The role of blockchain in facilitating cross-border payments to and from Africa

Cross-border payments are the backbone of international commerce. They enable consumers and businesses to participate in the global economy by facilitating trade, remittances, and business expansion.

In Africa, cross-border payments play a key role in enabling global businesses and retailers to expand into the continent while also allowing African businesses to pay international suppliers and manufacturers. Over the years, the volume of these transactions has grown significantly, with cross-border payments to and from Africa expected to reach US$1.95 billion by the end of 2024.

As the demand for efficient cross-border payment systems in Africa increases, banks have been forced to evolve from traditional methods—often characterised by excessive paperwork, high costs, and long settlement times—toward more flexible, modern systems.

The rise of fintech has revolutionised cross-border payments in Africa. These new players have leveraged innovative technologies to provide consumers and businesses with faster cross-border transactions at lower costs than traditional banking systems.

One such transformative technology is blockchain. The 21st century has seen the increasing adoption of blockchain technology and cryptocurrency in payment systems, particularly for cross-border transactions. This article will explore its impact on cross-border payments in Africa.

What is blockchain technology?

Blockchain is a distributed ledger technology that records transactions across multiple computers (nodes), ensuring data integrity and transparency. The ledger is immutable, meaning it cannot be altered or deleted once a transaction is confirmed. This makes blockchain an ideal platform for secure financial transactions, including cross-border payments.

It stores data in a linked chain format, ensuring chronological consistency. This consistency is maintained because altering or deleting any chain part requires network consensus.

A key characteristic of blockchain technology is its decentralised nature. Unlike traditional payment systems managed by a central authority, like banks, blockchain operates on a distributed network. Imagine multiple computers across the globe, each holding an identical copy of the blockchain database.

This structure eliminates the need for a single centralised administrator and improves security and transparency. It contrasts centralised systems like a company's excel spreadsheet or a bank's database, where data is typically stored and managed in one location.

Cross-border payments in Africa

Before now, cross-border payments in Africa were known to be expensive and complex. This was due to traditional banking methods that involved multiple hidden intermediaries and some regulatory hurdles complicating the process. This led to a rise of fintech solutions to help power cross-border payments for consumers, African businesses, and global retailers expanding into the continent.

Businesses have depended on fintech solutions to make faster cross-border payments to suppliers and business associates overseas. Even with these solutions, an average cross-border payment to and from Africa takes about three days. Some of the challenges involved in cross-border payments to and from Africa include:

Currency exchange rates and fluctuations: One of the foremost challenges of cross-border payments in Africa is the volatility of currency exchange rates. Fluctuations can significantly impact the costs and profitability of imports, as they affect both the importer trying to pay for goods and the exporter trying to collect payments.
Cross-border transaction fees and complexities: Each cross-border transaction often incurs various fees, including wire transfer fees, intermediary bank fees, and currency conversion fees. Depending on the methods, countries, and intermediaries, the cost could be as high as 11%. The accumulation of these costs can significantly eat into profit margins if not managed efficiently.
Regulatory and compliance hurdles: Navigating through diverse regulatory frameworks across different countries adds another layer of complexity. Compliance with international regulations regarding money laundering, trade laws, and tax obligations demands meticulous attention.
Delays: An average cross-border payment in Africa takes 7 to 14 days. These delays can affect the speed at which the intended recipient receives funds.

Innovative cross-border payment solutions like Klasha are emerging to address these challenges. These new technologies provide faster, more cost-effective, and secure alternatives. Blockchain technology, in particular, has features that revolutionise the African cross-border payment ecosystem.

How does blockchain facilitate cross-border payments in Africa?

These transactions can be carried out using stablecoins, cryptocurrencies, and blockchain-based payment rails. For a blockchain transaction to occur, the payee and recipient must agree on which cryptocurrency (Ethereum, Bitcoin, Stablecoins, etc.) to use. Stablecoin is used for most blockchain payment transactions. It is price-stabilised by pegging its value to specific assets like the US dollar. This means it is valued at the same rate as USD. A typical payment on blockchain follows this process:

The sender initiates the transaction by selecting the cryptocurrency or digital asset to transfer, specifying the recipient's public wallet address and the amount.
Using their crypto wallet, the sender authorises the transaction and pays the associated blockchain processing fee.
The blockchain network receives the transaction request, and nodes verify the sender's account balance to ensure sufficient funds.
Once verified, the transaction is added to a block in the blockchain, pending validation by miners.
Validation typically occurs when at least three nodes have certified the block containing the transaction.
Upon successful validation, the transaction is permanently recorded on the blockchain, completing the transfer.

Once a transaction is initiated on the blockchain technology, it takes an average of 4-6 seconds for it to be completed. In sub-Saharan Africa, the impact of cryptocurrency payments has been steadily growing. Nigeria has seen an increase in cryptocurrency transaction volumes, rising by 9% YOY to $56.7 billion between July 2022 and June 2023. 96% of Africa’s cryptocurrency volume is attributed to cross-border payment. It is safe to say blockchain is the future of cross-border payments.

By eliminating intermediaries, blockchain facilitates cross-border payments by providing:

Cost-effectiveness: Blockchain technology significantly reduces transaction costs in B2B and P2P payments. A study by the OECD Library indicates that blockchain enables a 60-80% reduction in cost, which is about 3% compared to traditional payment methods. This efficiency stems from eliminating multiple intermediaries, resulting in substantial savings for transacting parties.
Speed: Blockchain transactions offer near-instantaneous confirmation times. On average, transactions are finalised in 4-6 seconds, starkly contrasting traditional systems' 2-3 day processing time. This rapid transaction speed enables quicker fund access and deployment for both individuals and businesses.
Security: Traditional payment systems often rely on centralised data storage, which can be vulnerable to security breaches, data loss, and fraud. Blockchain addresses these concerns through its distributed ledger technology. By securing transaction and customer data across a decentralised network, blockchain makes data manipulation extremely difficult, significantly enhancing overall security.
Improved transparency: Blockchain's structure ensures immutable records and consensus-based entry confirmation, leading to unparalleled transparency. The transaction ledger is accessible in real-time to all authorised parties, eliminating data silos and enabling faster access to accurate information. This transparency fosters trust and facilitates smoother collaboration among stakeholders.

The future of African cross-border payments

While blockchain technology provides significant advantages for cross-border payments, its widespread adoption faces several challenges. These include a largely unfavourable regulatory environment, limited public understanding of blockchain mechanics, and the volatility of associated cryptocurrencies.

Nevertheless, these obstacles are manageable. As the technology matures and its benefits become more apparent, more stakeholders will likely recognise blockchain's potential to revolutionise cross-border payments to and from Africa. This growing awareness may lead to a push for broader adoption and more supportive regulations in the coming years.

At Klasha, we're on a mission to provide seamless cross-border payments to and from Africa. If you'd like to learn more about our suite of cross-border payment solutions, speak to our Sales team.