Nigeria's cash crunch and the innovation Ecosystem
Innovating at the speed of light
It's been weeks since I have touched Naira notes and my experience is not different from a typical Nigerian. Every Nigerian has been experiencing a cash crunch in the past few weeks.
A backstory, Last October, the apex bank announced its decision to redesign the notes, adding that members of the public were hoarding banknotes, with statistics showing that over 85 per cent of the currency in circulation is outside the vaults of commercial banks.
Available data at the bank showed that in 2015, currency-in-circulation was only N1.4 trillion. As of October 2022, currency in circulation had risen to N3.23 trillion; out of which only N500 billion was within the banking Industry and N2.7 trillion was held permanently in people’s homes.
Based on data on the 2022 Nigeria Fintech Map by Segun Adeyemi, we have over 70 Fintech startups playing in Mobile money/Informal banking, payment processing switching infrastructure and digital banks verticals.
Despite the increasing payment channels available to Nigerian consumers, the digital payments industry remains significantly under-tapped. Payment for goods & services is mainly done with cash. According to the Enterprise Development Centre (EDC) of Pan African University, cash payments accounted for 95.3% of transaction volumes at the end of 2018.
Non-cash transactions are expected to reach 17.8% of total transaction volume in 2023 from 4.7% at the end of 2018.
I guess the EDC forecast couldn’t predict the apex bank Naira redesign that will lead to forcing digital transactions down the throats of Nigerians.
This disruption has created opportunities for mobile money firms and the innovation ecosystem in Nigeria.
Before we get into the massive opportunity for mobile money firms. The failure rate of bank applications is alarming since the massive drive for cashless. The question is are Nigeria banks/Fintech not prepared for this and why is the failure rate so high?
Let’s explore some of them:
Poor internet connectivity: One of the primary reasons why bank apps may fail is due to poor internet connectivity. Nigeria has relatively slow internet speeds, which can cause apps to crash or take a long time to load. If a user's internet connection is unstable or slow, it can lead to a poor user experience and cause the app to fail.
As of 2022, the estimated internet penetration rate in Nigeria is about 55.4%, according to Datareportal. This means that about half of Nigeria's population has access to the internet. While internet penetration has been steadily increasing in recent years, there are still significant barriers to the widespread adoption of the internet in Nigeria.
Inadequate infrastructure: Nigeria's banking sector is still developing, and the country's digital infrastructure may not be sufficient to support the growth of mobile banking. For example, there may not be enough server capacity to handle the volume of transactions that occur on bank apps, leading to slow response times and app crashes.
Incompatible devices: Bank apps may not be compatible with certain devices or operating systems, leading to technical issues and app crashes. This can be a problem in Nigeria, where many people use older devices or low-end smartphones that may not have the processing power or memory required to run complex apps.
Security concerns: Security is a major concern for banks and their customers, and if there are vulnerabilities in the app's security protocols, it can lead to app failures. Banks may implement security measures, such as two-factor authentication or biometric verification, which can sometimes cause app failures if not implemented correctly.
User error: Sometimes, app failures can be caused by user error. For example, if a user enters the wrong login credentials repeatedly, the app may lock them out, leading to an app failure. Similarly, if a user does not update the app regularly, it can cause the app to fail due to compatibility issues.
To mitigate these issues, banks can take steps such as improving their infrastructure, conducting regular security audits, optimizing their apps for lower-end devices, and providing customer education to prevent user errors.
However, the ball does not stop at the bank’s door, because if you look at the tech stack of electronic fund transfer in Nigeria it is built on
Nigeria Inter-Bank Settlement System (NIBSS) Instant Payment (NIP):
NIBSS Instant Payment (NIP) is an electronic payment system that facilitates instant interbank transfers between accounts in Nigeria. NIP is built on top of the existing financial infrastructure and leverages the use of the Bank Verification Number (BVN) to ensure that transactions are secure and reliable.
The technology stack behind NIP includes:
Application Programming Interface (API): NIP provides an API that allows banks and other financial institutions to integrate with the system and initiate transfers on behalf of their customers.
Web Services: NIP provides web services that allow customers to initiate transfers through their bank's online banking portal or mobile app.
Database: NIP stores transaction data in a secure database that is accessible only to authorized parties.
Encryption: NIP uses encryption to ensure that sensitive data, such as account numbers and transaction details, are secure and protected from unauthorized access.
Unified Payments Interface (UPI):
Unified Payments Interface (UPI) is a real-time payment system that allows users to transfer money between bank accounts using their mobile phones. UPI was developed by the National Payments Corporation of India (NPCI) and has been adopted in Nigeria as a way to facilitate instant payments.
The technology stack behind UPI includes:
Mobile Application: UPI is accessed through a mobile application that is installed on the user's phone.
