Regional Focus

Payments evolution leads steady transformation of African treasury

Published: Sep 2022

Alternative payments are transforming corporate treasury in Africa. Save the Children explains how new technology is allowing the organisation to change how it distributes awards on the ground in a snapshot of African treasury’s evolution.

Aerial view of Cape Town in South Africa

Save the Children, the global humanitarian organisation that works to improve the lives of children, has dispersed its awards via mobile wallets in several African countries for a while. Now, rather than rely on specialist intermediaries, the charity is looking to link its own TMS and accounting and central payments system with an African Mobile Money Gateway. “Alternative payments like mobile wallets are increasingly important when we disperse cash or voucher awards in remote areas,” says Edward Collis, Treasurer, Save the Children International who oversees a centralised treasury structure based out of London, dispersing around US$1.4bn in donor funds to 60-odd countries including 27 in Africa, home to some of the charity’s most extensive and oldest operations.

It is still early days and Save the Children is in talks with several banks and mobile wallet intermediaries on how to best link mobile wallets to its central payments system. Nevertheless, Collis believes this is the type of progress that encapsulates treasury innovation in Africa. “We are seeing a lot of innovation around the meshing of banking partners, mobile wallets and cash agent solutions. Things are moving fast,” he says.

As progress gathers pace, some of the key risks that had made Collis and the team wary are retreating. Since Mobile Money Operators (MMOs) are telecoms providers and not regulated like banks, the absence of capital protection or screening of payments processes and beneficiaries is a source of concern. But now banks, long on the back foot, are beginning to also offer mobile accounts evident in the proliferation of so-called intermediary or light accounts with mobile wallets. “It is quite attractive because we can now overlay bank regulatory comfort on top of the mobile wallet landscape,” he says. “The treasury systems-side is catching up as banks move fast. Africa is leading on mobile wallet technology.”

Save the Children’s progress navigating Africa’s fragmented and complex banking infrastructure using digital payments to distribute awards on the ground is just one example of the changes underway in African treasury. Other important trends see African corporates re-designing route-to-consumer strategies in response to the growth in e-commerce, also triggering an overhaul in their payments processes. The use of APIs and open banking is gathering pace in countries like South Africa and Tanzania. Requests to digitise receivables is one of the most frequent RFPs while companies seeking to diversify their supply chains in the wake of the pandemic is triggering an uptick in demand for supply chain finance solutions.

Regulation

One of the main reasons for Africa’s highly fragmented payments market is the absence of a dominant payment method or provider. Since different users and countries favour varying payment methods, corporates face steep costs receiving payments. But change is afoot. The Pan-African Payment and Settlement System (PAPSS) is working on the infrastructure required to facilitate the payment, clearance, and settlement for intra-African trade payments. “New payments infrastructure is going down that will include interoperability between different wallet providers,” says Esther Chibesa, Managing Director, Treasury & Trade Solutions Head SSA at Citi where clients include multinationals, some of Africa’s biggest corporate names and government entities.

Elsewhere, demand from companies to work with payment service providers to facilitate cross-border payments has seen new competition in the cross-border payments space visible in Paypal and Network International buying up local players to offer payment solutions across the continent. “We are seeing international operators access the African market,” says Viplav Rathore, MD, Head of Cash Products AME and MENA at Standard Chartered where he works across the bank’s Africa operations, on the ground in 15 countries.

Innovation is also coming to in-country payments. In another pilot project, Nigeria and Ghana are experimenting with CBDCs, employing FinTech expertise and using blockchain enabled rails to ease in-country payments. “Treasury teams in Africa struggle with visibility and cash mobility, but CBDCs actually offer hope, replacing in country payments with tockenised payments,” says Rathore.

Regionalisation

Payments innovation and digitisation is also aligning with the emergence of African trading blocs. For decades, intra-African trade has been hampered (amongst other things) by tariffs and bureaucracy at land boarders. One Treasury Today interviewee estimates 43 land checkpoints exist between Nigeria and its West African neighbour Ivory Coast. Trade is further complicated because dollars and other foreign currencies are often in short supply. This makes intra-African payments in dollars challenging while local currencies are regulated, hampering conversion.

Under the umbrella of an array of emerging regional blocs like WAMU [West African Monetary Union] or CEMAC [Economic and Monetary Community of Central Africa] new currency and clearing zones are beginning to emerge. Head south and the number of companies in Southern Africa’s free trade zone SADC using the South African Rand continues to grow. These currency unions enable treasurers to set up a single payment hub, from where they can conduct borderless banking – and create a much more efficient cash management structure. Corporates that once had liquidity spread across multiple banks are now consolidating that liquidity to a single payment account limiting counter-party exposure.

Ghana and Nigeria have forged ahead, setting up a pilot scheme whereby companies trading between the two countries use their own currencies to settle balances, backstopped by their central banks holding FX reserves. “It’s an exciting trend that will support intra-Africa trade,” says Rathore. The combination of free trade and frictionless payments will have profound implications for MNC supply chains, he predicts. “Treasury teams are beginning to adjust to the implications for frictionless payments that are also free from customs and checkpoints.”

E-commerce

In response to the growth in e-commerce and payments evolution, African corporates are increasingly thinking about how to best position for customers paying differently, re-designing their digital collections piece. It’s a complex new marketplace with multiple providers, says Chibesa. But it’s also triggering a new conversation with clients. “Corporate customers are requesting support to make SWIFT payments from their ERPs; talking about API sandboxes and discussing new platform configuration. We’d have never heard these types of requests ten years ago,” she says.

