African financial institutions are increasingly using Blockchain technology to facilitate payments

In the ever-evolving landscape of African financial technology, a notable shift is underway as regional financial institutions are increasingly leveraging blockchain technology to power innovative solutions. Africa, historically grappling with economic challenges, is now witnessing a rise in blockchain solutions that aim to solve the problems that have long limited the growth of the continent. 

The integration of blockchain holds the potential to fuel financial inclusion, bolster security, and completely overhaul cross-border transactions. The implications are clear — a resilient and innovative financial ecosystem is slowly taking shape across the continent. This article delves into the intricate tapestry of Africa’s financial evolution, unravelling the threads that bind blockchain technology to the progressive future of the region’s financial landscape.

Problems financial institutions face in the current digital payment landscape

Since the mid-2000s, African countries have begun to introduce instant payments to facilitate economic growth and financial inclusion. Kenya was the first to do this in Sub-Saharan Africa with the introduction of the Kenya Electronic Payment and Settlement System (KEPSS) in 2005. This was an instant payment system aimed at facilitating quick payments in the country. 

Soon after, in 2007, M-PESA, a mobile money service, was launched to take KEPSS to the next level. Since its inception, M-PESA has transformed Kenya’s digital financial landscape. As of March 2023, there were approximately 30 million mobile money users, an exponential increase from 1 million active users at the end of 2007. 

Unfortunately, problems persist concerning digital payments in Africa, especially across Sub-Saharan Africa. These problems include:

1. High remittance fees: Within the legacy infrastructure commonly used by countries in Africa, payments go through various intermediaries whose services are chargeable. As a result, sending money across Africa is quite expensive compared to other regions, and this is especially the case for Sub-Saharan Africa. The region is one of the most expensive places in the world to send remittances. According to a World Bank report, sending money to the region costs twice as much as sending money to any other region in the world. To send $200 to Sub-Saharan Africa would cost $17, while it would cost between $10 and $14 to send the exact amount to North Africa and South Asia. 
2. Payment disputes: One of the major issues financial institutions face when it comes to digital payments within a legacy infrastructure is payment disputes. Payment disputes occur when a customer identifies an invalid transaction or a transaction they do not recognise and reports the discrepancy to their bank to get their money back. These disputes are typically due to the current traditional infrastructure’s inability to handle failures at the bank and payment processor points. In addition to that, unstable network connectivity can adversely affect the flow of information from the bank back to the terminal during a transaction. Between February and March of 2023, the value of electronic payments grew from N37.6 trillion to N49.4 trillion due to the Federal Government’s Naira redesign policy. As a result of the increased load on the NIBSS Instant Payment (NIP) system, there were a lot of failed transactions. According to The Guardian, 40% of these failed transactions remained unresolved as of April 2023. 
3. Inadequate infrastructure: Another problem financial institutions face in Africa is a lack of infrastructure. While significant progress has been made in building payment infrastructure, there remains room for improvement. For example, the NIBSS Instant Payment (NIP) system, Nigeria’s Inter-Bank Settlement System, experienced a lot of strain due to the unprecedented amount of electronic transactions made during the Naira shortage brought about by the country’s Naira Redesign policy. According to a report by United Capital Plc, there was an increase in electronic transaction traffic, which put a strain on the current infrastructure. The report goes on to say that the increase in the use of e-payment gateways was 41.3%. The NIP system uses a central switch that, when burdened with heavy transactions, may experience downtime affecting the entire network. 

African financial service providers also have to deal with the problem of storing their critical data and information. While latency and reliability issues can be solved by storing data in the cloud, many regulatory bodies are yet to give the go-ahead for full cloud storage, instead favouring a mix between on-premises storage and cloud storage or total on-premises storage. However, on-premises storage presents its own set of challenges. In May, Zenith Bank, one of Nigeria’s biggest banks, suffered a fire outbreak at its primary data centre, which caused total infrastructure downtime. 

High payment switching costs also pose a significant challenge for African payment providers. It is no surprise that fintech continues to bring in the most funding in Africa’s tech ecosystem, as licensing requirements from regulatory bodies remain very expensive. For startups that scale across the continent, these licensing requirements are unique for each country, creating significant financial costs.

How blockchain technology can solve the problems financial institutions face with facilitating payments 

A blockchain is a decentralised database or ledger that allows for the transparent distribution of information throughout an entire system. Data within a blockchain is chronologically consistent since it cannot be modified or deleted without authorisation from the network. Therefore, blockchain technology helps create a secure, tamper-proof ledger that can track anything from orders to payments. 

Blockchain technology has been one of Africa’s biggest drivers of technological innovation in recent years, especially within the fintech space. Fintechs across Africa have started to explore the various ways blockchain technology can solve the problems financial institutions face regarding facilitating payments. 

