We just launched our WhatsApp channel. Want to get the latest news from the Tech in Africa?
Grace Ashiru
Millions of people across sub-Saharan Africa depend on remittances sent by relatives living abroad.
However, sending money to this region is more expensive than anywhere else in the world, according to the World Bank.
In response to this challenge, several African-founded financial technology (fintech) companies have emerged in recent years. Their goal is to reduce the high costs of remittances and take market share away from traditional players such as Western Union and MoneyGram.
The potential benefits of reducing remittance costs are immense. Lower transfer fees could encourage more money to be sent to Africa, which would provide a crucial lifeline for individuals and boost national economies.
In 2023, remittances to sub-Saharan Africa were worth $54 billion, with some countries relying heavily on these funds. For instance, remittances make up more than a fifth of the GDP in The Gambia, Lesotho, and Comoros, and more than a tenth in Liberia, Cape Verde, and Guinea-Bissau. In Kenya, remittances are more valuable than its key exports.
It’s important to note that estimates for remittance flows are often lower than the actual figures, as many payments are made through informal channels and go unrecorded.
“Remittances to low-and-middle income countries not only surpass foreign direct investment and official development assistance combined, but they also remain consistently high,” said Christian Kingombe, managing partner of impact investment advisor 4IP group and former member of the African Development Bank. “It is truly a vital source of development,” he added.
As of Q2 2024, sending money to sub-Saharan Africa costs the sender an average of 8.37% of the total transaction value, according to the World Bank, compared to just 5.53% in South Asia. The question is: how can fintech companies help bring that number down?
One key challenge is shifting customers away from cash payments. A Visa survey found that 12% of global consumers still send remittances by mail in the form of cash, checks, or money orders.
Processing cash is more expensive than handling digital transactions. Andy Jury, CEO of Mukuru, a major remittance provider serving Africa, explained that cash requires extensive physical infrastructure, including booths, tellers, and cash supplies, which increases costs. In contrast, digital payments can be processed more efficiently.
While the average cost of sending money to sub-Saharan Africa remains the highest globally, the cost of digital remittances to the region is below the global average. If more people in Africa shifted to digital services, average remittance fees could decline. However, accessing online services requires internet connectivity, which is only available to 37% of people in sub-Saharan Africa, according to the World Bank.
Even when internet access is available, convincing users to switch from traditional cash methods to digital services can be difficult. “Imagine growing up in a cash-to-cash ecosystem — transitioning to a digital system feels like a leap of faith, leaving your money in something intangible,” explained Jury. “But once someone tries it and experiences the benefits, that ‘aha!’ moment becomes the most powerful conversion tool.”
This shift is primarily happening among younger people. Nicolai Eddy, COO of NALA, a remittance fintech founded in Tanzania, noted that people under 35 are leading the move to digital payments. “For people in their fifties and sixties, they are accustomed to dealing with trusted cash-based services, and it’s easier for them to stick with that,” he said.
While building trust remains a challenge, the growing youth population and steady flow of migrants abroad are expanding the potential user base for digital remittances.
Shifting customers from cash to digital payments is just one part of the puzzle, but digital payments come with their own set of challenges and costs.
Historically, sending money to Africa through a remittance company has been a complex and often cumbersome process, involving multiple parties. “It’s so bloody difficult to move money around,” said Jury.
The process is often bogged down by middlemen, such as third-party intermediaries that move money between banks, and foreign exchange traders who negotiate the best exchange rates. These parties take a cut, which drives up costs and causes delays.
In recent years, several fintech companies — including NALA, Flutterwave, LemFi, Chipper Cash, and Leatherback — have adopted a model of cutting out these middlemen and enabling instant payments.
Many of these fintechs hold liquidity in every country where they operate, which allows them to deposit funds directly into local bank accounts or digital wallets instantly, as explained by Eddy. These companies often use proprietary software to move money and negotiate foreign exchange rates themselves, removing the need for third-party involvement.
“We’re cutting out two steps, in some cases it’s like five or six steps,” Eddy said.
However, bypassing the middlemen is not without its challenges. It requires developing in-house software and working directly with banks and governments to acquire the necessary licenses for transferring money internally within African countries, each of which has its own set of regulatory requirements.
Transferring money between African countries can be especially costly. In Q4 2023, the average fees for remittances of $200 from Tanzania to neighboring countries like Kenya, Uganda, and Rwanda were around 33%.
“We’ve got 50 different payment use case licenses in 15 different territories, and that’s taken nearly two decades to build up,” Jury explained. “Very few environments have alignment in terms of what they require. One market might ask for a passport as proof of identity, while another might accept a driver’s license. All of that variability increases the costs.”
The Pan African Payment Settlement System (PAPSS), still in its early stages, aims to unify regulations across African countries.
“I love that sort of stuff because it creates harmony,” Jury said. “Whether it’s centrally dictated or through creative integration with other fintechs, we’re constantly looking out for those opportunities.”
The UN has set a global target of reducing remittance fees to an average of 3%. According to Eddy, one of the biggest barriers for fintech companies in Africa to lowering their costs is the fees charged by banks and digital wallets for depositing money locally. He believes that if governments were to cap fees for family-related remittance transactions, fintechs could process payments at total fees as low as 1%.
However, Dr. Joseph Antwi Baafi, a senior lecturer at Akentien Appiah-Menka University of Skills Training and Entrepreneurial Development in Kumasi, Ghana, suggests that governments should focus on reducing operating costs for remittance fintechs and companies that manage digital wallets in Africa.
“Governments can play a huge role in terms of infrastructure support and tax support to help these network operators operate at full capacity and efficiency,” Dr. Baafi explained. “This, in turn, would reduce charges.”
For Jury, the key to success lies in tailoring products to meet the specific needs of users.
“If you approach this with a Silicon Valley mindset — taking a small proposition, throwing a lot of money at it, and trying to scale it quickly — you’ll fail very fast,” Jury said.
“But if you can take a global platform or infrastructure and truly understand the local context, then invent something relevant for the customer, there’s an enormous tidal wave of opportunity waiting.”
