Nigeria, Africa’s third-largest economy, is showing phenomenal growth rates for all forms of electronic payment, including cards. There are major challenges to overcome if issuers and card schemes wish to spur growth and drive down usage of cash, but efforts are gathering momentum. Victoria Conroy reports.
Nigeria is a country that has seen phenomenal transformation of its payment systems in just a few short years. Massive infrastructure investments, network interoperability advances and a trend of bank consolidation have spurred growth in all forms of electronic payments, and in the last four years, international scheme-branded cards have been introduced to the market. It would appear that Nigeria is ripe for growth in card payments.
Reforms in the country’s electronic banking system began in 2004, and on the whole they have been extremely successful. Nigeria’s government has embarked upon a strategic plan to grow its economy to be among the 20 largest economies in the world by the year 2020, under a project titled: Financial System Strategy 2020. One of the objectives of this plan is for electronic payments to form the bedrock of all financial transactions.
However, significant challenges remain. In a country of 140 million people, less than 10 million are classed as banked, and it is estimated by the Central Bank of Nigeria that over NGN700 billion ($5.95 billion) remains outside the reach of the banking system.
One of the steps of the 2020 strategy is that by the end of 2009, all businesses with more than 50 employees will be required to make salary payments via direct deposit into a bank account, which will significantly reduce the number of unbanked people, and lead to greater debit card usage.
Many banks and non-banks are also focusing on delivering banking services through lower-cost established delivery channels like mobile phones – Nigeria had around 55.3 million mobile phone customers in 2007, compared to 32.2 million in 2006.
In terms of card penetration levels, according to figures from card network InterSwitch obtained by CI, there were around 24.2 million debit and cash cards in circulation by July 2008, with over 5,894 ATMs (compared to seven in the entire country in 2002) and 9,873 POS terminals.
Figures concerning credit card numbers have not been made available given that the market is at such an early stage, although the last two years have seen several credit cards aimed at the affluent consumer segment introduced to the market.
According to Guaranty Trust Bank, one of Nigeria’s card issuers, by 2010, Nigerian banks will have jointly issued at least 40 million payment cards, with an increase in the number of ATMs and POS terminals to 9,000 and 15,000 respectively. Payment infrastructure development will depend on the level of hindrance from unstable communications networks and power supplies, plus resistance by some merchants.
However, Nigeria’s credit bureau infrastructure has been making good progress since its inception in 2003. In mid-2007, several of Nigeria’s leading banks teamed up with Accenture and the International Finance Corporation to establish the first bank-sponsored credit bureau, the Credit Reference Company, while two other independent credit bureaus have also been established.
The Central Bank of Nigeria is still working on a legal framework governing credit bureau data, and until this comes into being, it is likely that Nigerian lenders will extend lending only to those high net worth borrowers representing the least risky customers.
The problem for the time being is obtaining data on prospective borrowers, many of whom possess no formal paperwork or identification in a country hampered by a lack of electronic infrastructure.
Pricing, positioning and products
Despite a relative lack of payment infrastructure, card growth rates are booming. There is not one single factor that has led to growth, but rather a convergence of social, economic and industry drivers occurring at the same time to bring forth the concept of the cashless economy, something which Nigeria’s government is strenuously encouraging in order to reduce the numbers of the unbanked population. The number of Nigerian banks issuing international cards such as MasterCard and Visa increased from just one prior to 2003 to seven by the end of 2007, while eight others were in the process of being licensed.
The year 2007 also saw the introduction of NGN-denominated credit cards and Visa V Pay debit cards.
Card functionality has also been enhanced. Whereas five years ago, most cards in Nigeria could only be used as ATM cards, they can now be used to pay bills, make POS and internet purchases, and transfer money between accounts, although the overwhelming majority of card transactions remain ATM withdrawals.
