PAPSS: Revolutionizing African Trade with Instant FX Market Platform

The Pan-African Payment and Settlement System (PAPSS), launched by the African Export-Import Bank (Afreximbank) in collaboration with the African Union Commission (AUC) and the African Continental Free Trade Area (AfCFTA) Secretariat, is set to revolutionize intra-African trade with the launch of its FX market platform this year. This innovative system aims to facilitate instant cross-border payments in local currencies, eliminating the need for third-party currencies and correspondent banks. The platform, which has already seen significant milestones, including the integration by KCB Group in Kenya and Bank of Kigali in Rwanda, is poised to unlock new opportunities for trade and investment across the continent.



The Need for PAPSS

Africa's trade landscape has long been hindered by the absence of an efficient payment system that supports intra-regional transactions. With approximately 42 individual currencies, conducting business across borders has been cumbersome, time-consuming, and expensive. Traditionally, African businesses relied on correspondent banks, often outside the continent, to settle payments between two African currencies in a third, external currency, usually dollars or euros. This system created foreign exchange and liquidity challenges for African central and commercial banks, making intra-African trade less attractive.

The introduction of the African Continental Free Trade Area (AfCFTA) highlighted the need for seamless trade facilitation. PAPSS addresses this need by providing a centralized payment and settlement system that enables the efficient flow of money securely across African borders. By leveraging digital technology, PAPSS offers a secure, efficient, and cost-effective platform for cross-border transactions, contributing to financial integration and economic growth.

Benefits of PAPSS

PAPSS offers several benefits that align with the broader goals of the AfCFTA. One of the key advantages is the ability to send and receive cross-border payments using local currencies. This eliminates the need for hard currencies like the US dollar or euro, reducing foreign exchange and liquidity challenges. As Catherine Muya, Head of Product: Digital Payments Solutions at Absa, noted, "PAPSS elevates the role of African currencies, because for the longest time there has been a heavy dependency on the foreign currency, which has been to the detriment of those African currencies, suppressing trade and economic development."

The system also simplifies the cross-border trading experience by reducing the time and cost associated with transactions. For example, a business in Botswana can now sell a product or service to a business in Ghana and receive payment in pula, while the buyer in Ghana settles in cedi. This direct conversion from pula to cedi reduces the need for hard currency liquidity and speeds up the transaction process. As Mike Ogbalu III, CEO of PAPSS, stated, "The customers will experience faster, more cost-effective, and secure cross-border transactions from the comfort of their banks’ mobile applications or through their branches. Businesses can trade more freely and competitively by eliminating the need for correspondent banks outside the continent and removing dependencies on third-party currencies."

PAPSS is expected to save Africa more than USD 5 billion a year in payment transaction costs alone, according to the AfCFTA. This cost savings can be reinvested into businesses, fostering economic growth and development. The system also supports 24/7 availability, which is crucial for trade that often occurs between different time zones. As Muya noted, "Trade doesn’t only take place during business hours, and it often happens between different time zones. PAPSS’s availability alone is a dealmaker, which will open many trade corridors within Africa."

Challenges and Mitigation Strategies

While PAPSS offers numerous benefits, its implementation is not without challenges. One of the key hurdles is acceptance and adoption. Moving people from the 'status quo' to a new system can be difficult. As Mike Ogbalu III noted, "It’s always a challenge to move people from the ‘status quo’." This resistance can hinder the widespread adoption of PAPSS. To mitigate this, PAPSS is equipping its participants with the ability to articulate the benefits of the system in terms of speed, low cost, and guarantee of receipt of funds. By demonstrating these advantages, commercial banks and their customers can be encouraged to adopt the new system.

Another challenge is adapting to new standards. PAPSS uses the latest standards in payments, ISO 20022, which, while similar to current standards, will still require an adjustment period. This transition can be complex and time-consuming. To address this, PAPSS is actively supporting its participants in this transition. By providing training and support, PAPSS can help commercial banks and other participants adapt to the new standards more smoothly.

Regulatory compliance is also a significant hurdle. Ensuring compliance for cross-border transactions to settle a payment in 120 seconds is a complex task. The system must comply with the regulations of multiple countries, each with its own set of rules and requirements. PAPSS works in collaboration with Africa’s central banks to provide a payment and settlement service. This collaboration ensures that the system is compliant with the regulations of the participating countries. By involving central banks in the governance and daily operation of PAPSS, the system can better navigate the regulatory landscape and ensure compliance.

Competitive Advantages

PAPSS offers several competitive advantages over existing cross-border payment systems. One of the key advantages is the ability to offer instant payments. Traditional systems often involve delays due to the need for foreign exchange and liquidity requirements. In contrast, PAPSS offers instant payment settlement, which is a significant improvement over traditional systems that can take days to process transactions. As Catherine Muya highlighted, "in the pilot exercises we saw turnaround times of a matter of seconds." This speed is crucial for businesses, as time is money. Traders will no longer have to wait days for their payments to clear, and the system’s availability alone is a dealmaker, which will open many trade corridors within Africa.

PAPSS also reduces transaction costs by eliminating the need for correspondent banks and third-party currencies. This makes it more affordable for businesses to engage in cross-border trade. The AfCFTA estimates that PAPSS will save Africa more than USD 5 billion a year in payment transaction costs alone. This cost savings can be reinvested into businesses, fostering economic growth and development.

In terms of security, PAPSS provides a secure platform for cross-border transactions, minimizing risks associated with traditional payment systems. As Mike Ogbalu III noted, "The customers will experience faster, more cost-effective, and secure cross-border transactions from the comfort of their banks’ mobile applications or through their branches."

Conclusion

The launch of the PAPSS FX market platform this year marks a significant milestone in the journey towards enhancing financial integration and economic prosperity across Africa. By facilitating instant cross-border payments in local currencies, PAPSS aligns perfectly with the broader goals of the AfCFTA. The system offers numerous benefits, including cost efficiency, speed, and security, making it a game-changer for intra-African trade. While there are challenges to its implementation, proactive support, collaboration with central banks, and ensuring regulatory compliance can mitigate these risks and ensure the success of PAPSS. As Africa continues to strive for greater economic integration, PAPSS stands as a beacon of innovation and progress, paving the way for a more prosperous and unified continent.