From experiencing the informal remittance journey first-hand on the bus to Harare, to unpacking payment system barriers in Côte d’Ivoire and Togo, to developing a cross-border payments strategy in the East African Community – payments is one of our long-standing thematic areas at Cenfri.

It’s also the digital financial service that has gained most traction, and that has dramatically changed the financial inclusion landscape in Africa. Despite the high uptake of digital payments, however, many consumers continue to mostly transact in cash, and use digital payments for very limited purposes.

So, how can the market evolve beyond inclusion to habitual use across a range of use cases? And what changes are needed to make digital payments the rails for more effective flows of funds domestically and across borders?

Our work in this field over the past 15-plus years has given us a bird’s eye view of the evolution of trends in the payments market and enabling environment. We’ve come to realise that, though much is new, these fundamental questions remain relevant. Indeed, they are gaining increasing prominence in the age of Digital Public Infrastructure (DPI), instant payments and central bank digital currency (CBDC).

We group the trends that we’ve witnessed into three buckets – policy, governance, and infrastructure.

Policy: Broader participation, serving broader policy objectives

Payment regulation has evolved beyond the “regulation-light” approach we saw in the early days of mobile money where participant rules rather than regulation set the parameters. In several African markets, payments licensing has now expanded to include non-bank participants such as fintechs, and the possibility of opening tiered accounts that entail less exclusionary but more effective KYC requirements.

The policy emphasis has shifted away from touting digital payments as a simple replacement for cash (which has not yet materialised) or from advocating for passive access to accounts. There is now a broader policy interest in digital payments as a way to coordinate the economy, increase the velocity of money and collect revenue. Payments are recognised as forming the basis for active engagement between an individual and the economy: for true financial empowerment, rather than merely providing a store of value or a means of getting money from point A to point B. In an increasingly online world, however, there is also rising recognition of the potential consumer protection risks and the need for effective recourse.

Governance: Treating digital payments as a public good

Several African markets face the dilemma of market imbalances. Dominant (mobile money) providers often act as price setters, thereby keeping digital transaction prices high. Also, digital payments are still inextricably linked to cash. Cash-in-cash-out (CICO) is crucial to the success of digital payments, as it takes time for a digital ecosystem serving diverse use cases to emerge. Agent commissions favour this trend.

This means that digital payments end in cash – a proverbial dead end – rather than circulation of digital value. The fact that most systems, especially instant payment systems, do not yet support, in a meaningful way, use cases such as business-to-business or government-to-person transactions – or even P2B or B2P– spills through into the utility that users can tap, and reinforces the CICO dominance. So do bottlenecks to interoperability.

With the rise of DPI, the focus is on accessing the individual to create network effects – rather than placing an emphasis on the end-user’s need to access the financial system in an interoperable way for a variety of use cases. Bottom line: the market mechanism is imperfect – it keeps prices up and doesn’t create sufficient use cases. Hence, there is an increasing realisation that central banks play a key governance role in enabling low-cost, “public-good-like”, interoperable payment systems

Infrastructure: All the bells and whistles, but is it sustainable?

Some African countries have enough switching capacity to service the entire continent. After a RTGS (real-time gross settlement) system boom in the late 1990s and 2000s, African governments acquired automated clearing houses, EFT systems, and card switches en masse. Every infrastructure had a unique value proposition but either did not include all types of payment service providers or was limited to certain instruments, batch clearing and settlement. Also, regulation and governance were often designed after the infrastructure was in place, leading to unsustainable business models and, ultimately, underutilisation of these expensive systems. The trend has been for new infrastructure to be built in addition to existing rails, which then do not get consolidated. The result is scale fragmentation and networks that do not include all service providers, thereby introducing barriers for end users. The use cases served also remain too limited for these systems to fulfil their full economic potential.

The newest kids on the block are instant payment systems and retail CBDC, underpinned by DPI. These systems once again promise value-add for service providers and governments alike, but come at a potentially steep price for infrastructure and network enablers. Moreover, the proliferation of domestic and regional instant payment systems just adds to the fragmentation and lack of scale already witnessed in the broader payments market.

To build scale, the focus is now on enabling all-to-all interoperability between payments providers and therefore payments instruments and channels. But as the complexity in having existing systems speak to one another increases, so does the level of risk. Add to that the need for efficient cross-border payments, and the complexity and potential risk increase exponentially.

Balancing trade-offs

Fundamentally, the policy conundrum remains one of balancing trade-offs: What do we want the infrastructure to enable and, therefore, what parameters should policy and governance frameworks set? This includes some big-ticket questions:

• Do we want “near-free” digital payment public goods that require government intervention, or can we get the incentives right to achieve market development outcomes in private, closed-loop systems? Letting the private sector lead can bring scale benefits, but private players do not necessarily have the appetite to create the market development outcomes we want to see. Thus, if we are serious about providing alternatives to cash, we must think about the question of payments as a public good. Under such a paradigm, the payment rails playing field would be levelled, and providers can compete on services, rather than the network they’ve created for themselves. This aligns well with the concept of DPI. While DPI has recently gained buzz-word status, the concept is nothing entirely new in the payment space – the building of interoperable public goods versus proprietary closed-loop systems is at the heart of the payment system discourse.
• How do we move to safer and more sophisticated digital payments options that are future-ready without undermining the large strides Africa has made in digital payments access? This includes the question of technology migration away from USSD, which has formed the backbone of access to digital payments for many people across Africa.
• How can the payment system question be addressed not only at a domestic level, but also to serve the trade and integration objectives of the continent’s regional blocs? Significant value is locked up in private sector cross-border schemes. In parallel, several regional instant payment schemes are either recently launched or under development. There are also increasing levels of complexity in large trade, with long delays in cross-border regional settlement and third-party due diligence processes.

These are questions worth asking, even if the answers are elusive, because ultimately, what is at stake is creating the transactional base for domestic as well as regional economies to generate economic opportunity and ultimately welfare.

What’s next for our payments portfolio?

Each country context is different, but the three building blocks of policy, governance, and infrastructure remain constant. We still see great value in doing diagnostic assessments to understand not only payment systems, but the landscape of stakeholders, the enabling policy environment, and the end-user needs and behaviour that they serve. We can add value by clarifying terminology to articulate what makes systems not only instant, but truly inclusive, and to set the parameters for when payment systems become digital public goods.

It is important we do not shy away from the tough questions but continue to shape fit-for-purpose payment systems and modernise them in line with innovative ideas that  support the fundamental development role of payments in Africa.