, only about 30% of people in sub-Saharan Africa have access to the Internet. Offline capabilities are still important.
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Overall, the space remains a VC-driven battleground, and companies with deep pockets will need to prove their worth over time.
builder of infrastructure
Payment and acquiring infrastructure is proving to be one of the most valuable business areas in Africa.
Among Africa’s unicorns, the infrastructure track is the crown, and Flutterwave is the crown jewel — it’s Africa’s most valuable startup, Africa’s Stripe .
These back-end payment infrastructure companies enable cross-platform payment and acquiring. For example, Flutterwave provides a set of APIs for businesses to make and receive payments on various card networks, digital wallets, or other payment platforms. Its clients include Uber, Booking, Africa’s largest e-commerce platform Jumia and delivery platform MAX, among others. Stripe itself is difficult to shake the status of Flutterwave. Different countries in Africa use different currencies and digital wallets, which are very different from the European and American markets .
Futterwave continues its strategy in 2021 with M-Pesa (a service launched by Kenyan telecom giant Safaricom in 2007 that allows users to make deposits and SMS transfers at mobile service outlets), Airtel and MTN (Nigeria’s largest telecom operator) In cooperation, merchants can use these digital wallets to acquire bills. It is becoming the core payment infrastructure service provider in Africa.
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Companies such as Thunes and TerraPay can help connect global digital wallets with local digital wallets in Africa. For example, with Thunes’ support, M-Pesa users can transfer wallet funds to PayPal. They also help connect Alipay with digital wallets in Africa.
Infrastructure companies build entire stacks in the markets in which they operate, from accessing various local payment methods, dealing with licensing and regulatory issues, building fraud prevention and KYC capabilities, to any local considerations that require customization.
MFS Africa is another important player in this field. MFS’s early technology was to connect various digital wallets in Africa, and now it has expanded its capabilities to offline outlets – it acquired Nigeria’s super-agent network Baxi to provide online merchants with cash acquiring capabilities. For example, a Nigerian can pay to the M-Pesa wallet by depositing cash at a Baxi branch.
In 2020, Stripe acquired Nigeria’s Paystack for $200 million. Flutterwave closed a $250 million financing in February 2022. These events show the market’s favor for infrastructure companies. The logic behind it is simple: the market complexity of entering a country in the payment field is high, and the growth of global companies is often accomplished through mergers and acquisitions .
Companies like Flutterwave and MFS are attractive to Paypal, Visa or Mastercard. Flutterwave and Paystack have further expanded their business, such as merchants’ quick website establishment, consumer apps and billing functions on mobile phones.
These infrastructures will power new products or front-end innovations. Like Stripe, they are the drivers of the growth of FinTech and Internet GDP in Africa.
Regional Payment Plan
Solving the problem of cross-border payments also requires some central banks to establish settlement-layer infrastructure for cross-border payments.
There have been such attempts in the past: East Africa has a SWIFT-based payment and settlement system, and all settlements can be done within the East African region without the need for overseas correspondent banks. This system, called REPSS, is used in COMESA, a free trade area composed of 20 East African and South African countries such as Libya and Swaziland. In SADC, what they have is SIRESS.
A problem I have observed in the past is that these payment systems are not being promoted by the big banks . For example, KCB Bank in Kenya, which operates in many countries in East Africa, prefers that users make payments through its own internal system rather than a regional payment plan. GT Bank in West Africa has a similar abacus.
As a result, regional payment schemes have not been widely adopted. SIRESS also had a rough start, billed in South African rand, while some customers would prefer to settle in U.S. dollars.
In order to solve the problem of currency liquidity and promotion, the Pan-African Payment and Settlement System (PAPSS) came into being. The African Export-Import Bank is the liquidity provider behind it. Officially released in January 2022, PAPSS will reduce the reliance on third-party currencies such as the U.S. dollar, euro, and pound for trade between African countries, allowing parties to use their own currencies for instant settlement, and is expected to save about $5 billion in exchange fees each year.
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This is an interesting innovation. And because it’s “pan-African”, big regional banks will actively use it to expand into countries not covered. Of course, these regional payment plans are more aimed at B2B large-value payments, and may not have much effect on B2C and P2P payments for the time being.
