As a student, Mallick Bolakale ran a tech gadget business that relied on purchasing products from international eCommerce platforms. However, making payments was a constant challenge.
To navigate this, he often relied on middlemen. Once, his transaction was flagged because the payment was made from an IP address different from his own, leading to a loss of funds.
Years later, as part of Paystack's financial crimes compliance team, he would encounter these same issues but on a larger scale as foreign businesses trying to receive payments from Nigerian customers were often required to create local entities.
"The question for me was, I'm a digital business. People would access my services from everywhere in the world, except my services are prohibited from a particular country. Why do I need to create a local entity?" Bolakale asks rhetorically. "Now that I had that experience with Spotify, I knew first-hand what an eBay or whoever would have thought that would make them shut down an entire country."
After leaving Paystack in 2022, he launched Startbutton, a merchant of record service that helps businesses bypass these challenges and expand globally without the need for local entities.
Quick access to global markets
The challenges Bolakale faced are not unique. Cross-border payments have long been a hurdle for businesses in Africa, especially with the growth of the continent's digital economy. But with a growing emphasis on trade within the continent, more businesses are exploring opportunities to provide their services beyond their original countries of incorporation.
However, different regulatory requirements across Africa slow the pace of expansion, a challenge merchants of record are perfectly placed to solve.
A merchant of record (MoR) is an entity authorised to process transactions on behalf of a business. They take on several key functions for businesses, including initiating transactions and settlements and ensuring that funds are correctly processed and received.
"They basically say, 'Don't worry, we've got this; just relax and scale.' They act as the legal entity for your sales in those countries, handling all that paperwork and red tape. This means you scale your enterprise much faster and without the headache of fulfilling all those complexities or betting on an unproven market expansion," Austin Okpagu, Nigeria Country Director for Verto FX, says.
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Merchants of record stay abreast of local laws and regulations, ensuring that all transactions and businesses comply with regional requirements. Furthermore, they handle the calculation, collection, and remittance of taxes on behalf of the businesses they work with.
The case for merchant of record solutions
The United Nations Economic Commission for Africa predicts that the African Continental Free Trade Area (AfCFTA) agreement will increase intra-African trade by up to $70 billion by 2040. However, this growth is hindered by numerous challenges, many of which stem from the continent's fragmented financial infrastructure and regulations. These issues pose significant barriers for businesses attempting to expand beyond their local markets.
A major pain point is the fragmented regulatory landscape across African countries. Each nation has its own set of financial regulations, tax laws, and digital payment rules, which businesses must adhere to.
For example, foreign companies often have to establish a local entity to receive payments from users.
Additionally, businesses have to comply with local tax regulations even if their operations are limited in scale. These regulatory differences across countries make it a significant challenge for businesses to maintain compliance while scaling their operations.
"The alternative to using an MoR is setting up a local entity. If you set up a local entity, you will be liable for all the taxes that a local entity in Nigeria is liable for. But if you use an MoR, they will handle all the taxes on your behalf and there are taxes you won’t need to pay," Adekoyejo Olatoye, a fintech expert, notes.
Currency volatility and exchange rates add another layer of complexity. Many African currencies fluctuate considerably against global currencies like the US Dollar or Euro.
This unpredictability makes it difficult for businesses to set stable pricing for their products and services when dealing with cross-border transactions. As a result, businesses risk incurring losses due to unfavourable exchange rates or an inability to manage currency fluctuations.
These challenges are particularly difficult for small and medium-sized enterprises (SMEs) that lack the infrastructure or financial expertise to hedge against these risks. On the other hand, customers are often unable to predict the true cost of purchases, potentially discouraging them.
Payment infrastructure also remains an ongoing issue in many African countries. While mobile payment adoption has increased in recent years, traditional banking systems in several African nations are still underdeveloped, and credit card penetration remains relatively low.
This makes it hard for businesses to accept international payments or integrate with global eCommerce platforms. Consequently, many African businesses rely on intermediaries or manually process payments to work around these gaps. Moreover, many African countries have preferred payment methods that businesses may not be familiar with.
Fraud prevention and security presents another challenge. Africa faces unique risks in terms of digital fraud, and businesses that process international payments need to implement strong security measures to protect customer data and maintain trust.
However, standards for fraud prevention and transaction security differ from country to country, making it challenging for businesses to apply consistent protocols across all markets.
Olatoye notes that while merchants of record solve much of the cross-border payment challenges faced by businesses, the liability they assume means they often mark up their rates significantly. However, he argues that when weighed against the benefits, this can be a small price to pay especially for businesses with smaller operations.
Can merchants of record fix cross-border payments in Africa?
Merchant of record (MoR) services can address many of the challenges businesses face with cross-border payments.
By acting as intermediaries between businesses and customers, MoRs take on critical functions like payment processing, compliance with local regulations, and fraud prevention, which enables businesses to focus on growth rather than the complexities of managing payments in multiple countries.
One of the key advantages of MoRs is their ability to navigate regulatory complexities. MoRs specialise in handling these tasks, ensuring that businesses comply with local laws and tax requirements without having to deal with the administrative burden themselves.
Currency conversion and exchange rate risks are also mitigated by MoRs. MoRs typically offer embedded currency conversion tools, which allow businesses to easily convert between currencies at competitive rates.
These tools help mitigate the uncertainty that businesses face when pricing their products or services across borders, ensuring that both the business and the customer receive fair value
In a continent like Africa with multiple currencies, MoRs allow businesses to seamlessly handle cross-border payments in different local currencies, avoiding the financial uncertainty that often comes with manual currency conversion.
Another benefit of MoRs is fraud prevention. MoRs employ advanced fraud detection systems and are familiar with the security challenges specific to different African markets. This ensures that businesses are better equipped to handle security threats and protect themselves and their customers.
MoRs also significantly reduce the time and cost of market entry. Setting up a local entity in a new country can take months, including the time needed for incorporation, hiring staff, and ensuring regulatory compliance.
In contrast, MoRs can help businesses begin operations in new markets in just a few days. This speed to market is invaluable, especially in industries where businesses need to move quickly to capitalise on growth opportunities.
Despite these advantages, Okpagu notes that the novelty of MoR solutions may present challenges with regulators who are often unaware of how they operate.
"In some cases, localising your business may offer better protection against some regulatory uncertainties that could arise," he notes.
Additionally, with MoRs doing a lot of heavy lifting locally, finding the right MoR is crucial, as the wrong one could spell trouble with local regulators.
While MoRs offer a promising solution for businesses looking to scale, their long-term viability depends on how well African regulators adapt. Additionally, progress with cross-border payments will depend on the development of clear and unified regulations ultimately driving increased intra-African trade.
