African Markets Exemplify Financial Interoperability

Why interoperability matters — in Africa, and globally

Financial interoperability is critical to building a better, more connected global financial system. But what does this concept mean in practice? How do stablecoins make global settlement more efficient?

In many parts of the world — particularly markets like the U.S. and EU — the idea of an interoperable financial system is just starting to emerge. Real-time B2B payments have yet to achieve real scale in the US, and in the EU they were restricted to bank-to-bank transfers.

Elsewhere, forward-thinking businesses, developers and governments are already creating breakthroughs that can serve as examples for the rest of the world. Southeast Asia, East Africa, Mexico and many South American markets have enjoyed mobile wallet technology innovations for over ten years.

In Africa, local innovators raced ahead during the last decade and integrated the prevalent mobile money infrastructure to connect to cards, e-banking wallets and eventually digital currencies and stablecoins. Already in 2014, it was possible to purchase and sell digital currencies with mobile money in seconds. This was unavailable in the US and the EU until recently.

However, it was difficult to extend this speed and efficiency across mobile money networks or outside the region to settle globally. African markets were often restricted or isolated from fast global bank settlement.

With one of the youngest global populations, the continent of Africa has many markets that are capable of lightspeed technology adoption. Mobile money acceptance (and the digital wallets that fintechs built to integrate into them) grew rapidly over the last decade. As local banks struggled to become digital, investment of time, top-tier graduates and capital poured into startups. 

Given that many African banks were only allowed to be established after independence and many struggled to grow in the post-colonial era, there were relatively few banking champions across the continent. Regional banking champions that have begun to grow across the continent still seem unable to cultivate true innovation and offer pan-African products that work for the B2B market. There is no African banking group poised to capture the digital transactions at the center of the new pan-African trade movement.

Telecoms took advantage of the void in a pan-African banking champion when the mobile money revolution began in 2007. With development finance pouring into the mobile money revolution as an effective way to increase financial inclusion, the telecoms grew even stronger, and mobile money wallet and “agency-banking” infrastructure raced across the continent to serve the mid- and retail- markets. By 2022, sub-Saharan Africa had already transacted $832 billion in mobile money – nearly double the value of the rest of the world combined¹ – making Africa the global mobile money powerhouse.

Interoperability between telecoms and across borders to neighboring countries was and remains thin. Telecoms tried to invest in patches and bridges to increase interoperability across their regional operating companies, but none truly succeeded. With a slow start, the banks failed over and over at out-competing mobile money and bridging the borders between each of their countries' operations. 

It was the fintech movement, starting with the original Kenya/Nigeria champions at Cellulant, who began building cross-border infrastructure between African telecoms and different country regulations and managed to grow to scale. Domestic champions like Interswitch and Craft Silicon built bridges and connectivity between banks and mobile money to compete with local and national switches.  

AZA Finance was part of the second wave of fintechs that offered new products and technology rather than simply connecting mobile money wallets and bank accounts as-is. Companies like Kopo-Kopo, M-Kopa, Paga and Zoona offered business services, lending, and new last-mile infrastructure outside the telecoms.

However, the African fintechs were still isolated from global payments due to the lack of global banks willing to bank and connect with these companies. Digital currencies changed the playing field by allowing African fintechs to connect directly with global fintechs without depending solely on a banking intermediary. This was a monumental step-change. This need for digital currencies was fundamentally different than in other regions, such as the EU, where start-ups found it easier (although not easy) to become banked by global institutions.

Drivers of African financial interoperability

This real use case for digital currencies for African fintechs has given rise to digital financial infrastructure that fosters tighter connections among countries worldwide. International investors are backing more African startups because these startups are often “global” from the seed stage. In short, local entrepreneurs are founding companies that are succeeding on the international stage, and Africa is no different.

The population boom of the African market now and projected for decades to come is a major driver in multinationals beginning to invest in the continent. In many ways, this is the last untapped market for growth. Multinationals are rapidly making African expansion plans and contributing to local knowledge and ecosystem development continent-wide. AirBnB, Netflix and Amazon join Google, which has long invested in the continent and its tech community with its hubs, accelerators and innovation labs.

