What will African transaction banking look like in the future?

In June 2018, SWIFT published a white paper exploring the trends in transaction banking in Africa. The paper reveals that cross-border banking has evolved over the last five years, with intra-Africa payments and clearing increasing and the use of regional currencies rising.

The paper looks at what is driving change in African transaction banking and also provides six scenarios that could impact banking in Africa in the years to come.

1. Fewer but bigger African players

Over the last five years the number and strength of pan-African banks operating across the continent has increased and this trend looks set to continue. This is because African banks are today better positioned in terms of their balance sheets, local market understanding and risk appetite to capture growth across the continent. They are therefore attractive partners for foreign banks interested in doing cross-border business with Africa.

Additionally, banks are refocusing their business and risk management strategies. Global transaction banks are reviewing and rationalising their correspondent banking relationships in Africa as a result of ever increasing compliance obligations, and pan-African banks are taking the opportunity to expand.

2. A slight shift towards regional currency denomination

SWIFT data shows that the share of the US dollar in cross-border payments from Africa has fallen. However, it still accounts for 45% of all payments leaving the continent. For inter-continental transactions and for transactions between less well-known trading partners, it is unlikely that the hegemony of the dollar will be challenged soon.

However, SWIFT data also suggests that for a substantial and growing proportion of intra-Africa trade, we could expect increased use of regional currencies. The further development of regional payments systems denominated in local currencies will support this shift. Equally, African central bankers will continue to promote the use of their local currencies.

Simultaneously, across the continent, access to the US dollar is becoming increasingly difficult for smaller players, principally because of tighter anti-money laundering and Know Your Customer requirements. This could further drive the use of regional currencies.

3. Interlinkage of regional payments systems

While regional payment systems are being successfully deployed across the continent, several regions are looking at how these could be interconnected to allow payments to flow from one system to another and provide pan-regional settlement capability. One example is the ‘Tripartite Free Trade Area’ between the East African Community, the Southern African Development Community and the Common Market for Eastern and Southern Africa.

4. Increased intra-African trade as a result of regional economic transformation

Commodity-based African economies remain vulnerable to external shocks and fluctuations in the price of oil. As a result, African policy makers and international financial institutions such as the African Development Bank are focused on economic diversification and the capability to add value to raw commodities through processing and manufacturing, as a way to increase economic resilience.

Diversification is supporting the growth of intra-Africa trade, where manufactured goods are beginning to dominate regional trade, accounting for 60% of total regional trade. In turn, higher levels of regional trade are helping to boost cross-border banking across Africa.

5. The emergence of an African multi-currency clearing centre

As growth and greater integration generate more transaction volumes, the economics of setting up multicurrency clearing infrastructures that include the euro and dollar alongside regional currencies are becoming more persuasive, and strong and reputable international financial centres are emerging. In Africa, SIRESS is moving towards this solution with the planned introduction of the US dollar in late 2018. This is expected to improve the settlement of transactions within the region and bring more transactions onto SIRESS that were previously settled through correspondent banking arrangements using US dollar clearers.

6. Digital transformation

Financial technology (FinTech) is driving the digital transformation of financial services across Africa. In the retail space, many markets have embraced mobile payments, notably East Africa. Banks are also rolling out new products and services across digital channels to grow their customer-base. They are partnering with telcos and FinTechs to deliver new and cheaper financial services to their customers. Technology is helping frictionless payments and borderless financial services to become a reality.

Historically, innovations started in wholesale markets and then found their way into retail markets. Now, innovation increasingly starts in retail markets and sets the standard elsewhere. With the pace of change quicker than ever and the borders between countries and market segments becoming increasingly blurred, it will be interesting to observe how digitisation and technological innovation will impact cross-border and high-value payments moving forward.

Macro-economic and political forces will continue to shape Africa’s banking sector as they have over the last five years. Digitisation and technological innovation will also play an increasingly important role. To be a successful pan-African player will require careful monitoring of these forces so that business can be positioned to benefit from potential shifts. Read the full paper here.