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Africa is a continent of 54 countries with cultural diversity across different countries and also within single countries. Africa has a young, fast-growing and urbanised population. The rapid adoption of technology makes the African continent a fertile ground for innovation. GSMA forecasts that there will be 634 million unique mobile subscribers across *Sub-Saharan Africa by 2025, equivalent to 52 percent of the population. US tech giants like Microsoft, Uber, Airbnb, Facebook, Google etc having experienced high growth in their local markets, are expanding, and have their sights set on emerging markets. African continent presents a huge market for these businesses to increase their market share. This article explores payment strategies foreign companies can adopt as they plan their expansion drive to Africa.
Regulatory environment
Before the recent Europe Payment Service Directive 2(PSD2) which has Strong Customer Authentication (SCA) as a regulatory requirement, Nigerian regulators had enforced 2 factored/3D payment authentication for all web transactions from an issuance perspective in as early as 2010. Any exception would require a letter of non-objection from the regulator. Despite the friction, this creates in the payment experience and how it could affect transaction conversion rate, businesses have adapted to it. A new policy framework in June 2020 requests card issuers not to enable card for web transactions unless requested by the customer. Ghana, as in most African countries, also enforce 2 factored authentications.
The regulation also influences the commercial and operational environment. In Nigeria, the Central Bank (CBN) fixes the pricing for Web and POS transactions and bank charges. The operational requirements might slow customer acquisition by insisting potential customers provide documentation difficult to acquire. To avoid innovation assumptions, it’s always better to err on the side of requesting a letter of non-objection from the regulator than being flagged and sanctioned for violating the regulation. Without this realisation, some Western or Eastern innovation might struggle in Africa.
Acquisitions and Joint Venture Agreement
Company registration requirements, capitalisation requirement for payment companies and deposit requirement to regulators as a pre-requisite for acquiring an operating license can be a barrier for foreign payment companies to deploying payment services solutions in Nigeria and other African countries. A foreign payment company can gain access to local markets by either seeking collaboration with a local player through joint venture agreement or acquisition. This provides an opportunity to test their product/services and gauge receptiveness before making a huge financial commitment. It also forestalls the long timeline required for registration and licensing.
In 2018, Opay, owned by a Norwegian internet company Opera acquired a controlling stake in PayCom, a fintech company founded by Telnet Nigeria to operate in Nigeria.
Providing for Domestic Card Acceptance
Coming from the western world, you think there are Visa, MasterCard, Amex etc. As you land in Africa, it would introduce you to Verve card. Yes, you would find western card brands, but it is essential to provide also for domestic card acceptance. Verve, a Nigerian card brand, is Africa’s first home-grown EMV payment card scheme. It has seen a great uptake in Nigeria, Kenya, Uganda, Ghana, Sierra Leone, Gambia, Zambia, Cameroon amongst other African countries. Verve is a pan-African payment scheme with over 38 million payment tokens accepted in over 21 African countries.
Africa has a new domestic card, Meeza. The Central Bank of Egypt conceived Meeza on May 1, 2019, as part of the government’s efforts to drive financial inclusion and transition to a cashless society. Most Egyptian banks issue Meeza cards. Meeza prepaid cards allow customers to withdraw cash from Automated Teller Machines (ATM), to conduct Point of Sale (POS) and e-commerce transactions in Egypt. The Central Bank of Egypt targets 20 million “Meeza” cards within 3 years.
Sometimes providing for domestic card acceptance might require making certain adjustments to fit the nuances of the cards, like providing for your application to accept extra card numbers.
Strategic Partnership Between local and foreign PSPs
Global businesses are fast penetrating the market in Africa. Some examples include Uber, Netflix, Airbnb, Bolt, Facebook, Google, Kikuu (Ecommerce Asia), Booking.com, etc. These businesses already have payment service providers (PSPs) in their western or eastern locality. These PSPs might have led their expansion from North America to Europe, Asia to America, or vice versa. However, to succeed in Africa, they need to partner with local/domestic PSPs to facilitate collection for their global merchants. How so? For card payment, the partnership would result in processing transactions locally, reducing the cross-border card network and interchange fees. Processing transactions locally can increase payment success rate by eliminating cross-border failures. This partnership also offers alternative payment methods, which might be more popular than card payments in Africa.
