Payday Growth Author

Cross-border payments are rapidly growing with economic integration in the financial sector. It’s no news that there is an increase in the number of people looking for easier ways to send and receive money from different countries or continents, and with this, we can see that there is an unending need for cross-border transactions. 

In this article we discuss;

What are Cross-Border Payments?

The term “cross-border payment” refers to any transaction involving two or more parties located in different countries across national borders. So if you send money from Nigeria to James in Canada, you’ve made a cross-border payment, right? It sounds easy-peasy, I know, but it’s more than just that, and we’ll get to talk about that in this article. 

Cross-border payments can happen in more than one way. Let’s take a look at some of them;

  1. International Wire Transfers: This is what happens when you send money from Nigeria to James in Canada, a bank-to-bank transfer from one country to another. This requires a sender and a receiver with active bank accounts.
  2. International Money Transfers: When you use services like Paypal, Western Union, MoneyGram, or other money transfer operators or remittance companies to send money, then you have performed an international money transfer. 
  3. Cross-Border Card Payments: This is when you use a debit or credit card issued by your home country to make purchases or withdraw money when you travel or even when shopping online in another country. 
  4. International Trade Payments: These involve transactions between importers and exporters across borders. They can include payments for goods, services, or investments, and often use specialized instruments such as letters of credit or trade finance solutions.
  5. Cryptocurrency Payments: Digital currencies like Bitcoin, Ethereum, or Ripple offer an alternative means for cross-border payments, allowing individuals or businesses to send and receive funds directly without the need for traditional banking systems.

Key Challenges of Cross-Border Payments in Africa

Cross-border payments in Africa face several key challenges. These challenges can hinder the efficiency, transparency, and cost-effectiveness of international money transfers. Let’s dive into what some of these major challenges are:

1. Limited Banking Infrastructure: Many regions in Africa lack adequate banking infrastructure, especially in rural areas. This limits the availability and accessibility of banking services, making it difficult for individuals and businesses to engage in cross-border payments.

2. High Remittance Costs: The cost of sending and receiving money across borders in Africa is often high. Traditional banking channels and money transfer operators charge high fees, which can be a significant burden for individuals and businesses, particularly those with lower incomes.

3. Lack of Financial Inclusion: A large portion of Africa’s population remains unbanked or underbanked, lacking access to formal financial services. This makes it challenging for individuals to participate in cross-border payments, as they may not have bank accounts or the proper identification documents required for verification.

4. Currency Exchange and Volatility: Africa has multiple currencies, and exchange rates can fluctuate significantly. This introduces complexity and uncertainty to cross-border payments, making it challenging to determine the exact amount to be sent or received and increasing the risk of currency depreciation.

5. Regulatory Hurdles: Inconsistent and complex regulatory frameworks across African countries pose challenges for cross-border payments. Varying regulations, compliance requirements, and anti-money laundering measures can delay transactions and increase costs, creating barriers to efficient cross-border payments.

6. Limited Technology Infrastructure: In some regions, inadequate technology infrastructure and limited access to the internet pose obstacles to cross-border payments. Without reliable connectivity and access to digital platforms, individuals and businesses face difficulties initiating and completing transactions.

7. Informal Payment Systems: Informal payment systems, such as hawala or informal remittance networks, are prevalent in Africa. While these systems facilitate cross-border transactions, they often operate outside formal channels, making it harder to monitor and regulate transactions and potentially increasing the risk of money laundering and fraud.

8. Security Concerns: Cybersecurity threats and fraud are significant challenges in cross-border payments. Weak digital security measures and inadequate awareness about online scams make individuals and businesses vulnerable to financial losses.

Addressing these challenges requires a concerted effort from governments, financial institutions, and technology providers to enhance infrastructure, improve regulations, promote financial inclusion, and foster innovation in cross-border payment solutions tailored to the African context.

How do Cross-Border Payments for Bank Transfers Work in Africa?

Cross-border payments in Africa

Cross-border payments in Africa can be complex due to various factors, including different currencies, regulatory frameworks, and technological infrastructures. However, efforts have been made to improve the efficiency and accessibility of cross-border payments on the continent. Here’s a general overview of the process:

1. Initiation: The cross-border payment process begins when an individual or business initiates a payment to a recipient in another African country. This can be done through a bank, a money transfer operator (MTO), or a digital payment platform.

2. Compliance and Documentation: Both the sender and the recipient may need to comply with anti-money laundering (AML) and know your customer (KYC) requirements. This typically involves providing identification documents, proof of address, and other relevant information to the financial institution or payment service provider.

3. Payment Instruction: The sender provides the necessary payment details, such as the recipient’s name, bank account number, and bank’s SWIFT/BIC code. They may also specify the payment currency and the amount to be transferred.

4. Currency Conversion: If the sender and recipient use different currencies, the payment amount is converted into the recipient’s currency. This conversion can be done by the sender’s bank or through a third-party currency exchange provider.

