Introduction: The Costly Reality of Sending Money to Sub-Saharan Africa
Millions of individuals across sub-Saharan Africa rely on remittances from family members abroad for survival. However, sending money to this region remains the most expensive in the world. According to the World Bank, transaction costs average a staggering 8.37% of the transfer amount, far above the global target of 3%. These high fees significantly reduce the funds received by families, impacting livelihoods and slowing economic growth.
To combat this challenge, a wave of African fintech companies is emerging, aiming to reduce remittance fees and disrupt traditional money transfer services like Western Union and MoneyGram. By leveraging digital innovation, these companies seek to transform the remittance landscape and make financial transactions more affordable and accessible.
The Economic Impact of Lower Remittance Costs
Lowering remittance fees could have a profound impact on African economies, as more funds would reach beneficiaries instead of being lost to high transfer charges. In 2023, remittances to sub-Saharan Africa amounted to $54 billion, playing a crucial role in supporting families and driving economic stability.
For some African nations, remittances account for a significant portion of GDP:
- The Gambia, Lesotho, and Comoros: Over 20% of GDP comes from remittances.
- Liberia, Cape Verde, and Guinea-Bissau: Remittances contribute more than 10% of GDP.
- Kenya: These funds surpass the country’s key exports in economic value.
However, official remittance figures often underestimate actual flows, as many transactions occur through informal channels, avoiding documentation and taxation.
The Digital Transformation of Remittances
The Challenge of Cash-Based Transactions
One of the primary obstacles to reducing remittance costs is the reliance on cash transactions. A Visa survey revealed that 12% of global consumers still use mail-based remittances, sending money via cash, checks, or money orders.
Cash transactions come with higher operational costs, requiring:
- Physical branches
- Cash reserves
- Tellers and security measures
In contrast, digital transactions minimize infrastructure costs and improve efficiency, enabling faster and cheaper remittances.
The Push for Digital Adoption
While digital remittance services offer lower fees, their adoption remains slow due to limited internet access and deep-rooted preferences for cash. According to the World Bank, only 37% of sub-Saharan Africans have access to the internet, restricting access to online banking and mobile financial services.
Additionally, trust issues hinder adoption, particularly among older populations. NALA’s COO, Nicolai Eddy, highlights that younger generations (under 35) are more inclined to use digital payments, while older individuals remain loyal to traditional cash-based services.
How Fintech Companies Are Cutting Remittance Fees
How Fintech Companies Are Cutting Remittance Fees
Historically, sending money to Africa was a complex process involving multiple intermediaries, each charging fees and causing delays. Fintech startups are now eliminating these middlemen by:
- Holding liquidity in multiple countries to facilitate instant transfers.
- Developing proprietary software to control transactions and foreign exchange rates.
- Partnering directly with local banks and digital wallets to streamline deposits.
Companies like NALA, Flutterwave, LemFi, Chipper Cash, and Leatherback have successfully implemented these strategies, leading to significantly lower transfer costs.
Regulatory Challenges and Regional Variability
Despite these advancements, regulatory barriers remain a major hurdle. Each African country has unique financial regulations, making cross-border transactions complex and costly. For example:
- Different ID requirements (some require passports, while others accept driver’s licenses).
- Licensing challenges (remittance companies need approvals from multiple jurisdictions).
- High intra-African remittance costs (transferring $200 between Tanzania, Kenya, Uganda, and Rwanda costs around 33% in fees).
Efforts like the Pan-African Payment Settlement System (PAPSS) aim to unify regulations and simplify financial transactions across Africa, but the system is still in its early stages.
Government and Institutional Support: Key to Sustainable Change
To achieve the UN’s goal of reducing remittance fees to 3%, governments must implement supportive policies. According to Dr. Joseph Antwi Baafi, governments can:
- Lower regulatory fees for fintech companies.
- Cap transaction costs for family remittances to make transfers more affordable.
- Invest in financial infrastructure and digital wallets to enhance fintech operations.
By creating a more favorable business environment, African governments can empower fintech companies to offer cheaper and faster remittance services.
The Future of Remittances in Africa
Fintech companies are poised to revolutionize the remittance sector, but their success depends on:
- Encouraging digital adoption through awareness campaigns and incentives.
- Overcoming regulatory barriers by working with governments to simplify licensing.
- Enhancing trust and security to convince users to transition from cash to digital platforms.
As Mukura CEO Andy Jury puts it, fintech innovation must align with local market needs rather than adopting a Silicon Valley growth model. By tailoring solutions to African realities, fintech firms can unlock a massive financial opportunity and transform remittance services for millions.
Conclusion: A Brighter Future for Remittances in Africa
With continued innovation and government support, fintech companies have the potential to drastically reduce remittance fees and improve financial accessibility for millions across Africa. As digital adoption rises, the dream of affordable and seamless money transfers could soon become a reality, unlocking economic prosperity for the continent.
Also read: Mastercard Expands Digital Payments in East Africa with First Uganda Office
