The cross-border payment market continues to grow with the same increasing frequency as international commerce, migration, and economic trends. Currently, financial institutions, such as banks, have significant dominance in cross-border payments with a market share of 95 percent. Global remittance volume was $689 billion as at 2018, with trillions of dollars in global trade flows daily.
Outlook on Africa:
Estimated trade volume by African countries between 2015 and 2017 was $760 billion. The next largest financial flows to Africa is remittance, with over $80 billion received in 2019.
Current state of financial & commercial flows in Africa:
Let’s start by defining financial & commercial flow in the context of cross-border payments:
Commercial flow is the flow between a cross-border payment’s initiation and where the end-beneficiary is situated. For example; It’s a payment instruction from the Nigerian bank (initiated by a customer) to the receiving Chinese bank.
Financial flow represents the payment routes used for settling a transaction. In the example listed above; the financial flow for the payment between Nigeria and China might involve 3 financial flows:
Flow 1: Nigerian Bank to North American correspondent Bank;
Flow 2: North American Bank correspondent to Chinese correspondent bank;
Flow 3: Chinese correspondent bank to the receiving Chinese bank.
Over 70% of all cross-border financial flows from Africa are first routed to North America or Europe before getting to their final destination. In fact, only 20% of all intra-Africa cross-border payments are settled within Africa.
Despite the Asia-Pacific region being a top destination for commercial flows from Africa, and with China being Africa’s largest trade partner, only 5% of payment flows are directly routed to this region. US dollars is the dominant reserve currency for settling to this region. At the Macroeconomic and Financial Management Institute (MEFMI) conference in May 2018, as many as 14 African countries discussed the possibility of adopting the Chinese Yuan as part of a reserve currency management initiative to boost trade activities. This highlights the need for new solutions to enable frictionless infrastructure for enabling these flows.
Challenges with Existing Cross-Border Payment Systems
- Legacy global payment systems and correspondent banking networks are inefficient and complex; involving multiple banks across different locations. This makes it very expensive to settle transactions. Currently, it costs as much as 10% to settle these flows today, especially when African currencies are involved.
- On average, settling cross-border payments involving African currencies today take between 3 to 5 days. It’s even worse, when there are 2 African currencies involved. This is despite the growing demand for instant global payments settlement in the digital world we now live in.
- There is just not enough liquidity to exchange more volatile currencies like those of developing countries. This is why most of global trade is settled in USD and EUR. This limitation is a major barrier in building sustainable corridors especially in the frontier and emerging markets. In West Africa, banks in Angola, Nigeria, and DR Congo are still affected by foreign currency shortages — irrespective of these countries being major oil exporters from the continent. Despite this, financial institutions still need to pre-fund accounts in destination currencies in order to settle payments. This is a costly endeavour that ties up resources and exposes the institutions to further currency risk.
A proper infrastructure to support direct settlement between African currencies involved in the trade will be the key that unlocks trade at a massive scale in this region needs to be built. There have been different initiatives by major mobile money operators like MTN, Airtel, Orange and Money Transfer Operators in a bid to solve the interoperability issues in Africa.
Recent Trends With Digital Payments:
IBM has built a blockchain payment platform, using the Stellar protocol and stable coins to settle payments for financial institutions. The Libra Project is another initiative that is taking advantage of the blockchain to build a global payment currency.
In April, China’s central bank introduced the “digital yuan” in a pilot program across four cities, becoming the world’s first major economy to issue a national digital currency. China is likely to officially make the sovereign digital currency available to the public later this year, as per a news agency report which cited a research note by Citic Securities.
While fintech innovations with the likes of TransferWise, Revolut, Payoneer etc have been able to reduce the time and give access even to low-value remittances, it is still largely expensive. They are also unable to settle outbound payments from emerging markets due to the existing infrastructural problems.
How Fliqpay is building a better system:
Fliqpay is building cross-border settlement rails, where we tap into this liquidity through open APIs of the crypto exchanges, decentralised protocols, crypto payment gateways & wallet providers. Since we launched our beta 9 months ago, we have processed over $14million.
In solving the issues with cross-border payments, we have identified that over $150 billion worth of cryptocurrency (and stable coins) are traded daily all over the world. We’re using digital assets as a mechanism for secure and near instant settlement of cross-border payments, regardless of the location. With the network we’re building, we can now solve the interoperability issues with payment systems, even in corridors that were previously harder to establish.
Instant payment networks such as UPI in India, Fast in Singapore, NIP in Nigeria — or Mobile payments like Alipay or MPesa and more — have been able to make local payments more seamless. Fliqpay is building a network that can allow interoperability of these existing payment systems and more, using liquidity of digital assets to instantly process and settle payments within the networks. We are building our system to be “digital asset agnostic”, so that we fully tap into as much liquidity is available across all digital assets. In bypassing the correspondent banking networks for settling transactions, we’re able to significantly reduce the cost, and completely eliminate the need for financial institutions to pre-funded accounts in the settlement currencies.
With the network we’re building, financial institutions will now be able to seamlessly connect with their regular local payment channels, initiate transactions, while we use digital assets to instantly bridge the two currencies. This ensures payments are immediately sent and received in the local currency on both sides of a transaction. Because of our structure, we’re able to provide more transparency into each transaction we process, making it easier to audit the transactions in real-time and for compliance purposes.
Blockchain based payments is a game changer for cross-border payments and Fliqpay is leading the charge to build Africa’s leading cross-border payment network to connect Africa digitally to the rest of the world — be the first to know about it.