The challenges faced by the regulatory environment in Africa, particularly in cross-border payments, are significant. Despite the growth of digital financial solutions on the continent, businesses and payment service providers encounter obstacles due to the fragmented regulatory landscape.
One major issue is the lack of harmonization among African countries in terms of compliance requirements for cross-border payments. This lack of consistency complicates the creation of unified payment solutions as providers must navigate varying standards across different regions, increasing compliance costs.
Additionally, the absence of a clear regulatory framework for stablecoins and digital assets poses another barrier in Africa. Regulatory clarity is crucial for creating a transparent ecosystem, and efforts towards this are visible in certain regions like South Africa.
Moreover, the imposition of capital controls and restrictive foreign exchange policies in many African countries hinders seamless cross-border fund transfers, especially in major currencies like the US dollar or Euro. These restrictions create challenges for businesses engaging in international transactions or cross-border investments, such as Nigeria’s historical FX controls affecting smooth international transactions.
Influencing policymaking
Stakeholders have the opportunity to influence policy changes to streamline cross-border payments through various means:
Advocating for harmonized regulations: Collaboration with regional economic blocs can push for standardized payment regulations similar to SEPA in Europe, simplifying cross-border transactions.
Public-private partnerships for improved financial infrastructure: Initiatives like Nigeria’s NIP platform showcase the benefits of PPPs in developing real-time payment systems and policies that support cross-border trade.
Engagement with central banks to ease currency controls: Advocacy for policies that relax currency exchange restrictions can improve liquidity and facilitate cross-border transactions, similar to initiatives like Project Ubin in Singapore.
Building innovative products: Creation of products that resonate with users can lead to policy changes, as seen with Uber’s influence on regulations in San Francisco.
Challenges of multiple regulatory frameworks
Diverse regulatory requirements across jurisdictions demand significant resources, increasing operational complexity and compliance costs. Non-compliance can result in severe penalties, as evidenced by Nigeria’s fine imposed on Meta for violating local laws.
Another challenge lies in the delays caused by obtaining multiple licenses for similar activities in different regions, hindering market entry and growth opportunities for companies. Bureaucratic inefficiencies and unclear timelines further complicate licensing processes in emerging markets like Africa.
Data privacy laws and cross-border payment solutions
The rise of compliance needs in Fintechs in Nigeria reflects the demand for robust compliance mechanisms due to regulations like the Nigeria Data Protection Act. Compliance across regions demands adaptable systems without compromising efficiency.
Some jurisdictions require data residency, increasing operational costs for companies to comply. Efforts to harmonize privacy laws could reduce compliance burdens and promote innovation in cross-border payments.
Managing FX risks in cross-border transactions
Fast settlements: Swift settlements, facilitated by stablecoins, can limit FX risk exposure by minimizing time fluctuations.
Hedging strategies: Instruments like forward contracts and options help companies hedge against currency fluctuations, ensuring fixed rates for future transactions.
Real-time FX monitoring: Technology like APIs can monitor currency movements in real-time, aiding businesses in making informed decisions to mitigate exchange rate risks.
Use derivatives: Leveraging derivatives, like perpetuals, can help manage FX exposure, though this strategy is not widely practiced in stablecoins yet.
Multi-currency pricing: Offering customers the choice to pay in their local currency enhances user experience and sales, while managing internal currency conversions strategically can optimize costs.
You can access the full report here.
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Robert Sargsian is the co-founder and CEO of Due, a London-based fintech startup established in 2022. Omotesele Esekhaigbe is the Compliance and Risk Manager (MLRO) at Zone with over 8 years of experience in regulatory compliance and fintech advisory.