But despite increasing sophistication in the depth and breadth of credit card offerings that have appeared over the last three years, there are still major obstacles to credit card growth. To obtain a credit card from some Nigerian banks, applicants need a domiciliary account, essentially a foreign currency account denominated in US dollars. With the credit card market still at a nascent stage, and with credit bureaus yet to be fully established, holders of Nigerian credit cards (and debit cards linked to current accounts) face stringent account opening requirements that are more severe than those in developed card markets.
Most issuers require validated proof of income documents and multiple ID specimens, such as passports, utility bills and residence permits, character references and in some cases a recommendation from an existing customer or bank employee. For certain card products, the cardholder has to stump up typically 120 percent of the card’s credit or deposit limit as secured collateral before the card can even be used, although the number of secured cards requiring a minimal collateral deposit is declining.
Obviously, this can act as a deterrent for potential card applicants, especially in a country with a high number of unbanked people. Essentially, many ‘secured’ credit cards are in essence prepaid cards, with true revolving credit cards only available to affluent individuals.
For those that are approved to get credit cards, minimum repayment requirements on revolving balances vary, but tend to be between the 15-30 percent range, and in some cases, as high as 50 percent, compared to 3 percent or 5 percent in Europe and the US. Revolving balance interest rates are much lower than can be found in Europe or the US, with most issuers in Nigeria charging an APR of anywhere between 2 and 10 percent.
These factors have the effect of reducing the levels of profitability on true revolving credit cards, and may also explain why foreign issuers have yet to fully step into the market, although foreign issuers such as Standard Chartered have made attempts to launch cards in the Nigerian marketplace with limited success. However, as consumer awareness increases and as credit bureaus develop, issuers may have some room in the future to lower minimum repayment requirements as they get a better picture of a borrower’s credit risk profile, thereby increasing profitability and the pool of potential cardholders.
Currently, annual fees typically hover around the NGN30-NGN50 range for classic cards, and upwards of NGN100 for gold and platinum cards, whereas a few years ago annual fees were not much more than NGN10 on average. Cardholders also have to pay a monthly maintenance fee of around NGN5 typically, compared to NGN1 around three years ago.
Card and non-cash payments
Figures from the Central Bank of Nigeria show that overall electronic card transactions volume and value stood at 17.7 million and NGN148.72 billion as of December 2007, representing increases of 36 percent and 72 percent over 2006. The volume and value of NGN-denominated transactions also significantly increased from 40,329 and NGN10.6 million as of December 2005 to 404,697 and NGN26 million respectively as of December 2007.
ATM transactions accounted for 88 percent of electronic payments volume in 2007, and 88.5 percent in terms of value. The volume and value of ATM transactions rose by 30 percent and 108 percent to 15.7 million and NGN131.6 billion respectively in 2007.
Online POS transactions stood at 421,946 in volume and NGN6.44 billion in value, increases of 493.4 percent and 1,151.9 percent over the levels in the preceding year, mainly due to increased connectivity of POS terminals, wider public acceptance of debit cards, and the increased number of merchants accepting cards. Faster growth rates can be expected if Nigerian issuers make more concerted efforts to promote card usage at the POS instead of the ATM, which will also lead to higher profitability due to the higher interchange on POS transactions. For foreign currency-denominated card transactions, in 2007 volume and value shot up by 75.8 percent and 82.8 percent respectively compared to 2006, to reach 233,175 and US$63.5 million respectively.
Also, internet-based transactions increased to 903,067 and NGN10.6 billion in 2007, showing an increase of 306.4 percent and 261.1 percent in volume and value terms respectively, over the levels in 2006. The growth was due to the increased number of financial institutions offering internet banking and the growing number of merchants accepting payments through websites.
However, Nigeria’s reputation for financial fraud has led to many global online and bricks-and-mortar merchants refusing to accept card payments from Nigerian-issued cards. It remains to be seen how the international card schemes and Nigerian government or industry bodies will approach this issue, which is causing increasing consternation among Nigerian credit cardholders and flies in the face of the 2020 strategy.