Application Programming Interface (API): UPI provides an API that allows banks and other financial institutions to integrate with the system and initiate transfers on behalf of their customers.
Immediate Payment Service (IMPS): UPI leverages the use of the Immediate Payment Service (IMPS) to ensure that transactions are processed in real-time.
Encryption: UPI uses encryption to ensure that sensitive data, such as account numbers and transaction details, are secure and protected from unauthorized access.
Payment Service Providers (PSPs):
Payment Service Providers (PSPs) are third-party entities that provide electronic payment processing services to merchants and customers. In Nigeria, PSPs are licensed by the Central Bank of Nigeria (CBN) to provide payment services to banks and other financial institutions.
The technology stack behind PSPs includes:
Payment Gateway: PSPs provide a payment gateway that allows merchants to accept online payments from customers.
Fraud Detection: PSPs use advanced fraud detection techniques, such as machine learning algorithms, to detect and prevent fraudulent transactions.
Payment Processing: PSPs process payments between banks and merchants, ensuring that transactions are secure and reliable.
API: PSPs provide an API that allows merchants to integrate with the system and initiate transactions on behalf of their customers.
Now, let’s go back to poor internet connectivity: as stated earlier As of 2022, the estimated internet penetration rate in Nigeria is about 55.4%, according to Datareportal.
For perspective, these user figures reveal that 98.63 million people in Nigeria did not use the internet at the start of 2023, suggesting that 44.6 per cent of the population remained offline at the beginning of the year.
So it is apparent that data connectivity is crucial to driving financial inclusion however it is interesting to note that a total of 193.9 million cellular mobile connections were active in Nigeria in early 2023, with this figure equivalent to 87.7 per cent of the total population. Let’s keep in mind that most Nigerians have two sim cards/phones.
Essentially, we need to build solutions that will solve transactions involving low-value amounts of cash instantly. When you think about taking a 100 naira bus or buying 50 naira orange from an Aboki stand or tipping your gateman.
Before the cash crunch, both the payer and payee typically incur zero transaction costs and experience zero settlement time. We need to replicate that fast.
Interestingly, NIBSS has a collection service called mCash. On the website m Cash is described as an innovative payment solution designed to facilitate retail payments to Merchants. It is accessible to payers via mobile USSD technology which in recent times has become the most accessible channel (even without the internet) for financial and non-financial transactions. mCASH leverages the NIBSS Instant Payments (NIP) infrastructure for immediate fund delivery to Merchants’ accounts.
I believe the opportunity is massive for Fintech which can build amazing solutions on this technology.
This is also a great opportunity for MTN Momo to drive massive adoption.
One of my favourite startups Moniepoint is aggressively driving adoption. With over 100 billion USD processed in 2022, maybe they will be 3x the revenue in 2023.
The innovation ecosystem can also drive a fintech hackathon focused on creating innovative financial products that can work with existing infrastructure in Nigeria, developing solutions that work with existing mobile money platforms, or creating new digital financial products that can be accessed through USSD codes or SMS.
We can also think about developing new technologies to improve internet connectivity.
This could be an effective way to promote financial inclusion and improve access to financial services for people with limited internet connectivity.
Links
https://www.bloomberg.com/news/articles/2023-02-12/cash-crisis-proves-a-boon-for-mobile-money-startups-in-nigeria
https://paystack.com/blog/operations/nibss-instant-payments-nip#the-big-payments-opportunity:-the-rise-of-new-rails
https://nibss-plc.com.ng/services/mCash
https://2022.moniepoint.com/
https://www.premiumtimesng.com/news/578566-updated-cbn-extends-deadline-for-use-of-old-naira-notes.html
https://datareportal.com/reports/digital-2023-nigeria
Well taken thought-line at K
My thoughts;
The level of cash addiction across the nation clearly depict how poorly the regulator, players (commercial & fintech) have fared.
It has also exposed the lack of robust infrastructure needed to achieve financial inclusion in underserved areas.
Right now what we see is the massive exclusion of the supposedly banked in urban centers.
There is need for massive infrastructure scale, and awareness.
Need I forget to mention that brain drain also amplified the situation.
Stakeholders hell bent on underpaying talents can now dance naked in the market square to the rhythm of their awkward beats.
I see massive gap for fintech’s both existing and budding players to fill up.
A Startup solely focused on financial inclusion awareness can make a killing promoting same.
The game just got started.
This is an amazing article. I think the problem is summarized by how strong the NIBSS infrastructure is because every interbank settlement (except enaira) is done through the same NIBSS. I've asked myself and I'm researching how to process instant settlement outside NIBSS. I also see this time as an ample opportunity to introduce tap-on-phone card payment and I'm building a VISA app that anybody that can transact with cash can use.