By Vivek Shankar

Digital FX across Africa: A continent that’s plugged in and ready for explosive growth

November 2022 in Regional Perspectives

Vivek Shankar takes a deep dive look into the current state of digital FX services in Africa and the explosion of Fintech growth and innovation that’s taking place there.

Africa is often referred to as a single block or a model when discussing electronic FX growth. However, this picture neglects the sheer scale of the reality on the ground. Sub-Saharan economic GDP amounted to $1.8 trillion in 2021, a number that is expected to grow by 3.6 percent in 2022 according to the IMF.

This figure mirrors a global slowdown as higher inflation and tighter financial conditions restrict GDP growth. Despite these challenging conditions, eFX in Africa faces promising prospects. Tim Hutchinson, Head of Electronic Execution at Rand Merchant Bank, part of the FirstRand Group , has his finger on the pulse of current events. “A dominant trend in the countries is a population using digital means to manage so much of their personal lives,” he says. “As a result, these trends are naturally finding their way into how people want to consume and manage foreign exchange.” 
Discussing the state of eFX in Africa is challenging, given the varied trends present in individual countries. What are some of these trends and how are they impacting the big picture?

Fast growth and post-pandemic turbulence

Hutchinson explains that regulatory action and the rise of novel technology reflect broader themes prevalent in Africa. “Regulators are playing their part in building the market while navigating the complexities in the new economy including the likes of cryptocurrencies, cloud implications for data privacy, and consolidation of investments by major market participants,” he says. 

“As the demand for digital offerings intensifies, the need to be able to equally handle the complexities of the pre and post-trade world becomes paramount in offering value to clients,”

Tim Hutchinson

Aphile Molefe, Head of eFX Sales at Absa CIB, points to legacy conditions prevalent in those markets offering perfect conditions for fast growth. “One of the big advantages to digital innovation in Africa is that traditional channels were not as well established as developed or more developed markets,” he says. “This makes it easier for disruption to occur.”

Molefe’s comments are in line with the rise of several unicorns emerging from the continent recently, along with widespread crypto adoption in the likes of Nigeria. While these trends point to technological innovation in the consumer space, are they replicating themselves in business?

Hutchinson believes the gap between digitalisation in the consumer and business sectors is shrinking. “Banks have been considering ways of solving their retail offerings or looking to partner with incumbent fintechs,” he says. “This has led to several investments (by banks) into a core capability that can scale into broader use cases and client journeys focused on the corporate or institutional offering.”

Hutchinson points to investments in API capabilities to support FX rate bookings and payments. These investments can be scaled into larger use cases eventually. Molefe also points out that the sheer size of the continent and differing regulatory environments makes it very difficult for a single entity to establish dominance.

“Absa has experienced this just in our ten presence markets where considerable time and energy is spent accommodating the various regulations,” he says. “What you will find is that service providers have pockets of excellence in various parts of the continent.” Despite these challenges, he notes that the digitalisation underway in the continent is nothing short of remarkable.

No talk of economic growth in recent years is complete without taking the effects of the pandemic into account. Africa was battered during the pandemic and unfortunately, the post-pandemic environment has offered little respite. 

“As more buy-side entities embrace the centralisation of treasury and dealing operations, digital execution has become a key means to achieve efficiencies,”

Aphile Molefe

Geopolitical factors such as the Russian invasion of Ukraine, the subsequent European energy crisis, a rising Dollar, and an overall inflationary environment have exerted significant bearish pressure on African currencies. “Local factors such as load shedding in SA and presidential elections in Kenya have also contributed to the uncertainty and resulted in periods of further pressure on local currencies,” Molefe says.

Following the pandemic, African currencies witnessed significant investor demand. The ZAR rose by 30 percent over April 2021 highs only to suffer from a loss of investor appetite following the unfolding of events mentioned above. An overall lack of liquidity and market activity gives corporate participants more time to negotiate and execute deals.

Evolving buy-side demands and innovative solutions

The result of the growth of digitalisation has been changes in buy-side and client demands. “We have seen demand from our local buy-side shift towards more digital solutions across their needs,” Hutchinson says. “This is not only limited to FX but equally translated into Fixed Income and Money Markets where we have made significant strides in our electronification.”

Relaxed exchange control conditions have led to local banks prioritizing FX for the buy side, managing currency volatility. Globally, FX has witnessed the rise of automated execution workflows. Is this the case in the African markets too? Hutchinson says yes.

