A lighter wallet: The central bank tries to reduce the use of cash

While the economy of Nigeria remains largely cash-based, a concerted push is under way to reduce inefficient cash transactions. According to the Central Bank of Nigeria (CBN), excessive currency in circulation has undermined its efforts to ensure price stability. Moreover, high costs associated with currency sorting, cash management, transport and frequent printing have also kept bank service fees and lending rates high. Despite resistance from various quarters, the apex bank is pushing ahead with plans for a pilot project for a “cash-light society” in Lagos.

FLEDGLING INFRASTRUCTURE: Nigeria’s payment infrastructure, although limited, has developed over the last decade, laying some of the groundwork for future advancements. For example, the Interswitch central Postilion switch system, launched in 2003, linked all major Nigerian banks to an electronic payment platform. However, the slow spread of the internet has hindered the development of some forms of payment, such as point-of-sale (POS) terminals. A majority of payment cards in Nigeria have long used a magnetic strip, which requires an internet connection to the issuing bank for the transaction to be approved. But with most businesses offline, the appeal of electronic transactions has remained limited. While it is still possible for merchants to bring their terminals into their banks to download accumulated sales regularly, the process has discouraged the widespread adoption of POS.

One reason for the slow development of payment cards may be the limited competition in the underlying electronic payment systems. The majority of domestic electronic transactions were originally handled by Interswitch, while most foreign (mainly dollar-dominated) transactions were carried over the MasterCard network. ValueCard, a card service provider in which Visa holds a minority stake, emerged in 2004 as a competitor to Interswitch, launching the only payment cards in Nigeria that were compliant with the EMV (a standard developed by Europay, MasterCard and Visa) system. In 2009 the CBN started requiring all cards issued to use the EMV chip-and-pin system, less easily copied and more secure.

Figures from a 2010 study of some 2200 bank clients by Intermac Consulting underscore the historically limited use of POS and ATMs in Nigeria, finding that the country had just 7500 POS terminals and 8000 ATMs then in operation, most of which were in urban areas. By comparison, the US has more than 400,00 ATMs. Part of this is driven by the fact that banks generally find it costly to operate ATMs in Nigeria. In addition, the use of third-party ATMs, which are typically less expensive for banks, is limited, with these units accounting for only about a quarter of all terminals in the country.

REGULATORY-DRIVEN SHIFT: The cost to society of a significant volume of cash-based transactions is not trivial, with the central bank estimating that the direct cost of cash management to the banking industry amounted to N192bn ($1.2bn) in 2012, in addition to associated risks such as mishandling of notes, robbery and corruption. In response, the regulator has taken several steps to reduce the amount of physical currency in circulation and encourage the use of electronic payments. These changes were introduced as part of a new “cashless” policy that was unveiled in April 2011.

At the centre of this new policy has been a series of service charges and fees that have been designed to discourage both individuals and businesses from carrying and using cash. As initially announced, withdrawals and deposits of cash were to be subject to daily limits of N150,000 ($960) for individuals and N1m ($6400) for businesses. For amounts that went over these limits, a fee of 10% (for individuals) or 20% (for businesses) would be charged on the amount that exceeded the specified maximum.

While these fees may have seemed onerous at first, as the CBN was quick to point out, some 90% of withdrawals are below the threshold levels, with the central bank arguing that the vast majority of bank clients essentially subsidise the cost of large cash transactions that are carried out by a minority. “It is fair that bank customers with preference for large value cash transactions, which count for less than 10% of total cash transactions, should pay for their preferences,” CBN Governor Lamido Sanusi told the local press in 2011.

MODIFIED RULES: Initially the regulator set a date of January 2012 to introduce the programme in Lagos State, with the remainder of the country to follow later in the year. But the central bank subsequently modified its plans, delaying the roll-out of the scheme until June 2012 for Lagos State and January 2013 for the full country. The CBN also relaxed some of the restrictions, increasing the maximum withdrawal to N500,000 ($3200) for individuals and N3m ($19,200) for businesses, and reducing the fees to 3% and 5%, respectively. It is these new rates that went into effect in June in Lagos.

As part of the same scheme, the CBN has also barred banks from providing cash-in-transit (CIT) services to businesses, replacing them with licensed CIT providers with minimum capital requirements of between N1bn ($6.4m) and N3bn ($19.2m) for currency sorting firms and N4bn ($25.6m) for CIT and currency sorting businesses. Just as is the case with the withdrawal and deposit restrictions, this new CIT system likely means that it will be more costly and difficult for companies to carry out cash-based transactions, therefore encouraging them to shift to making electronic ones.

However, it remains unclear whether or not businesses will in fact adopt the means to do so. While the new rules may have made it more costly to handle cash, embracing alternatives such as POS transactions is not without its challenges. First, business owners must acquire additional hardware and trust that the necessary infrastructure – such as electricity and telecommunications – will be available and reliable. Second, staff needs to be trained on how to use the machines. Finally, POS transactions are subject to a 1.5% fee, although as some have pointed out, this cost could be transferred from merchants to consumers in the form of higher prices.

However, in a sign that the CBN may be having at least some initial success in persuading retailers that this change is in their interest, in July 2012 the central bank was able to announce that some 88,622 POS terminals had come into operation during 2012, an impressive figure in a country that had fewer than 10,000 POS terminals just two years earlier.

