Shake Your Market Maker: Digital Disruption in the African FX Landscape

28th June 2018

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.

Changing views

As well as encouraging the central banks to think outside the box when it comes to digital FX, corporate treasurers too must take the time to reconsider the way they trade FX. Today’s treasurers must ensure that they are achieving best execution and are streamlining FX workflows. At the same time, they want to minimise operational inefficiencies from manual capture and reporting. Electronic FX trading is an obvious solution – and yet some treasurers are still afraid to make the switch, or don’t think it’s right for them.

In a sense, this is understandable, because simply signing up to a single or multi-dealer dealer platform will not automatically solve every treasurer’s FX challenges. But approached in the right way, the potential efficiencies are significant. At Standard Bank, therefore, we advocate taking a strategic look at broader digital innovation trends and how they can complement the treasury function’s workflows; we then work hand-in-hand with our clients, mapping out their process flows, identifying any gaps, and finding the appropriate digital solution to suit their specific requirements.

Through this collaborative process, we can also help treasurers to better understand their internal needs in terms of governance and operational efficiency, whilst discussing best execution as it relates to market impact. In addition, thanks to our on-the-ground expertise, we can provide insight and guidance beyond pure FX execution by offering additional value-based services across research, hedging and, most importantly, settlement capability. 

Moreover, by leveraging our global and local capabilities, we can guide treasurers through the broader economic, legal and political landscapes in which their FX transactions occur, combining market intelligence and research with real-time pricing, trade execution and post-trade services – all on one platform.

Opportunity knocks

In this way, we can deliver digital solutions that talk to the heart of treasurers’ current FX and wider cash management needs, whilst preparing corporates for the operating environment of the future. After all, in just a few decades’ time, doing business in Africa will be very different from what it is today. By 2040, for example, half of the world’s young population will be African. With this demographic shift, digital business will become the norm and, as a result, traditional treasury processes will be challenged. 

That is no bad thing; it simply means that treasurers, and their banking partners, must start looking for opportunities arising from this change. 

In the world of African FX, that change is digitisation – which is bringing about a market in which liquidity and pricing can be disrupted for the better. But for the true benefits to be felt, corporates, financial institutions, fintechs and central banks must all be prepared to shake up the status quo.  

Tim Hutchinson

Head of Digital for Financial Markets, Standard Bank

Tim is responsible for developing the digital transformation of the Global Markets Business of the Standard Bank Group. He is responsible for working across the various asset classes (FX, secuities, credit & rates) as well as branches and regions (in the African operations) to ensure that the desks and product houses are moving to a new digital way of working. In his role he reports to the Head of Markets and forms part of the markets management team.

 Tim has been working at the Standard Bank group for 14 years, spending the majority of his career in foreign exchange, initially in a sales role for corporates.  Towards the latter part of 2010 he moved onto the electronic FX desk where he helped shape and build out the electronic FX offering as it relates to trading, sales and clients. Tim was responsible for the re-design of the centralised trading model for FX and creation of the digital solutions, and recently he was asked to extend this role to include the rest of the asset classes.

Tim holds a Bachelor of Commerce and  a Post Graduate Qualification in Investment Management from the University of Johannesburg.

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