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 — known as remittances — to sub-Saharan Africa than any other region in the world, according to the World Bank.
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.
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.
Worth $54 billion to sub-Saharan Africa in 2023, 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 than its key exports.
And estimates are generally assumed to be lower than the real figure due to the prevalence of unrecorded payments made through informal networks.
“Not only do (remittances to low-and-middle income countries) exceed foreign direct investment and official development assistance (combined), but it also somehow remains constant,” said Christian Kingombe, managing partner of “impact investment” advisor 4IP group, and formerly with the African Development Bank. “So it is really a very important source of development,” he added.
The problem with cash
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, according to the World Bank, compared to 5.53% in South Asia. How can fintechs bring that number down?
The first challenge is to move customers away from making cash payments.
A survey by Visa found that 12% of global consumers still send remittances by mail as cash, checks or money orders.
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 requires a large physical infrastructure, including booths, tellers, and supplies of cash.
While the average cost of sending money to sub-Saharan Africa is the highest in the world, the cost of digital remittances to the region is less 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, according to the World Bank.
Even when users have access to mobile apps, it’s not always easy to persuade them to move over from the tried and trusted cash model.
“Imagine a world in which you’ve grown up in a cash-to-cash ecosystem — it’s a sort of leap of faith to leave your money in this esoteric, intangible thing,” explained Jury. “(But) if you get somebody to use it, they educate themselves on the benefit, and they can get that ‘aha!’ moment. That’s the most powerful conversion tool.”
It’s 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. “It’s really like 35 (year olds) and below where there’s a huge focus on the digital side of things,” he said. “People in their fifties and sixties, they’re used to the person at the shop who they know, and they just continue to go there.”
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.
Bypassing the middlemen
Luring customers over from cash is one piece of the puzzle. But digital payments have their own costs.
Historically, sending money to Africa via a remittance company has been a complex process involving many different parties. “It’s so bloody difficult to move money around,” said Jury.
The middlemen — mainly the third parties used to move money between banks, and the foreign exchange traders who find and negotiate the best rates — all want a cut, and they can drive up costs and cause delays.
In recent years, fintechs — like NALA, Flutterwave, LemFi, Chipper Cash, Leatherback, and many more — have emerged with a model of cutting out the middlemen and enabling instant payments.
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.
“We’re cutting out two steps, in some cases it’s like five or six steps,” explained Eddy.
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.
Sending money between African countries can be especially costly; in Q4 of 2023, fees were an average of 33% for remittances of $200 from Tanzania to neighboring Kenya, Uganda, and Rwanda.
“We’ve got 50 different payment use case licenses in 15 different territories, and that’s taken nearly two decades to build up,” said Jury. “Very 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’s license. All of that variability increases the costs.”
Although still in its infancy, the Pan African Payment Settlement System (PAPSS) is designed to unify regulation across different African countries.
“I love that sort of stuff because it creates harmony,” said Jury. “Whether it’s centrally dictated, whether it’s ourselves creatively integrating (with other fintechs), we’re constantly on the lookout for those things.”
Regulation
The UN has targeted a global 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. “If they cap those fees for those types of transactions, we could be processing at 1% (total fees),” he said.
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.
“Governments (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,” he said.
For Jury, the key to success is to tailor the product to the user’s needs.
“If you come at this with a Silicon Valley mind(set) where you’re going to take a small proposition, throw lots of money (at it) and scale it up, you come unstuck very quickly,” Jury said.
“But if you can take a global platform or infrastructure and ensure you appreciate the local idiosyncrasies and invent something that’s relevant to a customer, there’s a massive, massive tidal wave of opportunity coming.”