This Pan-African Payment infrastructure Could Unlock Billions of Intra-Continental Trade
Seamless intra-Africa trade is the next phase in the continent’s extraordinary growth trajectory. With billions of dollars of trade currently hampered by inefficiently connected financial services, this newly launched innovation is poised for great things.
African money is on the move. It’s part of a continent-wide shift to remove the barriers between its markets and help trade flow more easily. Intra-regional trade has enormous potential, but historically, a fragmented financial system spread across multiple countries led to many missing out – or paying more than they needed to do business with their neighbors.
Developed and supported by the region’s leading institutions; the African Export-Import Bank (Afreximbank, The African Union, and the African Continental Free Trade Area (AfCFTA), the Pan African Payment & Settlement System (PAPSS) is a new Financial Markets Infrastructure estimated to save the continent more than USD $5bn in payment transaction costs per annum.
Previously, businesses suffered what was essentially a penalty for intra-African trading.
This figure is a culmination of tax, fees, and third-currency costs. Previously, businesses suffered what was essentially a penalty for intra-African trading. With the value of local currencies always in flux, the difference between two different currencies is most often settled in a third hard currency, usually the dollar. With PAPSS, users can pay and receive transactions in their home currency, which means the reliance on dollars drastically lowers.
Following a successful pilot in the 6 countries of the West African Monetary Zone (WAMZ), PAPSS is now launched to a broader customer base in late 2021. Interestingly, not only will this platform optimize existing trade, but it will also help to formalize informal trade on the continent - estimated to be worth $40bn dollars.
How PAPSS works
PAPSS exists to make sure payments can happen instantly across African borders – in local currency. This cuts down on the costs of using a third currency, usually US dollars, and the time it takes to process transactions.
There are three core processes to make sure this happens quickly: Instant payments, pre-funding, and net settlement.
Before
After
before
It cost more and took days
It cost more and took days for businesses and individuals to send or receive payments. This is because local currencies are converted to hard currencies internationally, which adds days to the transaction times
after
Real-time payments
The whole process happens in as little as 120 seconds
before
Compliance takes time
When the payment returns to Africa, legal and compliance checks add even more time onto it
after
PAPSS immediately runs essential checks and validation.
If it passes, the payment instruction arrives at the beneficiary’s bank – clearing in local currency
before
Exponential expenses
Meanwhile, the fees begin growing with every move the money makes
after
There are only two parties in the transaction
There are only two parties in the transaction, the sending and receiving institution thereby considerably reducing the cost of the transaction.
before
Cross-border complication
Financial institutions need to source hard currencies
after
No one loses out
Without the need for third-party currency exchanged abroad, no one loses out, and intra-African trade becomes significantly easier
before
Exorbitant rates
Exorbitant rates for the exchange of local to hard currency.
after
Local currency
Pre-funding is done in local currency.
before
Finding funds
Need to source for sufficient liquidity for settlement
after
Optimizing settlements
PAPSS conducts “multicurrency net settlement” across multiple participating central banks. Rather than settling the “deficit” between a pair of countries, PAPSS calculates the net deficit/surplus in payments across all the participating countries which effectively reduces the amount of hard currency required to balance their individual accounts.
Payments without borders
All of this is possible thanks to advances in collaboration. Technology is being leveraged to enable a new level of coordination between the region’s central banks, with Afreximbank supporting the multilateral net settlement through a shared infrastructure.
Instant and binding credit to accounts is backed up by a transparent messaging system, which uses global standards to update all stakeholders. The financial data generated by the transaction is stored and presented in a useful format, increasing efficiency, and improving reporting, and meeting regulatory requirements.
Crucially, PAPSS is not here to replace or even compete with existing financial services. It’s a complementary service that can expand their potential customer based. Ultimately, the power of PAPSS is in its ability to connect and collaborate with every financial institution in Africa.
As much as the world is a more connected place, essential financial services have lagged for too long. With the introduction of PAPSS, it’s a sign that modern Africa is moving into a new phase – fueled by new financial infrastructure and made possible through collaboration.
Learn more by visiting https://papss.com
Afreximbank is powering trade across Africa and beyond.