And we are only at the beginning. These developments point the way toward a future in which value is faster, cheaper and easier to exchange not just within Africa but across other regions, too, following Africa’s example of building more accessible digital infrastructure. 

Let’s examine how African fintechs, regulators, entrepreneurs and developers have created today’s system and what the rest of the world can learn.

How Africa is leading the way today

Today, Africa’s financial system is reaping the benefits from innovators and developers who began laying down “digital commons” nearly twenty years ago.

These developers were seeking easier ways to do business across the continent’s immense legal, fiscal and regulatory diversity. At the same time, they sought ways to surmount neglect from Western banks and financial services providers. The effects of these policies still linger today, as many banks enact “de-risking” policies that place many African markets on their “no-fly” list. Fintechs already face a hard time getting banked, but fintechs with retail clients in African markets face severe discrimination globally that even strict compliance often cannot overcome. 

Lack of banking access drives innovation

AZA Finance is one African fintech that has found a way to succeed despite this regulatory complexity. AZA Finance offers services that make international payments and currency exchange faster, cheaper and easier for African businesses, helping them operate across the continent. AZA Finance also partners with some of the world’s largest global companies and fintechs to help them expand into Africa. 

Banks provide many of these services within one country, and companies such as AZA Finance partner with these banking institutions in order to gain regulatory coverage and connect cross-border payments for African businesses. These bank partnerships are a key driver of Africa's recent fintech boom, which has seen nearly $1.5 billion invested in 2022.⁴ 

This investment surge reflects the continent’s economic promise and draws on Africa’s strengths in web development. The overall population of African developers grew 3.8% in 2021, bringing the total number to 716,000.⁵ During that same year, African tech startups raised more than $4.3 billion from local and international investors.⁶

Africa: A powerhouse of web developers

In the coming years, we expect Africa’s growth in tech and web development to accelerate even faster thanks to another key factor: Africa’s built-in demographic advantages. Unlike other regions, Africa’s population is growing rapidly and is expected to double by 2050, accounting for a quarter of the world’s population.⁷ Even today, around 40% of the continent’s people are 15 or younger (compared to the 25% global average).⁸

Demographics point to further tech adoption

African fintechs have used these factors to build an impressive network of solutions to create a secure, interconnected economic system. Their immense success makes the region an example for others that seek to drive investment and growth. 

Here are some other fintechs that are leading the way today.

• Wave
  This celebrated challenger fintech and app-based payments platform began in Senegal and has since expanded into other countries in the West African Economic and Monetary Union (WAEMU).
• Mama Money
   Mama Money is a cross-border money transfer and banking service based in South Africa that serves more than 32 countries.
• Mukuru
  Mukuru is a leading next-generation financial services platform in Southern Africa that offers affordable and reliable financial services to a customer base of over 13 million across Africa, Asia and Europe.

Now let us take a closer look at how African governments are planning to support even greater innovation in the coming years.

The regulatory outlook

Across the continent, governments continue to look toward the future by embracing new technologies, establishing regulatory sandboxes and initiating pilots to enhance financial systems and improve interoperability. Many are exploring various types of digital currency to digitize their national payment systems. 

Cross-border interoperability is a major focus area. The African Continental Free Trade Area (AfCFTA) and other formal agreements have unlocked opportunities for African businesses to work across a common economic bloc, which has in turn driven demand for cross-border payments, treasury, foreign exchange and more.

The Pan-African Payment and Settlement System (PAPSS) is a public-private partnership between African governments and Afreximbank. The project has been over a decade in the making and is attempting to bring government settlement systems onto a single platform.   

There is also significant action happening within individual countries. In May 2022, the Securities and Exchange Commission (SEC) of Nigeria published regulations for digital assets, bringing digital currencies under its purview. Under these regulations, crypto exchanges operating in Nigeria are required to obtain a permit from the SEC and comply with certain requirements. The regulations also define digital assets and provide clarity on their legal status in the country.

