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Africa’s first continent-wide digital system aimed at facilitating payments for goods and services in local currencies is weeks away from being deployed in live transactions, GTR can reveal.

The Pan-African Payment and Settlement System (PAPSS) aims to enable the processing, clearing and settling of intra-African trade and commerce payments, leveraging a multilateral net settlement system.

In the latter months of 2021, the initiative moved into commercial production after being successfully piloted with six central banks across the West African Monetary Zone (Wamz), which counts Gambia, Gambia, Ghana, Guinea, Liberia, Nigeria, and Sierra Leone as its members.

That initial trial saw central banks use the system in a “controlled environment,” whereby payments were not linked to any underlying trade flows or payments between companies, PAPSS deputy CEO John Bosco Sebabi tells GTR.

But the system is shifting closer to real-world use, with nearly 20 commercial lenders active in the region having now been onboarded. Bosco says he expects them to move into “live production mode” sometime this month, or next.

Two more central banks from outsize Wamz are in the processing of joining PAPSS, Bosco adds.

“Banks having been testing the system in earnest, training users and staff on how to properly use it,” he says.

“The way PAPSS is structured, it relies on central banks, so initially it will be used by  commercial institutions in the West Africa zone. However, we have other central banks signed up and ready to start their integration soon. As we move into new jurisdictions we will bring in new central banks and commercial lenders,” he says.

 

How it works

Cross-border payments in Africa typically involve a third currency, such as the US dollar or euro, leading to high costs and long transaction times.

According to the African Export-Import Bank (Afreximbank), over 80% of the cross-border transactions originating from the continent’s banks are currently cleared and settled offshore.

The platform addresses this issue by enabling instant, cross-border payments in local currencies between African markets, thereby simplifying transactions and reducing dependency on hard currency. According to Afreximbank, its full implementation is expected to save the continent more than US$5bn in payment transaction costs each year, as well as underpin the growth in intra-regional trade envisaged by the African Continental Free Trade Area (AfCFTA).

Central banks are integral to the system and will play a key role as settlement banks for commercial lenders on the system, Bosco says.

For example, for a transaction involving a trader in Ghana and a counterpart in Niger, African financial institutions currently rely on correspondent banks in North America or Europe, adding both costs and time to the process.

“[With PAPSS] there are two African commercial banks involved and their central banks. Now, this greatly reduces the duration it takes for a payment. In the PAPSS pilot we have seen payments completed in 10 seconds and below,” he says.

The platform has been developed by Afreximbank, which is also acting as the main settlement agent in partnership with participating African central banks. The implementation of the infrastructure is taking place in collaboration with the AfCFTA secretariat, with the endorsement of the African Union.

Bosco says Afreximbank’s participation will guard against settlement risk problems.

“If a central bank has a temporary lack of liquidity for any reason, there is a standby overdraft facility from Afreximbank ensuring there is not a glitch in the system. In effect, Afreximbank acts as a guarantor.”

In recent weeks there has also been a push to start onboarding fintech companies onto the platform with a view to widening the payment and settlement system’s reach once it is being used commercially.

In February, Africa-focused digital payments network MFS Africa announced it had joined PAPSS, in theory extending the initiative’s reach to hundreds of millions of mobile users in 35 African markets.

The move would be of particular benefit to small and medium-sized enterprises (SMEs) and traders.

“Africa is the global leader in mobile money services. A recent study found that 64% of the daily global transactions through mobile money platforms in 2020 happened in sub-Saharan Africa,” says CEO of PAPSS, Mike Ogbalu.

Bosco accepts there are challenges facing the roll-out of PAPSS across the continent, not least a lack of technology infrastructure.

For instance, PAPSS is being built using ISO 20022, the latest standard for payment messaging between financial institutions. Bosco says “many banks will have to adapt to this”.

“Scaling up to be able to integrate can be a challenge,” says Bosco. “[But] for a system of this magnitude looking to rollout across the whole continent, these challenges are usual. They are not insurmountable.”