REACHING CUSTOMERS: While the central bank’s cash-light scheme may induce people with bank accounts to use their debit and credit cards more often, the CBN faces another challenge, namely that only 21% of the population has a bank account. However, in a market with such low banking penetration, alternative channels – such as mobile phone-based transactions – could help fill the gap. Indeed, Nigeria may have just 25m bank accounts (with widespread multiple accounts), but it has close to 100m SIM cards currently in use. “This is great timing for mobile financial services in Nigeria because 74% of over 100m SIM card holders do not have bank accounts,” Adebola Adeyinka, the CEO of Eartholeum, an electronic payments service provider, told OBG.

Other African countries have certainly had success with the development of mobile money systems. Ever since MP esa, the world’s first mobile banking service, was launched in Kenya in 2007 by Safaricom, millions of people have used their mobile phone as a banking device. Today MP esa handles about $4bn annually and 68% of the country’s adults use mobile money. It has brought banking services to people who would have otherwise been unable to access a bank, either because of geographic or socioeconomic position or both. These individuals can now save money, pay bills and transfer funds.

MARKET ENTRANTS: Meanwhile, in Nigeria, the central bank has already taken steps to support the development of mobile money services in the local market, with the CBN having licensed 16 mobile money service providers since late 2010, including banks (such as GT Bank, Stanbic IBTC, First Bank, Ecobank, UBA and Zenith Bank), as well as specialised electronic payment transaction firms like Eartholeum, eTranzact, MoneyBox Africa and Pagatech.

These licensees have in turn signed agreements with various telecoms operators. In December 2011 UBA and Stanbic IBTC paired up with local telecoms firm Globacom Nigeria to launch the first mobile money service in the country, known as Glo Txtcash. GT Bank has partnered with South African mobile operator MTN to start its mobile money service.

Under the terms of these agreements, mobile network operators are permitted to provide network infrastructure only for mobile banking and cannot directly receive deposits. They are also obliged to let subscribers use the mobile payment service of their choice. Indeed, the system remains largely in the hands of banks as opposed to telecoms companies, a fact that differentiates the Nigerian market from others across the African continent. “A big difference between mobile money solutions in Nigeria and a country like Kenya is that here dedicated financial institutions are in the driving seat rather than mobile phone operators. This guarantees that the money is handled by experts who have made it their core business to facilitate secure and easy transactions,” Tayo Oviosu, the CEO of Pagatech, told OBG.

While telecoms operators are mandated to work with any mobile money platform, there have been discussions about putting in place minimum transaction levels, which would penalise platforms that handle low transaction volumes, a move that has been resisted by the new players. “The market is still in its initial growth stage, so operators should not set minimum transaction volumes yet,” Valentine Obi, the CEO of eTranzact, told OBG. “They should wait at least a year until the market matures somewhat.”

REACHING THE UNBANKED: Mobile money operators serve clients both with and without a bank account. For the latter, customers buy a voucher based on their telephone number, which transfers funds into a mobile money account. The mobile money operator then sets up a trust account at a bank into which the customer’s money is placed. If the customer would like to deposit or withdraw funds from his mobile money account, he can do so through the mobile money operator’s agents. For example, Eartholeum is in the process of franchising some 3100 POS operators in Lagos to handle deposits and withdrawals of physical currency.

Very little information has to be provided to carry out a mobile money transaction. Indeed, as Oviosu told OBG, “We’re even able to offer our services to people without an ID card. This is something that mobile money success stories in Kenya and India didn’t have and, therefore, goes to show the potential of the service in Nigeria.” However, the CBN does specify rules that limit the transaction size based on the type of user and information provided. Those who only give an address and phone number have their transactions capped at N30,000 ($192) a day and N3000 ($19) per transaction. The next tier of clients, who provide their name, number, ID and proof of address, are allowed to transact N100,000 ($640) a day and N10,000 ($64) per transaction. Finally, those who provide a picture and other biometric data at registration see their limits rise to N1m ($6400) a day and N100,000 ($640) per transaction.

Despite these restrictions, the use of mobile payment systems has the potential to bring financial intermediation services to a population that may have previously had limited, or no, access to banks. “Platforms such as mobile phones, ATMs and online banking offer evident cost-efficient options to reach a wide audience compared to traditional brick-and-mortar options,” Sola David-Borha, the group managing director of Stanbic IBTC, told OBG.

EXPANSION: The local mobile money services market is expanding fast. During January 2012, close to 36,000 mobile money transactions valued at some N227.92m ($1.5m) took place. “This amount is expected to grow geometrically as awareness increases,” the CBN’s head of shared services, Chidi Umeano, told local press in June 2012. Some 80% of these transactions were accounted for by clients of Pagatech, the first mobile money licensee in Nigeria. The company is counting on continued growth, aiming at 15m users by 2015, but more local and foreign service providers are expected to enter the market.

Domestic firms could also look outside the country for opportunities, perhaps by penetrating the remittances market. For example, eTranzact has a UK-based subsidiary that can handle cross-border mobile money transfers. Yet some challenges remain for international mobile money flows. “One aspect the regulatory framework hasn’t yet covered is outgoing foreign transactions,” Eartholeum’s Adeyinka told OBG. “This is largely due to security issues and the absence of a national ID system, but I think these issues will be addressed in coming years.”

Nigeria is proving fertile ground for testing new means of moving a cash economy towards more efficient models of financial intermediation. Crucial to this will be the development of payment systems, and a regulatory push will likely encourage banks and merchants to establish the necessary infrastructure.