“We are seeing a buy-side move towards automation on their end, looking to digitize their internal processes (including execution,)” he says. “The pandemic was another contributor to the increase in electronic services as more clients wanted the capability to allow them to access liquidity as a result of their remote work (or the fact that their traditional voice sales relationship was working remotely.)”

Hutchinson also points to demands such as service integration through APIs as a significant trend prevalent. “We have seen more interest from clients to understand what we can offer electronically as well as proactively asking our view around third part party offering,” he says. 

Molefe echoes Hutchinson’s points and notes that buy-side centralisation has led to the rise of unique demands. “The demand for tools that create efficiencies to risk management workflows has increased,” he says. “This means more demand for digital channels for FX execution, order management, rate distribution APIs, etc. Liquidity providers Like Absa have responded by investing in these capabilities.”

Molefe also notes that competition on digital venues across Africa is increasing. “As more buy-side entities embrace the centralisation of treasury and dealing operations, digital execution has become a key means to achieve efficiencies,” he says. “In response, we have seen increased competition on digital venues. We have also seen a big focus on mobile capabilities which are proving to be popular since they allow FX risk management from anywhere, whether in between meetings or on the commute home or traveling to visit a regional office.”

Pricing capability remains a central feature most banks continue to invest in. Most clients tend to partner with regional banks to smooth their way toward their goals, given the disparate regulations present in each country. Differing settlement demands also push clients to seek regional Pan-African partners, as opposed to a global institution.

Digitalisation has boosted these banks’ ability to offer sophisticated pre and post-trade workflows, something the buy-side is keen on. “As the demand for digital offerings intensifies, the need to be able to equally handle the complexities of the pre and post-trade world becomes paramount in offering value to clients,” Hutchinson says. “At FirstRand we have recognized the need for this and along with our investment in core pricing and distribution capability, we are on the journey with significant investments into a pre-trade rules engine as well as a post-trade routing engine.”

In addition to offering significant pre and post-trade sophistication, Hutchinson notes that research continues to drive client conversations and subsequent activity. “Research has always remained one of the core differentiators for regional banks and we have seen this continue,” he says. “We believe that the complete offering to clients is what matters as they (our clients) are rationalizing and optimizing their banking relationship.”

“These investments differentiate us,” he continues, “as we are able to focus our efforts on exact nuances in the countries that actually make a difference in how clients experience the end-to-end lifecycle of a trade.”

Regional banks and handling local dynamics

When quizzed further about the role regional banks play in delivering client needs, Molefe is quick to point out that central bank engagement is critical to the process. “Banks with presence in local markets can not only assist with regulations that have changed, but also future developments as engagement with central banks is critical to stay ahead,” he says.

“With the centralisation of treasury activities being a continuing trend on the continent, a regional bank with a presence in the central hub will help treasuries navigate the complex reality of multiple markets and regulatory regimes,” he continues.

African Fintech growing by leaps and bounds

Alison Trace

Africa has perhaps experienced the benefits fintech brings to local economies more than anywhere else. Research conducted by McKinsey and Company notes revenues from digital wallets and payments in Africa are expected to grow by 20 percent annually till 2025.

Alison Trace, Digital FX Product Manager, SVP at Crown Agents Bank, is well-versed in these developments. “Africa is made up of 54 countries and has sat at the heart of our bank for much of our history,” she says. “Many of these countries are showing the energy and appetite to grow their economies and embrace the opportunities that technology can offer. Many are not encumbered by the legacy of outdated 20th-century technology and are in the exciting position of moving directly into the 21st Century technological world of mobile and financial technologies.”

A young, rapidly growing population is also powering widespread fintech adoption across the continent. What about the institutional world though? Alison points to a few examples to explain the fintech revolution has entered this space too. “Our web-based trading solution EMpowerFX has offered wholesale FX market access to our banking and payment clients from any approved location,” she says. “During the pandemic and other events where access to the office was compromised, our clients could access competitive wholesale FX rates.”

Alison also points to CAB’s EMpowerFX and EMpowerConnect products. “Through these, we can offer cross-border FX and payments without the need to exchange currency into USD by exchanging directly from African-to-African currency. This inter-Africa cross-border FX is helping our customers where traditional OECD banks are de-risking.”

CAB is also active in the mobile wallet sector, offering payment gateway technology to deliver payments in 12 countries. “Our payment technology offers single-point access to multiple mobile wallet providers making it easier to deliver money directly to the end recipient.” She also notes that the bank is currently integrating its FX FIX API into the Payment Gateway product to offer a seamless cross-border payment solution.

