Africa jumps into the digital remittance business and pushes to reduce transaction costs

Startups are sparking investor interest and, at the same time, pushing the market to better utilize the money sent by the African diaspora to the world's most expensive continent for these financial transactions.

Africa, a pioneer in mobile money and smartphone payments, now wants to take the final leap to make sending remittances via mobile devices increasingly cheaper and easier, from the Global North to all corners of the African continent. In the last decade, several startups have shaken up the market and pressured traditional companies to lower transaction fees. Now, these native African companies are gaining new momentum and expanding their businesses on behalf of investors interested in this market in Africa. Thus, companies such as Nala (founded in Tanzania), Juicyway and Flutterwave (Nigeria), APS (Gambia), Cauridor (Ivory Coast), Mukuru and Mama Money (South Africa) have expanded their reach and boosted competition.

One of the most popular fintechs, as companies dedicated to financial technology are known, in Africa is Nala. It was created in 2021 and last July raised $40 million (€38.16 million) from investors. With these resources, it hopes to expand. Nala currently has 500,000 users who can send money from the European Union, the United States, and the United Kingdom to 10 African countries. Another fintech that has garnered multimillion-dollar investments is Cauridor, which recently raised $3.5 million for expansion and to improve its payment infrastructure.

In addition to private interest in these startups, international organizations are also promoting this method of remittance delivery. The United Nations International Fund for Agricultural Development (IFAD), for example, is advancing a project with the company APS to accelerate the arrival of digital remittances to rural areas of Gambia.

Despite these advances, gaps remain. Sub-Saharan Africa is the most expensive region in the world to send money, and the one where this transaction has become most expensive between 2023 and 2024, according to World Bank data. Worldwide, sending $200 abroad involves paying an average transaction fee of 6.65%. But if those $200 go to sub-Saharan Africa, the average fee is 8.37%, a figure far from the United Nations goal of reducing it to less than 3% by 2030.

Remittance transaction rates by region:

In Africa, more than 200 million people benefit from remittances, according to United Nations data. With the money, families can pay for food, education, housing, utilities, and medical expenses. In 2024, Africa received more than $100 billion in remittances, according to provisional data from World Bank experts. Nigeria, with $19.8 billion annually, leads the list of countries that receive the most money from remittances. In other countries, remittances represent a significant portion of their Gross Domestic Product (GDP). In Gambia, for example, they account for 21.4% of GDP; in South Sudan, 17.5%; and in Lesotho, 20.6%. Furthermore, the UN estimates, based on 2023 data, that remittances in Africa are equivalent to almost 6% of the continent's GDP and exceed Official Development Assistance (ODA), which amounts to $42 billion, and Foreign Direct Investment (FDI), which amounts to $48 billion.

Pending Tasks to Take Advantage of Remittances

Hence, according to experts, it is vital to insist on lowering costs to take advantage of the flow of remittances. Killian Clifford, senior advisor on migration governance and financial and economic empowerment at the International Organization for Migration (IOM), stated via email that "it is up to the international community, governments, and the private sector alike, to help eliminate barriers to inclusion to promote faster, safer, and cheaper remittances." For Frédéric Ponsot, senior technical specialist on remittances and diaspora at the International Fund for Agricultural Development (IFAD), the key is to encourage competition.

This involves not only facilitating the emergence of new companies, but also promoting the presence of more specialized players in certain remittance corridors, that is, the "pathways" that money takes when traveling from one country to another. “APS, for example, is in Gambia, but also has operating licenses in the United Kingdom and Europe, so it can cover the corridor from start to finish,” Ponsot explains in a video call. This way, APS doesn't have to partner with other large companies like Western Union to operate, and all profits remain within the group. Therefore, the model is sustainable.

It's up to the international community, governments, and the private sector alike to help remove barriers to inclusion to promote faster, safer, and cheaper remittances. Killian Clifford, Senior Advisor for Migration Governance and Financial and Economic Empowerment at the IOM

However, operating the way APS does is expensive, Ponsot acknowledges. “One of the main challenges is raising capital. It's very difficult to build customer trust in the brand, and it's very difficult to obtain licenses,” the expert recalls. He also adds that there are barriers to securing support from banks, which view startups as high-risk businesses. Faced with this, the IOM warns that if these startups want to "truly become pan-African," it is necessary to harmonize countries' standards and payment systems. "They are rarely interoperable," Clifford acknowledges, but believes that progress could be made with the arrival of the African Continental Free Trade Area.

Another of the biggest long-term challenges, according to experts, is how these startups will be sustainable and how they will achieve this without becoming a risk. Some companies offer low transaction fees, while others even provide the service for free because they make their profits through more profitable currency exchange rates. “We're asking ourselves whether they're disrupting the market fairly or unfairly. Initially, the cost [of transactions] will go down, but if companies go bankrupt, the market will become concentrated again [with a few competitors] and the cost will go up again,” Ponsot warns, adding that if startups disappear, they could undermine the trust that Africa has begun to have in remittances and digital wallets.

South Africa's Onafriq, one of the pioneering companies in digital money and remittances, has already achieved sustainability through a system of alliances and partnerships with other brands. Now, it's moving to the next level. Rachel Balsham, general manager for Southern and Eastern Africa, explains that Onafriq is working on new tools and partnerships to ensure that money sent digitally continues to circulate in the system digitally, without converting to cash. Furthermore, it also seeks to promote “remittances with a purpose.” They will do this, she explains, by making it easier for Africans abroad to directly pay for their relatives' hospital or school fees. “This gives the diaspora a little more control over their money,” says the director.

Although Balsham acknowledges that lowering fees will continue to be a challenge, she warns that the appeal of digital remittances in the African context goes beyond that. “People choose to send remittances via mobile not only because of the cost, but because they offer a sense of security, convenience, and control,” she says.

By: Ana Puentes of elpais.com