A report by Aite Group advises treasury services providers on how to assess the strength of their products in a market the consultancy calls dynamic and almost unexplored. One fertile market is Nigeria, where the banking sector has undergone an overhaul, Duygu Tavan writes
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There is ample opportunity for foreign payment solution providers to seize the business opportunities in Africa, especially because local banks have what Aite Group calls lightweight packaged software. As the economies of these countries evolve and thus the corporate business becomes more sophisticated, more robust vendor solutions will be required.
Aite Groups report Cash Management and Trade Finance in West, East and Southern Africa found that the most requested software applications for corporate banking in West, East and Southern Africa will be in cheque processing, cash management, wire transfers, trade finance and document management. But it is important to distinguish between advances in technology and pure innovation, according to report author Enrico Camerinelli. He says that vendors should market basic applications that can manage liquidity and cash covering the basic needs.
There will be a push to move from cash-based payments into electronic payments. I am seeing big efforts in West Africa with regional economic communities, such as the West African European Monetary Union [similar to SEPA], which regards unifying the trade exchanges, trade protocols and also payments exchanges and handing out monetary unification.
This is where vendors from Western Europe can bring in their expertise in technology and also in terms of practices, says Camerinelli.
So payment processors with SEPA-compliant solutions are well placed to transfer their knowledge and business propositions in Africa, while SWIFT-based payments service bureaux should be in the sights of software application providers.
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Case study: Nigeria
Nigeria in particular is a noteworthy economy right now.
Two years ago, Nigerias banking sector was infected with crime. Then, the Central Bank of Nigeria (CBN) dismissed or arrested senior banking managers at five banks (Oceanic International, Intercontinental, FinBank, Union Bank and Afribank) on counts of fraud, concealment and loan grants without adequate collateral and injected NGN420bn ($2.75bn) into the banks to prevent liquidation. The CBN has undertaken a number of other preventive measures, including setting up three credit bureaux to enhance identification processes and reduce credit risk.
There is an end-September deadline for bailed-out banks to meet stricter liquidity requirements but already a number of banks have failed bought up by rivals. So despite being one of the strongest economies in Africa, in terms of adoption of new solutions, Nigerias cash management industry lags behind that of Ghana or Kenya, for instance.
The CBNs strict transformation initiative includes the recently announced migration to a cashless society. The guidelines set steep penalties for individuals and organisations that transact in cash over certain limits. This is forcing businesses and banks to adopt e-payments. That will boost the business of switching and e-payment companies, says eTranzacts director for business development, Sullivan Akala.
Individuals will not be able to withdraw more than a NGN150,000 without paying penalties. The limit for companies is NGN1m. So companies accept cash payments above NGN1m, they pay 20% of the value of that amount. For individuals, the bank is entitled to charge the individual 10% of the value. This discourages the use of cash, he says.
Good intentions – but regulation needs improvement
The business environment is very friendly towards e-payment solutions providers: Akala estimates that as a result of the CBN cashless society project, the whole industry of switching and e-payments will register significant revenue increases of 50-100%.
Competition is steep, but there are three main switching companies in the country right now and the environment and business opportunities are immense, argues Akala. It is a healthy competition.
Official statistics are hard to come by, but Akala says that before the end of December, the CBN expects to have a minimum of 50,000 POS devices in the country.
The cashless society project starts in Lagos in December and from there on, the project will be implemented across other cities. The initial deadline is to have cashless societies in Nigerias largest cities, Akala says and adds that by the end of 2012, the CBN aims to have the whole country cashless.
The intention and the efforts of the government is a big push to move from cash-based payments to paperless and also moving from cheques to electronic. The infrastructure, like the RTGS system or the clearing systems, is not as aligned as they should be, says Camerinelli.
The intentions are good – but in terms of infrastructure and regulations, they need to be improved. Realistically, the use of cheques is still predominant. I recommend that, if you are a vendor who is selling cash management, you have to look for basic applications, nothing too sophisticated, that can manage liquidity and cash in terms of sweeping or pooling. The basic functionality is what is important now.
Use of cheques declining
In West Africa, 50% of cashless payments are made by cheques and Camerinelli estimates that the metric for Nigeria is a bit higher, about 70% or 80% now.
Of course, the risk of fraud with cheques is high, which is why basic applications that allow cheques to be turned into electronic documents, like reading and scanning cheques and then using the scanned version to be used as payment for clearing can make a difference.
Now that the banking sector is set to meet international standards, these methods are growing, although the problem of infrastructure and having points of sale and willing merchants who adopt or accept payments via cards is still a problem because of the associated costs involved.
There is the risk of receiving a fraudulent cheque, but the costs of setting up electronic payments in rural areas are still prohibitive. In the wholesale banking sector the use of cheques is declining compared to electronic payments, yet if you look at the entire payments, in wholesale and retail, there is still a lot to do from an infrastructure.
There is merchant resistance and Camerinelli says that merchant acquirers should push into the mobile payments space because it is much easier to be accepted and the infrastructure is there already. The market is better prepared to adopt wireless or mobile solutions due to the high number of mobile phone penetration.
The development of these alternative payment methods are speeding up, so innovative solutions will be adopted. Sphisticated solutions like those in Europe or North America are not appropriate for the market. Instead, basic but stable solutions are the key.
Caramelli estimates that it may take at least 15 years for the Nigerian banking sector to achieve international standards in financial services. What this means for payments solution providers is that there is a fertile ground to generate revenue from.