In mid-2007, Visa gave Nigeria a clean bill of health as far as fraud is concerned, announcing that no incident of fraud had been recorded on Nigerian-issued Visa cards in the country, but fraud at ATM locations is rife, with many cardholders having had their cards compromised through fraudulent PIN and card detail requests via email or texts sent to cardholders.
In July 2008, InterSwitch announced collaborative efforts with its banks to educate consumers about ATM fraud and to also enlighten them of channels on which their cards can be used other than just cash withdrawals at ATMs. Visa’s online card authentication service, Verified by Visa, and MasterCard’s SecureCode has also been implemented by all Visa and MasterCard issuers in the country, further reducing the risk of fraud.
Card networks in Nigeria
Nigeria’s payment landscape is somewhat fragmented with a number of different bank-owned ATM and debit card schemes having been established. This has slowed down the uptake of payment cards, given that interoperability of cards between different networks was minimal, although the situation is changing now that banks have started to open up their networks to accept cards from other banks.
It was only four years ago that the first international scheme-branded cards were launched in the country (Ecobank being the first to launch an internationally accepted MasterCard card in 2004), and before payment infrastructure such as ATM networks were updated to accept foreign-issued cards, it was virtually impossible for foreign cardholders to use their cards in Nigeria.
In 2005, Central Bank of Nigeria e-banking guidelines suggested that all banks should migrate to chip and PIN by 2008. The country’s gradual migration to EMV technology, while not yet complete, has helped to encourage both foreign and domestic cardholders to use their cards safely in Nigeria without worrying about fraud, thereby pushing up transaction and spending levels in Nigeria.
Although both Visa and MasterCard have been present in Nigeria for some time, it is through Nigerian payment network ValuCard that Visa gained a significant foothold in Nigeria. ValuCard is a consortium of over 30 Nigerian financial institutions. The ValuCard proposition was a private-label offline chip and PIN domestic debit card, launched in 2000, which was issued by Nigerian member banks.
In 2004, Visa and ValuCard entered into a partnership agreement through which Visa bought a 30 percent stake in ValuCard, aimed at allowing both organisations to develop electronic payments in the country. ValuCard is now a principal member and joint acquirer for all Visa card transactions in Nigeria. Visa’s partnership with ValuCard led to ValuCard cards being decommissioned in favour of Visa’s V Pay proposition, an online chip and PIN card. However, unlike European markets where V Pay has already been launched and is a debit-only offering, in Nigeria V Pay can act as either a debit or a credit card, depending on the source of funding.
The other main payment network and big rival to Visa is InterSwitch, an electronic transaction switching and payment processing company which started operations in December 2002, and which achieved the first interbank ATM transaction in Nigeria in October 2003. In 2007, InterSwitch had around 4 million debit cards in issue through its bank partners. Other networks are MasterCard service provider Card Technology Limited (CTL), Smartpay, e-tranzact and ATM Consortium.
In 2004, CTL and InterSwitch partnered to interconnect member banks and their end users, meaning that debit cards issued by InterSwitch can be used in all payment terminals deployed by banks connected to CTL and vice versa. Additionally, banks connected to InterSwitch that issue MasterCard cards are able to process transactions from both switches. The InterSwitch and Visa platforms are not interoperable, meaning that many Nigerian issuers issue both Visa and InterSwitch debit cards.
United Bank for Africa
UBA has more than 6 million customers through an expansive network of 630 business offices throughout Nigeria. Established in 1961, it is the largest financial services group in Nigeria and West Africa, and has an 800-strong ATM network. As of July 2008, UBA stated it had over 5 million cards in circulation.
UBA offers a V Pay debit card, along with an own-branded UBA debit card. It also offers a MasterCard-branded dollar-denominated credit card in standard and corporate formats, along with a prepaid MasterCard. Its credit card offering incorporates the ‘Pride’ loyalty programme, which was introduced in 2007, with points redeemable at a range of merchants including Virgin Airlines, telco MTN and hotel chain Hilton.