Alison is quick to note that a forward-looking regulatory posture has proved critical in the growth of these solutions. However, given the diverse nature of the continent, some countries do it better than others. “In the major Fintech hubs – South Africa, Kenya, Nigeria, and Egypt – regulators have taken a progressive approach to regulation, showing a willingness to evolve frameworks to facilitate innovation,” she says. “In other countries across the continent regulation has been more restrictive which has inhibited growth.”

She believes that greater regulatory engagement with emerging businesses, risk guidance, and keeping pace with international standards and development are essential to creating a positive environment for fintechs.

New subsea cable systems provided by Meta and Google are set to expand internet connectivity in the continent, something that is sure to power further fintech innovation. Where does Alison see the next developments emerging?

“Improving the ability to move money across the whole African continent, not just the traditional financial centers is the goal,” she says. “This means expanding the provision of payments to the countries that still provide a challenge for settlement. Using improving technologies to work with the financial participants in these countries is key to developing them to bring financial inclusion to all.”

New subsea cable systems provided by Meta and Google are set to expand internet connectivity in the continent,

Regional retail FX perspectives

Solomon Gounden

Retail FX trading has recently flown under the radar thanks to widespread crypto adoption in the continent. However, retail trading volumes have steadily risen since 2016 according to Solomon Gounden, Managing Director at Finalto South Africa. “We have seen significant interest in South Africa, Kenya, Tanzania, Uganda, and Nigeria,” he says. “This activity began around 2016 and peaked with home confinement at the height of the pandemic. Growth has been exponential from a relatively low base and a fairly new CFD market compared to EU, UK, and APAC standards.”

One of the side effects of this rise has been increased demand for risk management and outsourced FX services from brokers. “There is considerable demand for services in the broker space at the lowest cost to implement,” Gounden says, “and we have seen low economic and competitive offerings from vendors such as Finalto.”

The bulk of retail trading volumes is still reserved for digital assets, given the lack of availability of African currencies on most FX platforms. “Crypto assets are widely traded in South Africa, predominantly liquid coins, and more recently in CFD on crypto assets,” Gounden says. “Banks in SA are also looking to develop and underwrite their own coins.”

He notes that regulators in the rest of the continent have displayed varying levels of crypto acceptance, with some rejecting these digital currencies. Given the economic turmoil present in some countries though, crypto is likely to gain even more prominence.

As more retail brokers enter this lucrative market Gounden cautions that several systems need to be in place to ensure success. “First, in any trading activity, you need a front end that has multiple assets, an array of deposit options, and a friendly user experience,” he says. “Secondly, you need applications to manage the back office activities, where KYC, finance activities, and client data reside and could be mined.”

“The third component in the tech stack,” he continues, “would be liquidity and risk applications, allowing brokers to access deep liquidity and hedging capabilities.” Overall, Gounden is extremely optimistic about the growth of retail FX in the continent, expecting it to mirror the growth that previously occurred in the UK and Australia.

Crypto assets are widely traded in South Africa.

Regulatory Landscape

Che Sidanius

Given the central role regulators are playing in the growth of eFX and Fintech throughout the continent, taking a look at recent wider developments is worthwhile. As with FX, lumping regulators into a single basket is inappropriate, given the diversity of approaches present in the continent.

The establishment of the East Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) in 1998 was a significant step the continent witnessed regarding combating financial crimes. Since then, regulators have taken considerable steps.

Che Sidanius, Global Head of Financial Crime and Industry Affairs at LSEG, is well versed in these steps, given his background in risk and compliance solutions. “The most notable development is a meeting organised by the South African AML Integrated Taskforce (SAMLIT) in 2022 in Tanzania to expand the public-private partnership model developed by South Africa, headed by its FIU, called FIC,” he says. 

“We’re the designated preferred data provider to FIC and participated in the ESAAMLG meeting to present on best practice and the use of data to combat money laundering and corruption.”
Despite these moves, the likes of South Africa and other sub-Saharan countries have faced criticism over corruption and lax controls. Recently, South Africa was placed on the FATF’s Grey list, impacting capital flows. Sidanius notes the impact was as much as 9.6 percent of GDP, pushing the nation to renew its effort to shore up its AML infrastructure.

Data lies at the heart of this effort, and LSEG is playing a significant role. “We’re the co-founder of the Global Coalition to Fight Financial Crime, alongside the World Economic Forum and Europol, but also joined by Interpol, the European Banking Federation, the Institute of International Finance, and the Sentry,” Sidanius says. “We’re also an advisor to policymakers including the European Commission, US Treasury, Monetary Authority of Singapore, a co-chair of the B20’s Integrity & Compliance Taskforce.”