However, neither Payment Tokens or Utility Tokens are considered to be “hybrid” — meaning they are not deemed investment tools or securities — and it is understood that they should not fall under the regulatory jurisdiction of SEC. The Nigerian Central Bank is also charting a path in digital currency by announcing the eNaira. At the same time, its Fintech Sandbox continues to incubate new financial solutions.

Ghana is also pushing ahead. The Payment Systems and Services Act, 2019 (Act 987) has amended and consolidated laws relating to payment systems and services, and now regulates institutions that perform payment service and electronic money business. This legislation is also the framework governing fintechs in Ghana.

In a related development, the Bank of Ghana (BoG) established a Fintech and Innovation Office to drive the bank’s e-payments and digitalization agenda. The office also promotes innovation in banking and fintech interoperability. The office has launched a regulatory and innovation sandbox pilot that gives preference to products leveraging blockchain technology. This is in line with its commitment to evolve an enabling and inclusive regulatory environment that promotes fintechs and supports innovation.

The BoG has also established the Ghana Interbank Payment and Settlement System (GIPSS) back in 2007. The mandate of GIPPS is to build and run interoperable payment systems for banks and non-bank financial institutions in Ghana. 

Kenya — the home of M-Pesa, one of the world's leading mobile money services — continues to be a leader on the regulatory front. Among other initiatives, the Central Bank of Kenya has proposed an amendment to bring digital currency under its Capital Markets Act. The CBK has also published a Discussion Paper on a potential Central Bank Digital Currency in May 2023 and has previously collaborated with the Monetary Authority of Singapore to host the Afro-Asia Fintech Festival.

Rwanda's National Bank is exploring the development of a digital currency, emphasizing the continent's move towards improved transactional efficiency. Morocco is also taking steps towards finalizing a digital currency regulatory framework,⁹ acknowledging that outright bans of digital currencies are often ineffective.¹⁰

Taken together, these national initiatives signify determination to innovate, foster new technologies and improve systems — all with the goal of providing their citizens more tools to unlock the entire continent’s economic potential.

Now, the next step in this evolution is here. Blockchain and digital currency — especially stablecoins — offer the promise to help turbocharge today’s interoperable foundation by driving out even more transactional friction, fostering tighter connections among local African economies and linking to global capital flows. 

Here is how this evolution could take shape.

Strengthening the foundation with blockchain

Blockchain and digital currency are building off of the mobile money revolution and the continent’s embrace of new technologies. African nations are already ahead in the digital global economy — they have already made the move from analog money that takes bank holidays to always-on, trusted digital money that empowers end users with the ability to send, spend, save and secure on their own terms.

New interest in blockchain is emerging because it can help to address a few friction points, such as payment delays, high fees and network incompatibilities. 

In addition, smartphone proliferation is accelerating, which makes it easier than ever for African fintechs to provide new types of powerful financial products. Digital wallets on smartphones can serve as compliant endpoints for a new generation of blockchain-based financial services. 

Share of African mobile phones that are smartphones¹¹

While blockchain commerce is happening today, stablecoins like Circle’s USDC — a dollar digital currency — can further accelerate the financial interoperability described above.

USDC is designed for internet-native financial services. It is open-source, which means it is programmable and easy to integrate into other fintech, bank and digital currency projects. Since it moves directly across the internet instead of using legacy financial rails, it can enable nearly-instant, nearly free transactions denominated in the world’s most widely used currency.

This payments infrastructure is designed specifically for fintech developers. It can pave the way toward seamless value-exchange by working in the background to bring mobile money, traditional finance and other layers together, increasing financial interoperability within individual African nations, throughout the continent and globally.

Circle launched USDC in 2018, and it has since grown into one of the most liquid and widely held digital currencies in the world. Each day, roughly $4 billion in USDC changes hands. Nearly 2 million people in more than 190 countries hold USDC in digital wallets.

