Rising compliance costs, small markets and low margins – the challenges of staying competitive when weighing cost vs AML compliance in Africa
Rising pressure, intense competition and small viable markets. African companies face unique challenges, as most of them operate in developing nations and regions of the world that are nowhere near the development level of the US and Europe.
So when the international community heaps extreme regulatory requirements on them, most face severe competitiveness issues that are unimaginable in Washington and Brussels today. See how to save on sanction screening.
Here’s how African companies need to consider cost vs. AML compliance – and some thoughts on staying competitive amidst international regulatory pressures.
(See SA’s FIC urgent plea to lawyers and estate agents: get compliant to avoid AML penalties.)
The Rising Pressure for AML Compliance in Southern Africa
In recent years, Southern Africa has seen a significant increase in Anti-Money Laundering (AML) compliance requirements. Out of the 7 countries that make up Southern Africa, 5 were either greylisted, served a warning or put under observation in the last 5 years.
Some might argue that the entire region is under close scrutiny by the Financial Action Task Force (FATF). For good reason, of course. We have proof of extensive gold smuggling rings, contravening companies that need to be served AML fines and rampant illicit financial flows.
Yet, while necessary, the global pressure to comply is both a legal mandate and prerequisite for international trade and investment, and it poses serious and unique challenges to companies in a region where many economies are still emerging.
Se why the SA Reserve Bank has fined Grindrod Bank R10m for non-compliance, why you need great AML in property sales and all about micro-credit AML.
Historical Comparison: What Trading in Africa is Like Today
It’s difficult to draw parallels between developing and developed nations/regions. But, in many ways, Africa’s broad consumer market is today where the United States were in the early 20th century.
You have:
- Rapid economic transformation: Moving from agriculture-based economies to more diversified and industrialised ones, as America did in the early 1900s.
- Limited access to capital: Restricted due to high interest rates and limited banking infrastructure.
- The need for technological adoption: Just like the US was grappling with electricity and the telephone back then, Africa is now being blasted with evolving fintech solutions – a blessing for startups but a transformation nightmare for corporates.
- Infrastructure development: Africa is only now building proper roads, railways, and digital infrastructure. For example: only 2 cities (Johannesburg and Pretoria) out of the 7600 on the continent have the equivalent of a metro train, and it mainly serves arriving tourists, not residents.
Imagine for a moment, going back in time to the Great Depression in the US and telling all traders they couldn’t buy or sell unless they first checked the identity of every customer against a list of names held in an office on the other side of the world… The modern world literally would not have been possible if we’d done that.
Sounds silly, until you go to rural Africa and see how many people there don’t even have electricity or potable water yet.
What most people don’t realise is just how price-sensitive and competitive developing markets like Africa are.
Challenges of Small Markets and Low Margins
African markets face extreme challenges that are virtually unimaginable to anyone in Europe or America today:
- Price-sensitive Market: The average purchasing power in Africa is low, with Sub-Saharan Africa's GDP per capita significantly lower than the world average. This creates a market that is highly price-sensitive, and companies need to allocate more resources to marketing to connect with a small consumer base that can afford their products. The scarcity of market data further exacerbates this challenge.
- Supply Chain Challenges: African businesses face logistical challenges due to weak infrastructure and difficulties in moving around, impacting the supply chain and necessitating creative distribution strategies.
- High Cost of Capital: African businesses often face high interest rates on bank loans, limiting their ability to reinvest and grow. The high cost of securing capital is a major factor preventing many businesses in Africa from reaching significant scale.
Not to mention the average income per person in Africa is 10 times lower than in the US and UK.
The Intensity of Competition in Developing Markets
The African market, while small, is fiercely competitive. Companies are constantly vying for a share of a limited consumer base, where brand loyalty is hard-won and easily lost. In such an environment, any increase in cost can significantly impact a company's competitive edge.
And this is especially true when it comes to regulation and compliance.
62.5% of the countries in the lowest-performing quartile of the World Bank’s Ease of Doing Business Index are African, indicating a challenging regulatory landscape. This can make it difficult for businesses to build consistent long-term plans, increasing the cost of doing business.
The Financial Burden of Compliance Costs
Compliance with AML regulations, such as conducting Sanction Screening, is not just a legal necessity; it's a significant financial undertaking. Implementing and maintaining compliance systems can be prohibitively expensive, especially for small and medium-sized enterprises.
These costs often translate into higher prices for consumers. This means African companies risk becoming less competitive in an already pressured and competitive landscape. See how to save on sanction screening.
The Dangers of Raising Prices in Developing Economies
In a region where a significant portion of the population is price-sensitive, raising prices to cover compliance costs can be a risky strategy. It can lead to reduced sales and even push customers towards more affordable, non-compliant alternatives, ultimately harming the business and the economy and the global community at large.
The Need for Smart, Affordable Compliance Solutions
There is a critical need for AML compliance solutions that are both technologically advanced and affordable. Such solutions would ensure compliance and efficiency without compromising on competitiveness. The ideal solution would be a seamless compliance integration into business operations at a cost that doesn't deter growth.
And that is why we developed ZenDetect. It’s locally made in Southern Africa, for the African market. Offers the latest sanction screening technology African companies need to ensure their AML compliance, but at a fraction of the cost.
We benchmarked ZenDetect against some international solutions (who seem to be unaware of how unfavourably exchange rates are skewed against African companies) and found that we can offer the same or better service at over 90% lower costs. See how to save on sanction screening and how to get sanction screening in Africa.
