Digital Escrow Helps Africa’s SMBs Bridge Trade Trust Deficit

An estimated $5 billion is lost annually in intra-African trade.

And apart from the high trade costs associated with operating in a highly fragmented region, Terence Naidu, founder and CEO at Truzo, an Africa-focused digital escrow service, says a lack of trust among traders has also hampered cross-border trade growth over the years.

“If you speak to firms across Africa, you realize that the reason small businesses don’t trade much with businesses in the other 54 countries is because they don’t know each other that well. And if you don’t know people well, you don’t trust them,” Naidu told PYMNTS in an interview.

Solving that trade trust deficit would ignite economic activity and intra-Africa trade across the region, he said, while democratizing the trade opportunity between small businesses buying and selling goods and services across markets.

That’s where the value of a digital escrow platform such as Truzo, which holds buyer’s money in a digital wallet until the fulfillment of a purchase agreement, could help fill in the trust gap in Naidu’s view, enabling buyers and sellers on the continent to transact with greater confidence and security.

In fact, in this digital age, digital escrow services like Truzo are a much better alternative to traditional letters of credit issued by banks which are more expensive, involve a lot of red tape and can take several days to process, he noted, all of which makes it untenable for most small and medium-sized businesses (SMBs) transacting across the borders.

“[Our service] is a digitized version of a traditional letter of credit issued by a bank. It’s cheaper, far more efficient, and it can be easily created in the palm of your hand via the Truzo app or via the website in under three to four minutes,” Naidu noted of the firm, which launched in 2018.

When it comes to transaction disputes, although approved Truzo arbitrators can intervene to act as mediators, he said the platform is “self-regulating” as sellers are conscious of how important holding their end of the bargain and delivering as per the terms of the transaction is to the lifespan of the business relationship.

Repairing Regulatory Fragmentation

Established in South Africa, Truzo recently launched its Africa-focused digital escrow service in the United Kingdom, following approval by the U.K.’s Financial Conduct Authority (FCA). According to Naidu, this major win, which makes the company the first Africa-focused, FCA-approved, digital escrow service, means transactions between the U.K. and South Africa are now safer and more reliable.

However, the biggest challenge moving forward is the lack of regulation across the African continent, which has led to escrow service providers springing up in different parts of the region without regulatory approvals.

“It’s an industry that is not regulated and that creates a bigger risk for users who face the risk of an unregulated escrow service provider running away with your money,” he explained. Moreover, the lack of regulatory oversight can lead to service providers being used for illicit flows of money — a much bigger risk that Naidu said taints the entire ecosystem and industry at large.

In the meantime, he pointed to the FCA approval as a major credibility boost and one that sets Truzo up to expand their business and widen the gap with other Africa-focused escrow competitors.

“We’d like to have the ability to take on cryptocurrencies, and include blockchain and smart contracts into our technology, and [overall] more efficiency across the escrow process. That’s what we’re looking at going forward — ensuring that we can add more innovation, streamline the process and make it even more robust and simple for our client base,” Naidu said.

For all PYMNTS EMEA coverage, subscribe to the daily EMEA Newsletter.