Cross-border payment standardisation
In June 2018, SWIFT published a white paper mapping commercial payment flows against financial flows in Africa. It found an increase in the use of African currencies for cross-border payments, going from 16.7% in the financial year of 2013, to 19.9% in the financial year of 2017. Intra-African clearing of payments also increased in this time, rising from 10.2% to 12.3%. This indicates that an increasing number of payments are being routed through Africa instead of via a clearing bank outside of the continent.
Crown Agents Bank is a wholesale provider focusing on governments, supra-nationals, financial institutions and NGOs in developing markets. Its Chief Commercial Officer, Steven Marshall, has a unique position from which to observe the flows. From here, he notes the convenience of the West African Bank and the Central African Bank covering 14 countries in Africa between them, as it is beneficial to have a single currency in each of the two regions. However, he also mentions that there is yet to be any real streamlining of the settlement systems, with banks using both real-time gross settlement (RTGS) and automated clearing houses (ACH), meaning there are significant differences in settlement times across those regions.
“It’s not just in West Africa, but across every sub-region in Africa, there is invariably collaboration – whether it’s between central banks or commercial banks – to try and create a frictionless transfer of funds across border,” Marshall says. “Right now, there’s a lot of excellent dialogue, obviously we’re yet to see that transform into any clear outcomes yet, but it feels like it’s building momentum and it’s coming at pace.”
US dollar dominance
It’s ironic, says Marshall, that countries tend to trade the most with their neighbours, but most African countries do a lot of trade with China, the Middle East, Europe, the UK and the US, but comparatively little trade is cross-border with other African countries. This is largely due to the global reliance on the US dollar for cross-border trading.
According to Marshall, an unintended consequence of the de-risking phenomena in recent years – know your customer (KYC) and anti-money laundering (AML) regulations, for example – is that it has been a struggle for certain commercial banks around the world to access USD correspondent banking. Cross-border trades therefore become easier if they are done in domestic currencies instead.
Moving away from the US dollar is not easy though, says Marshall. A key restriction is finding banks that are able to buy and sell local currencies in every market. A key way around this is to have some banks be a lot easier and freer with their legislation. “Central bank governors recognise the important role played by the regulators in every country, and the importance of simplifying the financial market rules and regulations in each of the countries in order for it to stimulate cross-border trade,” he adds.
Challenges in the region
For Crown Agents Bank, which is almost exclusively an institutional bank, the largest challenge comes from the need to freely move cash and investments around. Some companies accrue relatively large sums of the domestic local currency and then struggle to find local banks that can buy that local currency from them in exchange for US dollars, euros, or sterling. This isn’t always an issue however, as most institutions are rarely looking to take money out of the country or region, as they have programmes and projects on the ground to fund.
From previous experience with corporate clients, Marshall found that the largest challenges came from inconsistencies in the regulation around cash and liquidity management. “Even in markets where it appeared possible to create liquidity management structures, when you actually tried to implement such a solution, the central banks would be resistant to such structures being put in place,” he notes.
One of the greatest challenges today is the cost of sending transactions. “Whether it’s salary runs, vendor payments, your humanitarian beneficiaries, pension payments, it doesn't matter. You've got a cost to service that payment and you've got a time restriction on when you want it to land in the beneficiary's account, and the more challenging the market, invariably the more difficult that becomes,” Marshall says. It’s therefore imperative that banks look to reduce the cost, be that through technology or building strong banking relationships. For banks, “we still think that can be a very profitable business, but it’s only profitable if you find a technology solution to the age-old problem of settling transactions in some of the more difficult markets,” Marshall concludes.