THE DIGITAL PAYMENT ECOSYSTEM IN NIGERIA: CHALLENGES AND FUTURE PROSPECTS

Authored By: Chinweuba Ifeoma Racheal

Abstract

I once had an experience with a cobbler who accepted mobile transfers. And in that moment, it struck me: do mallams now use online banks? I wondered. A quick stroll through the streets of Nigeria will connect the dots: there is a sweeping shift in digital payment, with every shop and corner hanging a “POS HERE” sign. This paper is predominantly concerned with the inadequacy of the digital payment system in Nigeria. It argues that the system’s full potential has not been harnessed, and it x-rays possible solutions to remedy the said problems.

Keywords: digital payment, inadequacy, solutions

Introduction

In Nigeria, the banking system was largely manual, with transactions requiring physical presence and paper-based processes. Interbank transactions were burdensome and time-consuming, often taking days or even weeks to process. To address this, the Central Bank of Nigeria, in collaboration with all licensed banks in Nigeria, established the Nigeria Inter-Bank Settlement System (NIBSS). This laid the groundwork for a more integrated and technologically advanced financial system.

Consequently, the NIBSS Instant Payment platform (NIP) was launched in 2011, and it was an absolute game changer. It allowed customers to transfer funds instantly and singlehandedly increased the volume of instant payments. In 2020 alone, over 2.2 billion NIP transactions, valued at more than ₦278 trillion, were recorded.¹

Notably, the COVID-19 pandemic also played a role. At that time mobility was restricted, and going to the bank involved lots of face masks and social distancing, so people needed a more seamless method to avoid the discomforts. Thus, more people turned to online banking, triggering an increase in the use of digital payment.

Digital payment, colloquially regarded as mobile money, is the transfer of value from one payment account to another using a digital device or channel. This sector is primarily run by traditional banks (Access Bank), financial technology companies (Paystack), and mobile operators. The payment ecosystem itself is described as an interconnected system of technology, banking organisations and non-banking financial enterprises that facilitate the transfer of funds between purchasers and vendors.²

Taking a closer look, it is not just different online systems rubbing shoulders, but a confluence of entities that interact during the payment process. The ecosystem encompasses all forms of e-commerce, from in-person transactions to mobile payments, QR codes, and payment instruments such as credit, debit and prepaid cards. Overall, this article offers not just an examination, but a voyage – into the heart of Nigeria’s digital payment ecosystem, illuminating its challenges and envisioning the limitless possibilities that lie just beyond the tap of a screen.

Research Methodology

This work adopts a doctrinal research method, relying on primary legal materials such as the Central Bank of Nigeria (Establishment) Act 2007 and the Banks and Other Financial Institutions Act 2020. Information for this work was gathered through a review of statutes, judicial decisions and, largely, academic journals. This paper analyses these sources to lay out a complete evaluation of the status quo of the digital payment ecosystem in Nigeria.

Legal Framework

The primary laws that regulate payments in Nigeria are the Central Bank of Nigeria (Establishment) Act 2007 (CBN Act) and the Banks and Other Financial Institutions Act 2020 (BOFIA). These laws aid the Central Bank of Nigeria (CBN) in efficiently exercising its oversight function in the payments sector. Sections 33 and 57 of BOFIA and section 51 of the CBN Act empower the CBN to make rules, regulations and guidelines with regard to monetary policy and the control of the banking industry (the Regulations).³

It is worth emphasising that the bulk of day-to-day regulation in this space is not statutory at all. It is delivered through CBN circulars, guidelines and licensing frameworks issued under these enabling provisions – instruments that can change far more quickly than an Act of the National Assembly, and which operators must therefore monitor continuously.

Judicial Interpretation

This area of law is not yet well developed and has not seen many cases decided upon it. But when the time comes, the Supreme Court in Bakari v State has succinctly stated:… if a case comes before the Nigerian Court on emerging areas of law such as intellectual property, Fintech, Competition law, etc., which it’s [sic] jurisprudence has not fully been developed in Nigeria compared to other jurisdictions, the court can rely on the foreign precedent to reach its decision provided the decided case and the case at hand are reasonably similar.⁴

This observation, though made in passing rather than as the ratio of the decision, matters a great deal for digital payments. Where a dispute turns on an unauthorised debit, a failed transfer or the allocation of liability between a bank and a payment service provider, a Nigerian court presently has little domestic authority to draw upon. The door opened by Bakari means that comparative jurisprudence – from the United Kingdom, Kenya or India, jurisdictions with far more mature payments litigation – may legitimately fill the gap.