5. Fund Transfer: The sender’s bank or payment service provider initiates the transfer of funds to the recipient’s bank in the destination country. This is typically done using the SWIFT (Society for Worldwide Interbank Financial Telecommunication) network, which enables secure messaging and settlement between banks globally.

6. Intermediary Banks: In some cases, the payment may pass through one or more intermediary banks that facilitate the transfer between the sender’s bank and the recipient’s bank. These intermediary banks may deduct fees for their services, which can affect the final amount received by the recipient.

7. Processing and Clearing: The recipient’s bank processes the incoming payment and verifies the beneficiary details. The payment is then cleared, and the funds become available in the recipient’s account.

8. Notification and Confirmation: Once the payment is successfully received, the recipient’s bank notifies the recipient of the incoming funds. The sender may also receive confirmation from their bank or payment service provider that the payment has been delivered.

It’s important to note that the specific steps and processes involved in cross-border payments can vary depending on the countries involved, the financial institutions or payment service providers used, and any regional initiatives or agreements that may be in place to facilitate cross-border transactions. Additionally, advancements in financial technology (FinTech) have introduced alternative payment methods and platforms that aim to streamline cross-border payments in Africa.

The Process of Card Cross-Border Transactions.

Cross-border payments in Africa can be facilitated through various channels and processes. Here is an overview of the typical process involved in card-based cross-border payments in Africa:

1. Card Issuance: The first step is for an individual or business to obtain a payment card from a bank or financial institution. This can be a debit card or a credit card that is linked to their bank account.

2. Card Network: Most payment cards in Africa are affiliated with major card networks such as Visa, Mastercard, or UnionPay. These networks provide the infrastructure and connectivity necessary to process cross-border transactions.

3. Point of Sale (POS) or Online Payment: To make a cross-border payment, the cardholder can use their payment card at a physical point of sale terminal or for online purchases. The card details, including the card number, expiration date, and CVV, are typically required.

4. Authorization: When the payment card is used, the merchant sends the transaction details to the acquiring bank or payment processor. The acquiring bank then forwards the information to the card network for authorization.

5. Card Network Authorization: The card network checks the transaction details and verifies the cardholder’s account balance or credit limit. They also validate the transaction against fraud prevention measures. If the transaction is approved, an authorization code is generated and sent back to the merchant.

6. Settlement: Once the transaction is authorized, the acquiring bank settles the payment with the merchant. Settlement refers to the transfer of funds from the cardholder’s account to the merchant’s account. This process typically involves interbank clearing and settlement systems.

7. Currency Conversion: In the case of cross-border payments where the transaction is made in a different currency than the card’s native currency, currency conversion is necessary. The card network or card issuer applies exchange rates to convert the transaction amount into the cardholder’s currency.

8. Foreign Exchange (FX) Fees: Card issuers often charge foreign exchange fees for cross-border transactions to cover the costs associated with currency conversion. These fees can vary between issuers and may be a percentage of the transaction amount or a fixed fee.

9. Cardholder Billing: The cardholder receives a monthly statement from their card issuer, detailing all the transactions made using their payment card, including cross-border payments. The statement also indicates the amount due and the payment due date.

It’s important to note that specific processes and requirements may vary depending on the issuing bank, card network, and local regulations. It’s advisable for individuals or businesses involved in cross-border payments to consult their respective banks or financial institutions for detailed information on the processes and fees applicable to their specific card.

Major Components of a Cross-Border Payment.

Cross-border payments in Africa typically involve several key components that enable the smooth transfer of funds between individuals or businesses across different countries. Four essential components to pay attention to are: 

1. The Sender: The sender is the party initiating the cross-border payment. It could be an individual or a business entity located in one African country that intends to send money to another African country. The sender provides the necessary information and funds to initiate the payment.

2. Currency and Exchange Rate: The currency a buyer wants to use to pay for a product or service, e.g., US dollars, Naira, or Euro, and the amount charged by a bank for converting one currency into another during a foreign exchange transaction.

3. Payment type: The most common payment types are wire transfer and credit card, but when it comes to international payments, there are other options that play an important role too.

4. Recipient: The recipient is the party receiving the cross-border payment. It could be an individual or a business entity located in a different African country from the sender. The recipient’s financial institution receives the payment through the payment network or gateway and credits the funds to the recipient’s account. The recipient can then access the funds according to their preferred method, such as withdrawing cash, using a debit card, or receiving a direct deposit.

These four components work together to facilitate cross-border payments in Africa, enabling individuals and businesses to transfer funds across borders securely and efficiently.

Cross-Border Payments with Payday

Payday is here to make cross-border payments easier for Africans. 

With Payday, you can create virtual USD, GBP, and EUR accounts to receive payments and create virtual cards in minutes. This way, you can shop online very easily and send and receive money faster without worrying about exorbitant fees.

Download the app (iOS or Android), sign up, create your foreign accounts, and take things to the next level. 

Payday’s currency swap allows you to instantly convert your USD, GBP, or EUR to any of the supported African currencies.