Cross-border payments in sub-Saharan Africa, (Kenya, and South Africa) have come to stay.
However, according to statistics from the World Bank, it is more expensive to send money to and from the sub-Saharan region compared to other regions of the world.
In Q1 of 2020, an average of 8.9% was spent to send money to the region, which is higher than the global average of 6.8%.
One of the reasons is because of the several challenges associated with cross-border payments. This article addresses what cross-border payment solutions are, the comparison between domestic transactions and cross-border payments, and some proposed cross-border payment solutions.
Cross-Border Payment Versus Domestic Transactions
Domestic transactions have made significant progress in the last three decades with the influence of digital technology and telecommunications. People can now access bank accounts on their phones, make transactions and buy goods and services via e-commerce platforms, all within a country.
However, with the several challenges involved in cross-border payments, the same progress is yet to be achieved with cross-border transactions. These challenges have made progress with moving money outside the borders of a country slow, expensive and inconvenient.
There are several innovative cross-border payment solutions still in their infancy stage. While some countries are already implementing these cross-border payments, others are yet to.
These cross-border payment solutions must be capable of addressing issues such as transparency, security issues, slow transactions, and high costs.
What are Cross-Border Payment Solutions?
Cross-border payment solutions are improved global international payments system that allows end users to have access to cross-border payment services that are as efficient and safe as domestic payments services.
Below are the proposed cross-border payment solutions countries are working on implementing:
1. Payment Connection Systems:
This cross-border payment solution system works by connecting fast payment systems of different countries. This will allow costs for cross-border payments reduce and the transaction more efficient.
However, to achieve this, the payment connection between countries must be tailor-made.
2. Multilateral Cross-Border Payment Platform:
This involves combining new forms of Central Bank Digital Currency (CBDC) - money that exists in digital forms with new technologies.
CBDCs can help to reduce cross-border transaction costs. It can also decrease the complexity around cross-border payments, and reduce transaction chains.
More importantly, CBDCs will provide transparency, and convenience, and improve financial security because central bank money will be available for settlements of cross-border transactions.
Although this may take a longer time to fully develop, it can cause significant achievement.
Read also: What is Central Bank Digital Currency.
3. Foreign Currency Transaction:
Functionalities such as centralized foreign currency market native can be added to multilateral cross-border payment platforms to reduce the high cost of exchanging currencies.
Also, financial contracts such as foreign exchange auctions can be automated using ‘smart contracts”.
These systems can streamline compliance evaluations while maintaining the data sovereignty of nations. They can build trust and foster competition.
Compliance with Cross-Border Payments
The high rate of cross-border transactions especially from Africa to the West has many businesses using traditional (fiat) and nontraditional (crypto) means to facilitate cross-border payments between the two countries.
Financial institutions in Africa are left with traditional systems and correspondence models to offer service to their customers with few banks embracing digital cross-border solutions.
Given their compliance requirements, cross-border payments are complex. Moreover, new systems such as payment connection systems, multilateral cross-border payments platforms, and foreign currency transactions, make it more complex, at least for the early period of their implementation.
Banks can, however, stay compliant with Know Your Transaction solutions. These digital solutions for cross-border payments will help financial institutions stay compliant with FAFT requirements.
Read Also: Transaction Monitoring in Banks
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