USDC is a digital dollar backed 100% by highly liquid cash and cash-equivalent assets and is always redeemable 1:1 for US dollars. A portion of the USDC reserve is invested in the Circle Reserve Fund (USDXX), an SEC-regulated money market fund managed by BlackRock. Daily independent third-party reporting on the portfolio is publicly available.

While most stablecoins today are dollar-denominated (including USDC), we do anticipate that more non-dollar stablecoins will become available over time. As a first step toward this future, in 2021 Circle began offering EURC. This euro-backed stablecoin is issued under the same full-reserve model as USDC.

One aim of EURC is to better serve Africa’s 120 million French speakers¹² and the significant import/export activity with the euro zone.¹³ Greater cross-region connectivity and less payment friction could pave the way for tighter trade relations.

Circle designed USDC and EURC to flow across multiple blockchains. Today, USDC is native on 15 blockchains. Over time, our plan is to make USDC available wherever developers are active and the right security measures are in place, so that it can be used widely across the blockchain ecosystem.

Select USDC Blockchain Settlement Speeds

The open-source nature of this new infrastructure has fueled its early use globally and is key to enabling widespread adoption. Many of the most important blockchain resources are freely available for developers to build with, making it easy to create interoperable apps that could one day surpass today’s web and financial services giants on a new global operating system for money.

Pillars of tomorrow’s interoperable financial system

AZA Finance was the first company on the African continent to offer a bridge between digital and fiat currencies with its original “BitPesa” product.  Over the last decade, AZA Finance has led the way in showing African fintechs how to safely and compliantly use digital currencies to connect African companies to the global economy.  In addition to using it in its own treasury operations, AZA Finance offers USDC liquidity to its customer base of African businesses.

Here are some other fintechs that are already using this infrastructure to build commerce rails that are faster, less expensive, more inclusive and better integrated.

• Yellow Card
  This rapidly growing fintech powerhouse, with a presence in 17 African countries, makes it possible to send USDC and other digital currencies across Africa for free and access a wide range of digital currency services.
• Fonbnk
  The leading global marketplace for turning mobile minutes into digital money, Fonbnk makes it possible to swap airtime to USDC within its app or directly from a web browser.
• Mara Foundation
  Mara and Circle have partnered to train Africans in blockchain and web3 technology, including more than 2000 people from fintechs, government agencies, developers and the crypto-curious. Mara has highlighted USDC as a powerful infrastructure for African users to store their earnings and make payments. Mara further envisions working with Circle to advance USDC adoption among large institutions for higher volume-cross border payments.
• OnAfriq
  A leading African digital payments gateway, OnAfriq is building an interoperable network in a fragmented landscape that improves financial access by connecting hundreds of millions of people to the global digital economy. Their network spans 500 million mobile money wallets and 200 million bank accounts across 40 countries. OnAfriq is using USDC to drive real world use cases of digital money, to further their mission of making borders matter less.
• Chipper Cash
  With more than 5 million registered users, Chipper Cash is one of the largest consumer-facing fintechs on the continent. The company enables Africans to send money without the friction and fees inherent in legacy payment systems. They leverage USDC to optimize and reduce the cost of cross border settlements as well as merchant settlements across its partner networks.
• Scalex
  Digital currency utility can only be maximized through strong connections to the banking system. Scalex makes it easy for African users to convert back-and-forth from bank funds to digital currency within minutes, and offers easy access to USDC for people across Africa.
• ClickPesa Debt Fund
  The fund, managed by payment platform ClickPesa, provides financial support to micro, small and medium businesses in Africa. It helps to overcome the credit gap by providing USDC-based credit facilities through microfinance institutions. With an emphasis on financial and gender inclusion, the fund aims to empower entrepreneurs and enrich communities across Africa with the crucial funding support to grow.

Let’s build together

Africa has already made great strides toward an interoperable financial system that can serve as an example for other regions. Stablecoins and blockchains can help further extend this commercial infrastructure, driving additional benefits for local businesses and economies. We would love to help you understand the opportunities and take advantage of interoperability in financial services. Reach out to us anytime.

Sincerely,

Elizabeth & Jeremy