Thread by @StoneAtwine

Why wallets are the future of payments - a thread.

Payments have traditionally gone through banks, the outdated SWIFT system, and payment networks like Visa and Mastercard. The problem with that system is that it is designed to pay way too many people.

And it is therefore terribly expensive for the consumer and merchants that end up paying these fees. This system persists because it is deeply ingrained especially in Western countries.

I’ll give 2 quick examples to show how cross border money transfer and card payments work when purchasing something whether online or physically.

Card payments - when you use your card to pay at a restaurant, there’s a chain of connections happening in the background that adds about 3-4% to your dinner and lines the pockets of multiple corporations.

When you make a card payment, there are multiple players touching the transaction and they all want to get paid.

This is what happens.
You (diner) pull out the card and The Restaurant (merchant) sends the instruction to their bank (acquiring bank), the bank sends it to VISA (card network), then visa sends to it to your bank (diner’s bank)..

..they do any confirmations around availability of funds and fraud checks. Money is debited from the diner’s account and sent back through the same loop. Your bank to visa to the restaurant’s bank and into their account.

For some transactions, especially online ones, you’ll have other players like Stripe, FLutterwave, Checkout or Paystack. Every one in this chain wants to get paid. They usually share about 3-3.8% of the cost.

So when you pay $100, the bulk goes to the issuing bank, the diners bank. By the time the money hits the merchant’s account, it is about $97. The merchant has to pay this fee.

Naturally, it’s passed onto the consumer through slight increases in price. And some hardcore foolish merchants in Africa add it to your bill as a punishment for paying by card. Hehe.

Enter wallets.
When you pay with a digital wallet like @eversendapp or even mobile money, money is moved within one platform and a simple debit from your account to the merchant’s account is done.

Wallets do not have to pay multiple banks, payment networks (Mastercard/VISA) or even payments processors. And they can there’s fire charge a tiny fee that can easily be swallowed by the merchant. Anywhere from 0 to 1%.

In some cases, direct debiting of bank accounts can happen and make life easy for all involved. This should explain why the big payments players are snapping up all the new payment companies that are making direct contact with bank accounts. @Plaid anyone?

Card payments are deeply ingrained in the payments DNA of western countries especially the US. But in Africa, we are building from scratch and cards will never make a serious dent.

Even if banks are too slow to allow direct debits from their user’s accounts, wallets are already storing value and I believe this is the way of payments in Africa in the long term.

Let’s look at cross border money transfer.
When you send money from Kenya to Ghana using your bank, there must be some kind of relationship between your bank and the recipient’s bank. But this is not a direct relationship.

Hence the concept of correspondent banking. And the biggest foolery I’ve ever seen in my life. The SWIFT system allows the banks to exchange information and facilitates the transfer.

When you initiate that 10,000 transfer to Ghana, SWIFT will find a bank usually in New York where the two banks hold accounts if your lucky. If you’re unlucky there will be two New York banks.

Your bank in Kenya will debit your KES account of the sending amount 10,000 and a sending fee - usually $20-35. Then they’ll ask their New York correspondent bank to debit their (sending) bank account in NY the equivalent of 10,000 KES.

Caveat: you will be charged about 4-6% to exchange the KES 10,000 to USD. Remember you’re sending money to Ghana. Now you’re dealing with dollars.

The NY correspondent bank will debit the sending bank’s dollar account and keep a fee. This fee can vary wildly and widely based on the correspondent bank’s policies.

If you’re the unlucky kind and the sending bank in Kenya and recipient bank in Ghana don’t use the same NY bank, your money will be sent to a second bank in NY that the Ghana bank has accounts at.

They’ll also skim off their fee and they deposit the remaining amount to the receiving bank’s NY account. The receiving bank will then receive USD, exchange it - at another fee and deposit the remaining GHS into the receiver’s account. After 3-5 days. What?

And you know what’s even more interesting? These banks do what they call overnight borrowing and lending so they like to keep your money. That money can land in Ghana and they keep it for a cool 2 nights before it reflects in your account.

Obviously, small amounts are never to be sent through this system. I’ve heard stories of someone sending $100 and the recipient gets $12 after the banks are done with the transaction.

Sending fee, exchange commission, correspondent bank fee, receiving bank fee and forex commission. The most annoying thing is that the fees are usually unknown to the sender.

Now let’s compare with sending money with a wallet like @eversendapp. We take your funds from your wallet, exchange it directly from KES to GHS and deposit the equivalent in the recipient’s account.

And if you’re sharp and the recipient has Eversend, then there’s no sending fee but only a small transparent foreign exchange fee. INSTANTLY.

That my friends, is why we are building a connected financial system against all odds. And perhaps this explains why Eversend will have SME accounts. Because we are tired of the BS.