Offline payment agency outlets
Remember my friend’s story? “Black market” payments that do not go through an app or bank are also payments.
Mobile payments in East Africa are highly dependent on offline agent outlets. There are some benefits of offline payment:
- Payment side: cash is very reliable, and there is no risk of account theft or freezing
- Acquiring side: The most reliable electronic payment system in East Africa is the transfer between digital wallets, which arrives quickly. It is a match made in heaven with cash.
Of course, most of these activities are underground, unregulated and informal. But this is Africa – a continent that has turned “inefficient operations” into “efficient means” .
Of course, the problem is that these payment data are offline, so it is difficult for these agents to carry out small and micro business loans and other businesses, and they cannot be bound with merchants for a long time. Unregulated, they are also subject to sporadic repression from time to time. If there is a refund, and these agents happen to be banned, there is no way for the customer to recourse.
Banks fight back
Banks such as Standard Bank have come up with fast money transfer apps such as Unayo and Ecobank.
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Banks themselves provide full-stack capabilities for these remittances: settlement management, exchange, user accounts, and interfaces. In some cases, they partner with companies such as Thunes, Flutterwave, and Terrapay to receive payments on specific channels. If priced properly, these apps can be very attractive as it can extend to B2B bulk payments and working capital loans.
The problem with banks is that they lack the technical talent and culture to continuously improve products for their customers. FinTech companies, on the other hand, emphasize constant iteration. Banks may not have the technical expertise and culture to execute on customer value, whereas fintechs are all about constant iteration. In addition, infrastructure players are socializing capabilities that are otherwise monopolized by banks, and their competition with banks will be interesting.
Cryptocurrencies and DAOs
Cryptocurrencies have been the only paradigm shift in payments in recent years — other payment innovations are variations on the original Venice payment system, and cryptocoins combine instant clearing and settlement.
DAOs appear to be used to connect fiat and cryptocurrencies, and liquidity providers could power cross-border payments in Africa and earn some percentage of each payment.
People on the African continent are actively using cryptocurrencies. Cryptocurrency acts as an online “foreign exchange black market”, and Kenya ranks first in the world in terms of P2P cryptocurrency payments:
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But the continent may not embrace it. There are so many countries on this continent that all have their own currencies, and what most payments innovators are trying to do is bypass the dollar for settlement, and a dollar-pegged stablecoin would destroy those efforts. Therefore, most African countries have adopted a ban on cryptocurrencies, users do not have convenient deposit channels, and KYC may become more and more strict.
So everything is still in the early days, we need to observe the game between African governments and large commercial institutions like FTX – Kenya’s GDP is 98.84 billion US dollars, and the total transaction volume of the FTX platform in 2021 is 67 billion US dollars.
Summary: Betting Infrastructure
If I were to bet on cross-border payments in Africa, I would bet on infrastructure. Companies like Flutterwave have deep pockets, globally proven business models from companies like Stripe and Alipay, and products and technologies built around geographies . I would recommend everyone to open a Flutterwave or Paystack merchant account, you will see how easy and necessary they are.
The foreseeable future is:
- Digital wallets will become the main “bank” accounts for users in Africa. Most people in Africa do not yet have a bank account, and they will be opening an account on a digital wallet for the first time, rather than importing existing account information.
- FinTech companies will build offline capabilities. Flutterwave is promising, providing online payment and acquiring capabilities to trade finance companies in Lagos (Nigeria’s seaport and largest city), who are responsible for offline activities at the port’s outlets, provide funds and Manage customer relationships.
- Banks could be in trouble. I work in a bank myself, and these companies have too many external constraints, making it difficult to think around user needs. Iyinoluwa, the CEO of Flutterwave, had absolutely no banking experience. If banks want to win, they must bring in voices from outside the industry for themselves.
- The battle to improve the front-end user experience is still unclear, and it is necessary to continue to burn money to achieve a winner-takes-all endgame.
- Betting on infrastructure would be a good option and your capital investment will be used efficiently by Stripes in Africa.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/ftx-bets-heavily-attracts-3-billion-will-africa-give-birth-to-the-next-stripe/
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