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Payments

Breaking Down the Challenges of Cross-Border Payroll Payments in Africa

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With a population of 1.2 billion, a world-leading growth rate of 2.7%, and a median age of just 20, the continent of Africa offers tantalizing markets for anyone with an eye to the future.

In the present, however, Africa poses a unique set of obstacles to companies making payroll payments to their employees in the continent.

This article will look at the potential challenges companies encounter in sending cross-border payments to employees in Africa.

Limited Banking Infrastructure

Some African countries, such as South AfricaKenyaGhana, and Nigeria, have built strong banking systems. Nonetheless, due to the still-developing reality of African banking infrastructure, certain limitations still apply to many countries, and by extension, the continent as a whole. Some examples include:

  • Cash is still king for much of the continent. McKinsey estimates that as much as 90% of all transactionson the continent are cash-based.
  • Many rural areas have little access to banks, or even ATM machines, posing significant problems for companies looking to deliver payroll payments.
  • The pace of development is wildly uneven. The current central bank in Somalia, for example, was only established in 2009.

Yet, non-bank solutions are emerging and gaining traction. Buoyed by the widespread use of mobile phones, digital payments are making inroads into the cash culture. People across Africa are starting to move to online e-wallets accessible through their phones instead of cash.

Fintech startups are already dominating the hi-tech industry across the continent, producing an explosion in alternative payment methods. McKinsey predicts that payment revenues in Africa will reach $40 billion by 2025, a growth of 20% year-over-year since 2021.

High Transfer Costs

Even when banks provide coverage, payment rails in Africa are not conducive to fast and cheap payroll payments. The IMF tells a story of a $100 payment a man in Ghana made to his lawyer in Nigeria. It took two weeks and cost $40.

The money travelled the world and back. Literally. Most African banks route payments through clearing banks in the US or EU, even for payments within the continent.

That $100 payment started as Ghanaian cedi but was converted to dollars and sent to America – to the clearing bank used by Ghana’s central bank. Those dollars were then delivered to another clearing bank – the one used by Nigeria’s central bank – which converted the dollars to Nigerian naira and delivered them to the recipient’s bank in Nigeria.

Every leg of the journey added costs, including converting the currency to and from dollars.

But that payment was quick and cheap compared to what it would have cost if the lawyer lived in the Ivory Coast instead of Nigeria. While Ghana and Nigeria both use clearing banks that work in dollars, the Ivory Coast’s clearing bank works in euros. So those dollars would’ve required another conversion to euros before reaching the second clearing bank.

These types of costs can significantly impact the overall payroll budget, especially for organizations with a large number of international employees.

Currency and Exchange Rate Fluctuations

Africa is a continent of 54 countries that use 42 different currencies among them. That means virtually any cross-border payment will require at least one currency exchange.

Many of those currencies are highly volatile, leading to potential discrepancies in payroll amounts and increased costs due to exchange rate fluctuations.

Take the Ghanaian cedi as an example. The cedi lost 42% of its value between January 2020 and September 2022, trading at 9.94 cedi/dollar. By November of the same year, it leaped to 14.7, then dropped to 8.10 a month later.

Some countries impose strict controls over currency movement, requiring companies to plan payments carefully to avoid running into government-imposed limits. Others must contend with currency shortages, forcing banks to wait to receive money as it becomes available.

Compliance with Anti-Money Laundering (AML) and Know Your Customer (KYC) Regulations

Money laundering and fraud risks are global concerns, and organizations must comply with AML and KYC regulations. However, ensuring compliance in cross-border transactions will be a difficult challenge.

The sheer ubiquity of cash-based transactions poses transparency and traceability challenges. Every country approaches AML differently, both in terms of the laws in place and their ongoing enforcement.

As a result, many jurisdictions within Africa should be considered high-risk areas for AML and KYC compliance. Organizations operating in multiple African countries need to navigate through a maze of differing regulations, documentation requirements, and due diligence procedures.

Some countries – most notably South Africa, Nigeria, Kenya, Mauritius, and Ghana – have implemented strong measures to improve anti-money laundering efforts in recent years. At present, however, constant vigilance is required.

Regulatory Complexity

Africa is a mosaic of countries and cultures, each with its own regulatory framework regarding foreign exchange, taxes, and labor laws. Navigating the intricate web of local regulations – from minimum wage variations to diverse tax brackets and reporting obligations – can prove challenging and time-consuming for organizations operating across borders.

Knowing the laws and practices is one part of the challenge. Staying on top of changes across the continent is another challenge altogether. Failure to keep up can lead to fines for non-compliance, and the risk can be expected to grow as labor laws expand in complexity and enforcement.

Connectivity and Technology

In certain areas, limited access to reliable internet connectivity and technology infrastructure can hinder the seamless execution of cross-border payroll payments. This can lead to delays, errors, and disruptions in the payment process. Some interesting stats on African connectivity:

  • 570 million people in Africa are connected to the internet, out of a population of 1.2 billion.
  • Continental connectivity is more than double what it was in 2015.
  • Nigeria has the largest number of people with access to the internet: 100 million.
  • Connectivity varies from region to region. In the south, 66% of the population is connected, a figure higher than the global average of 62%. In Eastern Africa, 26% of the population is connected, and in Middle Africa, only 24%.

The Fintech Advantage

Overcoming the challenges of payroll payments in Africa requires a technology solution created for the task.

Papaya Global built the first unified payroll and payments platform designed for the complexities of global payroll payments. We’re regulated and licensed to transfer funds globally, and do so over our own payment rails for payroll payments via our partnerships with Tier 1 banks.

Our flexible virtual payroll accounts deliver a full value transfer – all within 72 hours. Our solution provides payroll e-wallets which you can fund in your currency of choice (out of 16 currencies), and then pay locally in 160+ countries – so there’s no need to open and manage multiple local bank accounts.

We provide fast KYC and run rigorous AML screenings for every payment, ensuring compliance. Our technology even provides automated JE and ERP connectors for easier process management and reconciliation. Contact us today to find out more.