Gaps in interoperability as barriers to inclusive digital payments in Africa

The AU and its member states aim to implement an integrated and inclusive digital society and economy in Africa to lower trade barriers by 2030. Ennatu Domingo and AfricaNenda’s Jacqueline Jumah and Sabine Mensah argue that instant payment systems play a crucial role in Africa’s digital public infrastructure, but that there are still many barriers to its interoperability – which Europe can help address.

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    The African Union (AU) and its member states have set the goal of implementing a digital single market – an integrated and inclusive digital society and economy in Africa – to lower trade barriers by 2030. Instant payment systems (IPS), if inclusive, could fulfil their role as part of the digital public infrastructure (DPI) in Africa, which is necessary for the African digital economy and could facilitate effective and seamless retail cross-border payments. But there are still many barriers to interoperability which the European Union (EU) can help address by supporting the adoption of interoperable inclusive instant payment systems across Africa.

    Despite significant growth in financial inclusion, over 400 million adults in sub-Saharan Africa are still excluded from the formal economy and rely heavily on the use of cash or informal providers for their financial management, which leaves them vulnerable to economic instability. There is therefore a need to accelerate the deployment and scale of inclusive instant payment systems by designing interventions to address barriers to interoperability as well as other challenges to IPS inclusivity, including gaps in the governance structure and technical functionality of IPS.

    There is growing interoperability, but with notable setbacks

    The rise in the number of instant payment systems in Africa is a substantial achievement, demonstrating a clear commitment from African actors and their partners. It is also helping to address issues around financial inclusion, and building domestic and regional resilience in times of crisis. As of June 2023, there were 32 active domestic and regional instant payment systems, with more under development.

    Despite the proliferation of IPS in the continent, the majority of these are not inclusive. Limited interoperability is a key barrier to the inclusivity of IPS. Only about 44% of IPS (these are the cross-domain payment systems that allow banks and non-banks to interoperate and support transaction flows to and from both bank accounts and mobile money accounts) provide for all-to-all interoperability. Here, switching, clearing and the exchange of instruments are contained within one system and enable end-users to directly transact between wallet accounts at different mobile money operators, between mobile money accounts and bank accounts, and across bank accounts. 

    Implementing interoperable payment systems is a costly exercise. Costs include infrastructure upgrades, system integration and operational expenses. A lack of clear incentives or revenue-sharing models for promoting interoperability may deter investment in cross-platform connectivity. Integrating different payment systems and infrastructure to facilitate interoperability is technically challenging and can be attributed to legacy systems, varied data formats, unmatched security protocols and connectivity issues.

    A lack of standardised protocols and compatibility between systems is also impeding interoperability. Regulatory frameworks governing payments also vary across the continent, leading to challenges in achieving harmonisation and interoperability. The different compliance requirements, data protection laws and licensing regulations present obstacles to cross-border interoperability.

    A closer look at Kenya, Tanzania and Uganda shows that there has been progress in developing more interoperable payment systems. As a result, transactions are increasingly being conducted, flowing between bank accounts and mobile money wallets. However, optimal interoperability is limited for domestic and cross-border digital payments.

    AfricaNenda’s State of Inclusive Instant Payment Systems (SIIPS) in Africa 2023 Report showcases that seven countries (Egypt, Ghana, Kenya, Morocco, Nigeria, South Africa and Tanzania) have multiple instant payment systems, but only in Ghana are these systems interoperable with one another. Addressing interoperability barriers is essential for promoting inclusive digital payments in Africa and expanding access to financial services for underserved populations.

    Four foundational steps to improve interoperability of digital payment systems

    The instant payment systems landscape in Africa is fragmented. But there are foundational approaches that can help overcome interoperability challenges and promote inclusive digital payments: 

    1. Implementing policy and regulatory harmonisation could promote alignment across countries in Africa and help address regulatory barriers to interoperability. This may be implemented through harmonising licensing regulations, coordinating regulatory compliance requirements, and fitting together data protection laws to create a more enabling environment for cross-border payments and interoperable instant payment systems.

    2. Implementing common standards and protocols for the exchange of data and messaging formats, and embracing open application programming interfaces (APIs) allows different payment systems to effectively enable seamless interoperability. In addition, mandating the use of open APIs and supporting API integration among financial service providers could enhance the connectivity and functionality of digital payment solutions across instant payment systems.

    3. Implementing interoperability incentives – such as supporting payment service providers to navigate the regulatory requirements and compliance obligations providing access to new markets that involve additional customer segments or cross-border opportunities, among others – could encourage the interoperability of instant payment systems. 

    4. Promoting mutually beneficial partnerships among payment service providers is essential in enhancing interoperability, as this unlocks opportunities in shared infrastructure and coordinated efforts to overcome technical, regulatory and operational challenges to inclusive digital payments.

    It is key to leverage the positive progress that African markets have made in implementing new instant payment systems to ensure the realisation of an African digital single market.

    International support is also key to accelerating interoperability and inclusive digital payments

    Based on its own experience in setting up digital public infrastructure for its digital single market, the EU can support its African partners, while it develops a comprehensive offer for partners in this area.

    Firstly, as the value of interoperability is not clear or embraced across Africa's digital markets, the EU and its member states can support the AU, Smart Africa and other African actors in promoting research and awareness campaigns to show the positive impact of interoperable digital payments on financial inclusion and economic growth. 

    Secondly, the EU and its member states should promote systems that integrate interoperability by design to ensure inclusive and affordable systems.

    The EU can also support the development of frameworks for industry coordination to facilitate knowledge exchange between policymakers, regulators, the private sector, international actors, technical experts and civil society organisations. This also reinforces efforts of the AU and regional economic communities aimed enhancing the political buy-in of national governments to implement their own national interoperable digital payment systems and connect with regional initiatives.

    What’s next?

    It is key to leverage the positive progress that African markets have made in implementing new instant payment systems to ensure the realisation of an African digital single market. In this process, anticipating and addressing challenges such as interoperability of systems and regulation will help achieve an integrated digital economy. 

    The launch of the African Continental Free Trade Area (AfCFTA) digital trade protocol is a key instrument to deepen the commitment of African governments and their partners to creating a digital single market supported by a network of interoperable digital payment systems.

    The views are those of the authors and not necessarily those of ECDPM or AfricaNenda.

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