Local collection is cheaper but poses a fresh problem. Charge currency differs from settlement currency. Collections made in local currency and payments charged locally would require a foreign exchange conversion to settle collected funds in foreign currency. This exposes the foreign company to currency or exchange rate risk. Currency risk, or exchange rate risk, refers to the exposure faced by companies that operate across different countries, regarding unpredictable gains or losses because of changes in the value of one currency in relation to another currency. Currency devaluation is common in Africa. As a commodity trading continent, economic slowdown due to reduced demands and dropping commodity prices adversely affect the African economy and could trigger currency devaluation.
Currency devaluation can affect the service pricing of foreign businesses. For example, Multichoice Nigeria (DSTV) purchases broadcast rights in foreign currency to resell to its subscribers in Naira. Naira devaluation (Parallel market price for USD moved from N360 -$1 in March to N468- $1 as at July 2020. Although Central Bank of Nigeria devalued the currency from N360 -$1 in July to N381- $1. Access to funds at CBN rate is limited to import items approved by CBN) means that Multichoice would require more Naira to get sufficient USD/EURO/GBP to renew its premiership and UEFA Champions League broadcast rights. However, the National Broadcast Commission in Nigeria (NBC) has suspended Multi choice’s implementation of a new tariff. Also, regulation makes funds repatriation post currency devaluation very complex to manage FX scarcity. FX transfers are also popular for enormous transaction costs. I envisage Netflix Nigeria running into similar problems as it now charges its subscription fee in Naira.
These developments could make Dynamic Currency Conversion (DCC) a better option for foreign PSPs processing card collections for foreign merchants in Africa. The acquirer passes the charge on a local issued card (in local currency) in the billing currency (foreign currency). Here, DCC service would enable a Cardholder –making a transaction, not in her billing currency – choose whether she should complete the transaction in either the local currency or the billing currency. Also, the foreign company could present the charge in foreign currency. They call this Presentment currency. A presentment currency is the currency you show on your website or mobile app, and the currency that your customer is charged in. Because of the volatility of FX, Banks does not have to abide by the exchange rate used by the payment gateway or merchants. While the payment gateway or merchants might use the CBN exchange rate to appear competitive, the banks usually pass the charge at a parallel market rate. In 2016, when Uber started operations in Nigeria, it presented the cost in Naira but charged users in USD. This generated enough controversy to get Uber to partner with a local acquirer who started charging in local currency.
Cash payment and the fragmented payment system.
The payment ecosystem in Africa is fragmented compared to that of its European or North American counterparts where card related payments are predominant. In Africa, there are over 277 mobile wallets, over 500 banks, about 40 currencies and several cards networks. Yet cash payment dominates other payment methods because of the huge informal sector and low banks penetration. Merchants prefer cash because it provides instantaneity of value. For the payers, there are no hidden fees and no requirement for digital literacy or internet access.
In the past, payment integration in Africa could be as complex as cultural integration, but FinTechs are building the bridges that connect every business and persons irrespective of geographical locations, languages, currencies and payment methods. Foreign companies looking to play in Africa must have a payment strategy that encompasses all available payment methods without the financial burden of integrating all the payment methods in each country of operation.
Adoption of Mobile Money for Payment Collection
Businesses seeking to succeed in Africa have to adopt mobile money as part of their payment strategy. Mobile money in Africa emerged as a product that blended in with the social and economic lives of people. With low bank penetration and high mobile penetration, the mobile money adoption rate in Africa is the fastest in the world. Mobile money operates on the Unstructured Supplementary Service Data (or Quick Codes) model, which makes low-income groups with no smartphones or internet access use the service.
Interoperability of mobile money across different mobile money account providers and bank accounts make mobile money strategic. Mowali (Mobile Wallet Interoperability), a joint venture of MTN and Orange launched in 2018 and with the support of GSMA, is an advanced/industry record gesture at interoperability. Beyond enabling users of MTN Mobile Money and Orange Money to transact across their both wallets which bring together over 100 million mobile money accounts and mobile money operations in 22 African countries, Mowali aims to provide one connection for all mobile money providers, banks, merchants, and other digital service financial providers to reach the 396 million mobile money accounts across Africa.
Ifunanya Ezeani (Payments) CCPP is a Financial Technology and Digital Innovation Expert
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