Shake Your Market Maker: Digital Disruption in the African FX Landscape
By Tim Hutchinson, Head of Digital for Financial Markets, Standard Bank
Africa’s foreign exchange (FX) market may be fragmented, but it is also unencumbered by legacy trading infrastructure. It comes as no surprise, therefore, that the continent has become a hive of fintech activity and digital FX innovation. Tim Hutchinson, Head of Digital for Financial Markets, Standard Bank, explains the latest developments in this space and how corporate treasurers stand to benefit.
Just five years ago, almost 90% of South African foreign currency trades happened over the telephone. Despite challenges around liquidity and complicated political and capital control environments, 75% of the country’s FX trades are now executed digitally. This electronic trading phenomenon is supported by a rapidly expanding fintech culture – which is spreading across the continent.
There are now circa 314 active fintech hubs in Africa today, across 93 cities and 42 countries. South Africa is most prolific with 54, but Kenya has 27, Nigeria 23 and Ghana 16. Although largely driven by the desire to improve financial inclusion, this fintech expansion is a sure sign of the understanding of a wider opportunity in terms of digital transformation.
Genesis of digital
At the same time, significantly improved levels of infrastructure investment over the last few years have helped more mobile operators and internet providers to engage with the needs of digital Africa. This growing digital environment, coupled with Africa’s new fintech focus, translates easily into the FX trading space to help solve some of the challenges inherent in the market.
For example, meeting the increasingly demanding FX needs of corporate Africa, both indigenous and extra-regional, is essential - but for financial institutions to function as effective market-makers on the continent, they must be able to instantly formulate and distribute risk-based pricing in an ever-changing world. Fintech and digital evolution are natural bedfellows here, especially when central banks increasingly require transparency and electronic audit trails to allow FX trades to happen across the continent.
As a result, several local banks have recently begun offering white-labelled single-dealer platforms for their clients.
It is worth noting here that, while some global multinationals prefer to opt for a multi-dealer platform, the majority of corporates with treasury operations in Africa tend not to take the multi-dealer platform route. One reason for this is the lack of liquidity in the local FX market, and the consequent need, when trying to place large transactions, to manage potential market disruption.
Standard Bank, meanwhile, has not only partnered with a vendor to develop our own platform, but also built proprietary workflows into our system, delivering a cutting-edge technology solution that leverages a fintech mind-set to allow corporate treasurers to access FX markets across multiple jurisdictions.
Making a difference
Yet, despite the growing availability of digital FX platforms, and innovations pushing the African FX market forward, there are still challenges - unique to the local FX market - that banks will not be able to tackle without third-party collaboration.
For example, one of the toughest hurdles when digitising FX trades in Africa is putting liquidity on the platform, since it is often scarce, with minimal central bank allocations. Most banks run an internal book, but distributing prices electronically demands automation and speed. Many banks haven’t been able to achieve this yet. Instead, they use traditional market data services to produce the required numbers. But putting these ‘slow’ prices in front of a corporate treasurer often sees them default to using the telephone, simply because they believe that they can achieve better pricing by doing so.
To really move the needle, therefore, the big investment in the African FX market has to be around price-making capabilities. At present, South Africa leads this space because it has an established primary market, whereas very few other African markets have. Consequently, all liquidity sits in the broker market. This is an opaque and slow world in terms of determining prices.
The solution – and, in Standard Bank’s view, the biggest opportunity for the African FX market – exists in collaboration between the central banks and the market makers. We need to start developing more primary markets. Innovation will then follow, with access to secondary market trading. Failure to take these steps will simply see liquidity pools remaining ‘off-screen’, ultimately limiting market development.