Some of the funding chains are getting thinner and stretched and in some places correspondent bank relationships are getting thin on the ground.

Edward Collis, Treasurer, Save the Children International

Visibility

Technology is also transforming cash visibility in Africa. Save the Children International runs around 500 accounts globally. Three years ago, about 35% of these accounts were visible, equating to about half the organisation’s total cash. Following an overhaul using SWIFT (the charity is a SWIFT corporate member) and a specialist payment and reporting partner, the treasury team now has visibility of around 98% of its cash and 86% of its bank accounts (with a target to achieve 90% visibility by year end).

“We get bank statement reporting every day from banks across Africa who send MT940 over SWIFT to our TMS which we then upload into our single ERP. It’s really helped with the visibility piece,” says Collis. In Yemen, Save the Children was the first organisation to obtain MT940 reporting from some of its banking partners and lessons from Yemen were then applied to Africa.

Improved cash visibility is also feeding into the payments piece, enabling treasury to better support local finance teams with improved bank reconciliations. Citi’s Chibesa describes burgeoning corporate demand to digitise receivables and receivable processing in line with the move away from cash and demand for visibility. Pre-pandemic, treasury processes relied on a combination of manual inputs and digital and non-digital formats that didn’t support real-time information and incurred operational costs, she says.

Save the Children is in the process of introducing local ACH payment capability executed via its central payment TMS platform, continues Collis. In the past, the local, in-country accounts payable team would generate a payments file and upload it locally into their electronic banking platform. Now it is routed through a secure, central architecture sitting between the organisation’s ERP and TMS payments system in a journey that goes via SWIFT to the NGO’s main banking partners in London. From there it is routed over the main banking partners’ networks to local branches in Africa and executed as a local payment. “We are about a third of the way through this process,” says Collis. “We are trying to get as much control and visibility as we can over our payments and funding. It is all about trying to minimise our balances and reduce the risk of local currency balances.”

Macro picture

Africa’s treasury landscape is being buffeted by the macro environment. Treasury Today interviewees report a spike in demand for physical cash pooling to enhance cash visibility and reduce the cost of borrowing as interest rates rise across the continent. Elsewhere, corporates are increasingly focused on the cost of capital and more efficient ways to raise working capital in the short term. It is leading to demand for strategies that lever payables, says Chibesa. “We see demand for strategies to extend days payable in a low-cost strategy that passes the cost of borrowing down the value chain,” she says, noting an uptick in demand for hedging strategies, notably from Africa’s own central banks. Elsewhere she reports tightening capital controls, especially in Central Africa, have sparked treasury fears of trapped cash. “Corporates have to adjust from a governance objective built for this reality,” she says.

Meanwhile enduring treasury challenges like access to liquidity and FX volatility are front of mind for corporates. Companies rely on FX reserves to import goods into Africa, yet hard currency reserves are low: dollars from traditional sources like Kenya’s tourist industry have been hard hit by COVID-19 while countries and corporates are paying more for imports because of rising prices. “Hard currency availability in East Africa, especially Kenya, is soft,” says Standard Chartered’s Rathore, adding that corporates are finding it difficult to take hard currency out of Nigeria.

Unlike a typical corporate which seeks to take cash out of its African subsidiaries, Save the Children’s flows are the other way – putting money into Africa. The charity converts its income in donor G20 currencies (typically dollars, krona, euros or pounds) into local currencies to spend on the ground. Almost all the organisation’s FX management is done centrally with a clear focus on tightly controlling local in-country cash balances to minimise risks to donor funds (for example, FX devaluation risk can quickly erode the organisation’s spending power on the ground).

This tight local country liquidity control is facilitated by a fortnightly funding cycle, resulting in Save the Children holding little cash in country compared to most corporates, explains Collis. “In some rare circumstances, we might hold cash for a couple of months which exposes us to the risk of devaluation, but trapped cash is not really an issue as we are constantly spending on our humanitarian programming locally,” he says.

Still, inflation adds another layer of complexity, reducing the purchasing power afforded by favourable exchange rates. “We spend a lot of time working out how to get better visibility and reporting to our donors and stakeholders related to FX devaluations and issues around the convertibility of FX,” says Collis.

Correspondent banks

Other stubbornly familiar challenges continue to blight Africa’s treasury landscape, particularly for international NGOs working in higher risk locations. Correspondent banks are increasingly thin on the ground, says Collis. Although paying banks that instruct local banks in, say, Somalia to make a payment remain stalwart partners, correspondent banks in the chain that only receive a small fee but are subject to costly and cumbersome compliance from the paying bank, are becoming scarce.

“For higher risk locations, it’s easy for banks to say no,” says Collis. “Some of the funding chains are getting thinner and stretched and in some places correspondent bank relationships are getting thin on the ground. We haven’t got to the point where we can’t fund our higher risk locations, but it is getting worse and trending this way,” he says.

As technology becomes more pervasive across African treasury, so cybersecurity is pushing centre stage. Interviewees report a spike in demand for treasury protocol for when an attack happens.

For corporates with treasury operations on the ground, Nairobi appears to have the edge over Johannesburg as Africa’s leading treasury centre. The Kenyan capital benefits from a young, tech savvy workplace, a favourable regulatory system and easy access to Europe, concludes Chibesa. For some MNCs, rather than setting up locally, running African operations out of Dubai increasingly ticks the box in a hybrid model or shared service centre overseeing and supporting African payments flows, tracking payments and collections. Wherever the location, African treasury is united by a common thread: the need to update regional strategies for a fast-evolving market on the ground.

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