In the second week of April insight2impact, Lagos Business School and Data Science Nigeria hosted an event at the Lagos Oriental Hotel. The topic for the evening was “The future of digital payments in Nigeria”.
Earlier that day, the insight2impact staff (who are from South Africa) needed to pay a local service provider for the event. The first hitch was, while the service provider owns a bank account, they did not have a POS device to accept on-the-spot digital payments. The visiting team attempted to transfer money directly into the provider’s account but were unable to transfer from a South African credit card to a Nigerian bank account. The team then attempted to withdraw cash from an ATM. They were again unsuccessful, as the amount was too high – they were unaware of the withdrawal limits at ATMs in Nigeria. They even attempted to swipe for cash at the bureau de change, but there was no POS at the time, nor enough cash. Eventually, multiple staff members withdrew many small amounts – enough to pay a deposit (about half the total fee) and guaranteed the remainder via international transfer.
The POS challenges or the ATM withdrawal limits will not come as a surprise to many Nigerians, but it did remind us that while we are excited about the potential of digital payments in Nigeria, the reality is much more sobering. With this incident in mind, the burning question posed at the event was “How do we transition from where we are to a cashless future?” Or, more realistically, how do we become a cash-lite society/economy?
The nationwide push for adoption of digital payments is admirable, but we must first consider our infrastructure – a challenge across many areas of our lives. If the underlying payments infrastructure discourages those who have already adopted digital payments, imagine how much it discourages those who still prefer cash.
The gaps in our infrastructure continually come to the fore, for example whenever we encounter problems with POS machines in stores or restaurants, or whenever the dreaded “dispense error” occurs at the ATM. There has, however, been a response from industry players. NIBSS, for example, introduced the innovative instant payment product that allows adults with bank accounts to transfer value instantly by using their smartphone or feature phone via either app or USSD. The insight2impact analysis of NIBSS transactional data shows that the number of unique users of the instant payment channel has grown by 71% in just one year. The central bank has also ensured that banks create adequate complaint-resolution desks that can attend to consumer complaints about service failures.
The central bank has also continued to engage the industry, understand the challenges and evolve its approach for transitioning to a cashless society – highlighted in the recent editorial in this newspaper. One of these new approaches allows new entrants, like subsidiaries of telcos, to extend payment services throughout the country by obtaining a payment service bank licence.
This response from the industry and regulators in Nigeria should be encouraged and celebrated, as it is the first step in the transition to a cashless society – unlocking robust distribution networks and developing better payment products. But, issues remain in this transition – issues that we have to address.
First and foremost is the inadequacy of digital payments infrastructure. While it is true that the NIBSS instant payment product has made inroads in improving payment services, it still relies on third-party networks, including mobile-network connectivity, that are unreliable in many areas of the country.
Secondly, products and payment channels must be designed with the Nigerian context in mind. POS devices may be unreliable and may discourage card use, but instant payment products also have their challenges. Poor connectivity means data-enabled smartphones aren’t always an option for making digital payments (several regions still only have 2G coverage). This leaves users with feature phones having to utilise USSD codes, which require long strings of numbers and symbols that take time to input (to only have the session time out) and have a high likelihood of mistakes, thereby discouraging use.
Thirdly, the instant payment product is currently only available to clients that are already utilising formal financial services (banked or mobile). This may change as new providers enter the space under new regulation, but there will still be challenges. Furthermore, the largest group we should extend digital payments to – merchants – is rather slow in digitising; many digital payment solutions are not affordable. Other complaints have included that it slows down purchases – due to POS-device issues or the time needed to insert the correct payment information. It also doesn’t help them in managing their cash flow. Of course, using digital payments would also make their transactions visible and therefore taxable – a major deterrent for those surviving day to day.
By overcoming these challenges, Nigeria could lead the way for developing nations to compete in digital economies. Nigeria cannot take the same route to a digital economy that other nations have. Rather, we must look at why people choose to use cash – convenience, ease of access, security – and create and encourage the use of digital mechanisms that mimic cash. It is critical that we bring the right ecosystem actors together to do this.
The event with Data Science Nigeria, Lagos Business School and insigh2impact featured contributions from NIBSS, the Central Bank of Nigeria, Open Banking Nigeria, industry operators and the Fintech Association of Nigeria. This event was one example of how we are bringing together different perspectives to find solutions for these problems. This will continue as we engage with the central bank through its fintech and payment working groups.
Our immediate aim is the transition to a cashless Nigeria, but our broader ambitions are to create a model that can be exported to Africa and beyond.
Dr. Olayinka David-West & Hennie Bester
Dr. Olayinka David-West (Senior Fellow, Information Systems at Lagos Business School and Digital Financial Services Specialist) and Hennie Bester (i2i programme lead and Director at Cenfri)