There are many benefits that blockchain technology offers financial institutions regarding facilitating payments. For example, incorporating blockchain technology will alleviate the problems financial institutions face in Africa’s highly fragmented payment landscape. Traditional database technologies for payments represent a more centralised system, an intermediary or third party, that would authorise and validate transactions.

However, this generates a few problems, such as a single point of vulnerability. This means the entire system will experience downtime when the central authority fails. On a blockchain network, financial institutions can connect directly with one another, eliminating the need for a central hub or intermediaries.

Furthermore, it enhances interoperability between the different payment methods customers have at their disposal, as they will all be connected and integrated into a single network. Improved interoperability reduces the cost of payment reconciliation for merchants and helps them track payments better. Faster transactions will become commonplace in a payment infrastructure built on a blockchain since payments do not need to go through so many intermediaries, which tends to cause delays. The removal of these chargeable intermediaries will, in turn, reduce transaction fees and the cost of operations for banks. 

The use of blockchain technology to facilitate payments can improve reliability and trust in digital payment channels and is generally seen as the next step in the evolution of digital payments.

African financial institutions are driving blockchain integration into digital payments

Financial institutions in Africa are becoming aware of blockchain technology’s roles in improving financial services such as credits, loans, and, most especially, payments. There is recognition across the board that blockchain technology is the next step in the evolution of digital payments in Africa. African fintechs have also started to realise the potential impact of blockchain on the continent’s most serious issues. According to Gideon Greaves, the managing director of Crypto Valley, a venture capital firm, “Africa is rapidly building a reputation as the hotspot of the crypto-tech world.”

The world is also paying attention to and increasingly funding African blockchain startups. Last year, African blockchain companies raised $474 million (a 429% increase from 2021), according to a report by Crypto Valley VC.

Onafriq, an African digital payment gateway connected to over 500 mobile money wallets, currently uses Ripple’s blockchain-based liquidity solution to power cross-border payments on the continent with cryptocurrency. The partnership between both companies allows Onafriq to reduce the speed of settlement to seconds, which frees up working capital for Onafriq. 

Zone, a Nigerian payment infrastructure company, has gone a step further and created Africa’s first regulated Layer-1 blockchain network for payments by securing a switching and processing license from the Central Bank of Nigeria and has begun connecting to most of the biggest banks, fintechs, and OFIs to deliver reliable, frictionless, and universally interoperable payments with its blockchain-powered infrastructure. Seven months after receiving its license, Zone had successfully connected over 20 of Africa’s biggest commercial banks, fintechs, and OFIs on its Layer-1 blockchain network for payments.  

The company also processes more than $1 million daily for 16 Nigerian banks, which use Zone’s blockchain network to process all their ATM transactions. Its blockchain-powered infrastructure, which removes intermediaries and connects banks directly with each other, also increased the success rate of ATM transactions nationwide by 12%. 

According to the CEO of Zone, Obi Emetarom, the company has managed to enhance the speed, reliability, and reconciliation processes of ATM transactions through its blockchain technology. Under Zone’s blockchain payment infrastructure, the reconciliation process for failed transactions is automated, which has stopped unscrupulous individuals from making fraudulent claims.

Regulatory bodies are also warming up to the potential of blockchain-based solutions. In South Africa, the South African Reserve Bank (SARB) has partnered with seven commercial banks in “Project Khoka” to use Quorum, an enterprise-grade implementation of Ethereum, to create a private blockchain-based interbank system that processes payments daily with full confidentiality and finality in record time. They were able to process 70,000 transactions in two hours, exceeding the transaction performance target. Based on the project’s success, the Khokha Council has approved the project’s experimentation with commercial bank-issued stablecoins for the regional transfer of value.

Outside African shores, global companies are rapidly adopting blockchain technology for their payment infrastructure. Coins.ph, a Philippines-based bitcoin exchange, offers a versatile bitcoin wallet app that allows users to buy and sell bitcoins, doubling as a mobile remittance service for converting bitcoins to Philippine pesos and facilitating cash delivery or pickup. CoinPip in Singapore enables secure and fast money transfers using blockchain technology to countries like China, the Philippines, Indonesia, and India, with a flat 2% fee. 

In conclusion

Digital payments have become a very important part of modern African society. They have become a driver for economic growth and financial inclusion. For instance, Africa’s domestic digital payment market is expected to hit $40 billion by 2025, an annual growth rate of 20%. Furthermore, according to MasterCard, since 2011, sub-Saharan Africa’s financial inclusion rate has grown from 23% to 43% in 2017, mainly due to digital financial services like mobile money. 

However, it appears that the current traditional infrastructure has reached its peak. Plagued with problems ranging from high operational costs to significant operational friction, a new type of infrastructure would be required to propel Africa into the future. To make Africa future-proof, fintechs have started to find innovative ideas, such as incorporating blockchain technology into digital payments. Companies like Zone and others are following exactly this path as they battle fragmentation and provide cost-effective alternatives to the traditional payment infrastructure predominantly used throughout Africa.