Despite the ongoing macroeconomic and geopolitical headwinds experienced by the global economy, one area of the international financial system that has shown steady progression is digital payments. Since the Covid-19 pandemic, they have been spurred by a jump in remittance flows, and the greater availability of digital infrastructure and services, as well as higher demand for fast and seamless non-physical transactions. The trend is even more notable across low- and middle-income countries. While non-cash retail payments climbed by 13% globally between 2018-21, they rose by 25% across emerging markets during that time.
Decentralised Payments
While PayPal, founded in 1998, can be considered the global innovator in digital payments – with an estimated 201.2m users as of December 2023 and a 50.3% market share in the payments processing sector globally – there have been other national-level platforms with higher penetration rates, especially across emerging markets. Pix in Brazil, Alipay and WeChat Pay in China, GoPay in Indonesia, M-PESA in Kenya, Maya and GC ash in the Philippines, and MoMo in Vietnam have all expanded substantially in recent years, many of which have experienced high rates of adoption and penetration within months.
For instance, in November 2020 the Central Bank of Brazil launched Pix, a business-to-business, business-to-company and company-to-company platform. By May 2023 it had reached 140m users – equating to an 80% penetration rate for adults – as well as 13m companies. This swift upturn was possible due to high existing smartphone and banking penetration rates in Brazil compared to many other countries in the region. In 2020 when Pix was established, 70% of Brazilians had bank accounts compared to 35.5% of Mexicans.
Indonesia is another important case study where the adoption of digital payment solutions has been robust. However, unlike Brazil, which has a high level of banking penetration, Indonesia had over 97m unbanked adults as of July 2023, roughly half of the country’s 184m adults. To boost financial inclusion in the country, the leading digital payment app GoPay provides each user with 100 free transfers per month, as well as other services such as the ability to buy mobile phone credit and data, pay bills and receive a monthly expense report to improve consumers’ financial planning. A study of Indonesian consumers in 2022 showed that 71% favoured using an e-wallet instead of cash.
GoPay, M-PESA, Pix, WeChat Pay and others enjoy high national penetration rates on same-currency transfers due to tailored services that meet the specific needs and regulatory environments of their respective countries. By prioritising convenience and trust, they have facilitated user adoption, which may not be easily replicated in international transactions. Cross-border revenue is growing at a considerable pace – rising at a rate of 17% to $240bn between 2021-22. However, international payment systems face greater challenges in achieving similar penetration due to the complexity of navigating diverse regulatory landscapes, fluctuating financial infrastructure and differing consumer behaviours across multiple markets. Furthermore, the establishment of a globally accepted platform requires coordination between financial institutions worldwide, making regional or global ubiquity harder to attain.
Regional Payments
One region where closer integration in the digital payments space may be feasible is the GCC, whose six currencies are all pegged to the US dollar. In the GCC region the value of digital payments is projected to rise by an annual rate of 8.7% between 2024-28 to reach $178bn by the end of the period. The Middle East is also expected to be the fastest-growing real-time payments market globally, with a 30.6% projected increase in transactions between 2022-27. In part, this strong growth in the GCC is thanks to the digital infrastructure laid down by governments and regulators since the pandemic.
Following a decision by the GCC Supreme Council, in December 2021 the Arabian Gulf System for Financial Automated Quick Payment Transfers (AFAQ) was launched. AFAQ was developed by, and is operated by, the Gulf Payments Company, which is hosted in the UAE and Saudi Arabia. AFAQ is designed to make seamless payments between the payment systems of the GCC’s six central banks, and is a pioneer in cross-border transactions. By mid-2023 over 50 banks had joined AFAQ.
Another trans-regional payment system in the Middle East is the Arab Regional Payment System – known as Buna – developed by the Arab Monetary Fund. This system goes beyond GCC countries, offering instant transactions in several currencies across the region to make cross-border payments as seamless as domestic ones. More than 100 financial institutions were included in its network as of February 2024.
Barriers To Growth
In many emerging markets, the principal challenge to boosting the usage of digital payments is the precise reason that they are needed – limited financial penetration. For instance, a 2018 report by the International Labour Organisation suggested that some 60% of the world’s employees were in the informal economy, 93% of whom were found to be working in emerging economies. Internet access has proven to be one of the most crucial factors in boosting financial penetration, as it is needed to be able to verify real-time payments. This can be a challenge in rural areas where connection speeds are slower and the electricity supply may be unreliable.
In rural Africa, where mobile phones and smartphones are less widespread, digital payments are often executed through agency banking. Under this model, financial services are delivered outside traditional bank branches using third-party agents to provide banking services. The transaction takes place via the pointof-sale device of mobile agents. In Nigeria more than 50% of this market is dominated by OP ay and PalmPay, two Chinese-owned digital banking platforms, which between them had over 1m mobile banking agents facilitating payments in their networks as of July 2023.
Senegal-founded mobile money start-up Wave became Francophone Africa’s first unicorn – or, start-up valued at more than $1bn – in 2021. Started in 2016, by 2022 it accounted for half of mobile money accounts in Senegal. Wave’s key feature was utilising QR codes that agents scan to complete a transaction, eliminating the need to manually dial alphanumeric codes on mobile phones – as used by other firms. As literacy rates vary in the coverage area, the QR codes facilitate payments for those unable to read or write alphanumeric codes.
Remittances
One of the most important customer-to-customer cross-border financial links between advanced and emerging markets are remittances – also one of the fastest growing subsets of digital payments. Remittances received by low- and middle-income countries grew by 3.8% in 2023. This marked a slowdown from the 10% seen in 2021 and the 5% in 2022, though it was still above the average expansion of 3% seen globally in 2023. Some regions exhibited stronger growth, such as 8% for Latin America and the Caribbean, and 7.2% for South Asia. This is compared to 3% for East Asia and the Pacific, and 1.9% for sub-Saharan Africa. In MENA remittances receipts fell by 5.3% on the back of a drop in inbound remittances to Egypt, attributed in part to the gap between the official exchange rate and the parallel market. The largest flows of remittances came from the US, from where $125bn was sent to India, $67bn to Mexico, $50bn to China, $40bn to the Philippines and $24bn to Egypt.
Digital payment solutions have grown substantially in the remittance market given the high commission rates for sending money through banks and post offices, which charged an average of 12.1% and 7% in 2023, respectively, according to the World Bank. Money transfer operators, meanwhile, charged an average commission of 5.3% and mobile operators charged 4.1%.
According to Visa’s 2023 “Digital Remittances Adoption Report”, an estimated 53% of remittance senders were using digital apps to complete their transactions. Given that 47% still use traditional channels, there is still significant room for growth in the digital payments space. On a country-by-country basis, remittances originating in the GCC have among the highest usage of digital channels, with Saudi Arabia and the UAE reporting 69% and 65% usage of digital channels to send remittances – higher than the 53% global average.
Overall, the landscape of cross-border financial transactions is evolving rapidly. Fuelled by digitalisation and the push for financial inclusion across emerging markets, the growth of payment platforms highlights the shift towards digital payments – driven by the necessity to cater to both banked and unbanked populations. Meanwhile, the increase in cross-border remittances and the development of digital payment systems within regions like the GCC underscore the growing demand for more efficient, accessible and cost-effective methods of financial transactions. Despite the challenges posed by varying regulatory frameworks and financial infrastructure, the innovation and adaptation witnessed in the digital payment sphere promise to bridge the gap in global financial inclusion and efficiency.
Read More from OBG