Critical Analysis

Prior to the 2023 general election, the Central Bank of Nigeria signalled a currency redesign and issued a policy that would take the old naira notes out of circulation, citing several issues including financial instability and a lack of clean and suitable notes. Owing to the rush in its implementation, a naira famine arose, with many people stranded and unable to afford basic necessities like food. Thrust into this situation, Nigerians turned to the digital ecosystem. Electronic transactions skyrocketed, but the systems could not keep up with them. Systems were down, and the frequency of failed transactions increased.

If the system had been reliable, this would perhaps have been the perfect opportunity for Nigeria to transition into a cashless economy. As far back as 2012, the CBN, under the leadership of Sanusi Lamido Sanusi, boldly stated that Nigeria would transform into a cashless economy. Yet this has not come to fruition. Why? The shift has met resistance from several quarters, and four obstacles in particular continue to deter segments of the population from fully embracing digital payment: the infrastructural gap, the cost of transactions, the risk of fraud, and the deficit in financial literacy.

The infrastructural gap. Nigeria continues to struggle with a lack of infrastructure, and this is more pronounced in rural areas, where financial institutions see it as an uphill task to operate due to several factors including insecurity, lack of internet connectivity, distance and availability.

The cost of transactions. High transaction fees also play a crucial role. Under the CBN Guide to Charges, a transfer from Access Bank to Zenith Bank attracts a tiered electronic transfer fee, and where the sum received is ₦10,000 or more, a further ₦50 Electronic Money Transfer Levy applies. Of course, these charges may have little or no effect on the man with the biggest shop in Onitsha Main Market – but what about Iya Busola, who sells pepper? They rob her of her profit, a problem she would not face if she simply tied her money at the edge of her wrapper.

The risk of fraud. The unfortunate reality is that the payment ecosystem handles a great deal of sensitive information, and many people are discouraged by the high risk of fraud. According to NIBSS, the annual fraud count increased by 112%, from 44,949 in 2019 to 95,620 in 2023, while the amount lost to fraud grew by 496%, from ₦2.9 billion to ₦17.67 billion.⁵

The financial literacy deficit. Lastly, there is a gap in financial literacy. The use of digital payment is strange to some people, and many therefore find it difficult to operate, particularly those in rural areas. This extends further to conservative populations, usually the older generation, who find it difficult to embrace change.

Future Prospects

What wonders lie ahead? This expansion of digital payment might be the best thing yet for the economy, as it holds the power to transform our financial landscape. According to one report, electronic payments added US$296 billion in real terms to GDP across the 70 countries and regions studied between 2011 and 2015. That is equivalent to the creation of about 2.6 million jobs on average per year over the five-year period, or about 0.4% of total employment in those 70 countries and regions.⁶ On this account, digital payment is capable of stimulating economic growth. It can also serve as an avenue to empower businesses and reduce inefficiencies, thereby contributing to overall development.

However, this metamorphosis necessitates a call to action. Ayodeji Aina, Head of Enterprise Innovation at First Bank, could not have said it any better when he observed that the infrastructure was built before anyone realised how large digital payment would become, and that the sheer volume of digital transactions has now placed too much load on it.⁷ There is an urgent need to correct this deficiency in infrastructure – and this time, not just in the big cities like Lagos or Abuja. It should be extended to the rural areas where the bulk of the population dwells.

Also, in embracing digital payment, regard must be had to its cybersecurity concerns. Nigeria does have a law regulating cybersecurity – the Cybercrimes (Prohibition, Prevention, Etc.) Act 2015, as amended by the Cybercrimes (Amendment) Act 2024, which criminalises and punishes cybercrime. But the statute alone is not enough. It still requires additional measures, such as educating the masses on best practices, as many still fall prey owing to gaps in knowledge. According to one survey, 60.7% of Nigerians are not aware of the biometric security feature at ATMs.⁸ Do you know of this feature? Mass enlightenment, then, is the key to building a safer system.

Conclusion

In conclusion, Nigeria’s digital payment ecosystem holds incredible promise. The obstacles are real – infrastructure that lags behind demand, charges that bite hardest at the bottom of the market, fraud losses climbing faster than transaction volumes, and a literacy gap that leaves whole communities outside the system. None of them is insurmountable. As infrastructure improves, trust deepens, and the revolution expands, we edge closer to building an ecosystem where a swipe is all you need. A system that empowers all – from the cobblers, to the merchants, and even the petty traders.

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