Sidanius also explains that LSEG plays a key role in Pan-African bodies. “Beyond risk solutions, we’re a trusted partner to the Egmont Group (a consortium of global financial intelligence units), FATF, and the preferred data partner to SAMLIT, and we are now beginning the process of ESAALMG.”

LSEG recently coined the term “Green Crime” to incorporate ecologically harmful activities such as illegal logging, fishing, and wildlife trafficking. Sidanius explains that Eastern African countries dependent on tourism have renewed their efforts to combat these crimes.

 “Financial Crime is no longer seen as a tick-box compliance exercise,” he says. “It’s seen at the highest political level as an issue related to consumer protection, investor protection, financial stability, and national security (related to Sanctions).”

He is optimistic about the role governments in the continent are playing. “Government action is not only addressing these issues but is also addressing the need for increased due diligence in the corporate sector to tackle modern-day slavery and human rights,” he explains.

Given these developments, only the future will reveal how impactful these efforts will be. For now, the picture is improving, and coupled with the forward-thinking stance governments have adopted towards fintech and financial development, conditions look positive.

Financial Crime is no longer seen as a tick-box compliance exercise

Hutchinson agrees that super regional banks offer the best solutions when seeking liquidity on the ground, something critical to most buy-side needs. “We have observed that certain regional players have been leading the charge in offering their electronic solutions to clients and they are already looking at next-generation solutions to meet the needs of their market,” he says. 

Despite clients consolidating capabilities with core technology service providers, regional banks continue to face significant client demand, given their unique value proposition. How well-resourced are these banks though? Can they upgrade their FX infrastructure to offer clients the solutions they need?

Hutchinson notes that he has observed two solution paths emerging. “Either a significant investment is undertaken in a front-to-back FX digital review or the outsourcing of core capability to third parties (including to other local banks,)” he notes. “In our viewpoint, smaller banks are taking the second approach given the cost and complexity of front-to-back solutions.”

He points out that a unique opportunity FirstRand faces is in delivering consistent client experiences across different entities. “This includes ensuring our offerings are at a base layer consistent in terms of what matters to clients, be that how orders are received, the applications they use as well as how we facilitate post-trade requirements,” he says. “We do this whilst also ensuring we can facilitate and handle the local dynamics around regulation.”

Both Molefe and Hutchinson concur that Africa poses several unique challenges and copy-pasting what’s worked in developed markets is not the best way to do things. “Africa is complex,” Molefe says. “There is no substitute for onshore expertise to guide you through the markets and there is no substitute for digital capabilities that make it easier to do business. The unicorn is the bank that can do both.”

“Many banks on the continent have made investments in their technology to facilitate electronic activity,” Hutchinson says. “By partnering with those banks the client not only will be able to achieve many of the electronic trading ambitions but equally play a part in helping the build-out of the market.”

Which way will digital innovation go?

As digital innovation accelerates in Africa, Molefe believes the inefficient end-to-end payment systems in the continent are ripe for disruption. “Many large banks are investing in more efficient settlement capabilities,” he says. “The current lack of transparency in payment systems will allow for a significant shift in more efficient and transparent systems such as Blockchain to embed itself in the ecosystem if comfort is provided by regulators.”

Inefficient end-to-end payment systems across the continent are also ripe for disruption

He also notes that fintech platforms buoyed by their success in the retail remittance world are entering the corporate settlement space. However, only time will tell how successful they will be. Speaking of settlement, Hutchinson notes that regulatory activity in that sphere will be a significant pointer to watch for.

“Many markets have tried unsuccessfully to create an onshore matching capability to create better price transparency,” he says. “We believe that recent events make these options potentially viable again. We also believe that the Digital Asset trend (while incredibly noisy) remains a trend to watch and we believe that this will be something that can help shape more digital innovation on the continent.”

Regulations surrounding AML and data protection are also significant areas Hutchinson points to. As always, the adoption of cloud tech and DLT lies at the forefront of future digital innovation. “A lot of digital transformation stands to be unlocked through those technologies,” he says. “Both of these have a number of implications in terms of information regulation – something that has been topical for a number of markets.”

In short, Africa is set to experience continued digital innovation in eFX. The future is exciting and stakeholders hope to see more trade and wealth-generation opportunities unlocked.