The card features a 45-day grace period and 2 percent monthly interest on outstanding balances, plus 15 percent minimum monthly repayment. UBA also offers the ‘X-Change’ ATM card in collaboration with MTN, offering cardholders airtime through MTN and multiple cards linked to the cardholder’s MTN phone number.
In May 2008, UBA partnered with UK football club Arsenal to collaborate on a range of financial services and football initiatives, including co-branded electronic payment solutions such as debit and credit cards for consumers in all West African locations where UBA currently operates. In June 2008, UBA launched a Visa-branded dual currency chip and PIN debit card, which can be used for NGN, US dollar and other international currency transactions. It also incorporates a credit line that customers can apply for to access UBA loan facilities.
Inter currently issues a MasterCard-branded credit card along with an instant unpersonalised prepaid MasterCard, which is reloadable and costs NGN25, and a range of personalised prepaid cards in standard, gold, platinum and corporate co-branded formats. Inter also offers a V Pay card, in place of ValuCard which was discontinued in August 2007.
During 2007, the number of active Inter debit cards and cash cards grew by a staggering 228.3 percent and 269.1 percent respectively compared to 2006, and the bank also rebranded its platinum and gold MasterCard products with more features aimed at the elite or high net worth segment.
Inter plans to expand its presence by introducing affiliate debit cards for other financial institutions, co-branding debit cards with corporate partners, introducing a salary card for government workers and other public sector payment cards for schools and pension payments. Inter’s ATM network numbered 677 across Nigeria as of March 2008, representing 15 percent of all ATMs in the country.
First Bank’s V Pay offering differs from competitor banks in that it incorporates discounts from a range of merchants in Nigeria, including telecom network ETN. First Bank also offers a MasterCard-branded secured credit card, with a maximum credit limit of NGN10,000.
First Bank offers the ‘GloFirst’ prepaid CashCard which can be used on the Glo Mobile telecom network. Through Glo M-Banking, GloFirst users have access to their bank accounts from their mobile phones and perform certain transactions such as checking account balances, transferring funds and ordering chequebooks.
Zenith recently redesigned its entire range of cards to incorporate a more rounded design to replace the traditional rectangle. Among its range, it offers MasterCard-branded credit cards in various formats, MasterCard-branded charge cards, and it also offers the ‘WebSurfer’ card, a MasterCard-branded virtual prepaid card that can only be used on the internet.
Zenith also carries a Visa-branded credit card, a dual currency credit card by which foreign transactions are settled in US dollars while domestic transactions are settled and repaid in NGN. The card also allows card-to-card transfers and comes with a grace period of up to 45 days. A free Visa-branded prepaid card is also given out for every credit card applied for and received by the customer. Zenith also offers its own-branded ‘Eazycard’, an online debit card that is used on the InterSwitch network.
Guaranty Trust Bank
GTB offers a multi-currency ‘CashPlus’ debit card on the InterSwitch network in two formats, a standard card for individuals and a corporate card. The cards are issued free of charge with each account opened at GTB. GTB also issues a V Pay debit card and a MasterCard-branded credit card for individuals and businesses which is dollar-denominated but can be used for purchases in other currencies.
GTB also offers a range of web-based payment services such as GTPay for internet payments using debit cards, and the GTPaydirect solution for corporates. GTB has also pioneered the use of ‘drive-through’ ATMs, self-service kiosks and mobile bank branches. GTB was the first bank in Nigeria to implement an interactive voice response (IVR) telephone banking service.
Access Bank’s ‘Mpower’ credit card is issued to salary account (Mpower) holders. The product allows the cardholder to draw up to 75 percent of their monthly salary as an advance, and allows two free ATM transactions per month on other banks’ ATMs, along with POS purchases.
Access Bank’s debit card can be issued on either the InterSwitch or Visa platforms. Access Bank also offers a dollar-denominated Visa-branded credit card, launched in October 2007, available in classic, gold, platinum and corporate formats. Access Bank was the first in Nigeria to deploy multi-card ATMs with the capability to accept V Pay, InterSwitch and Visa credit cards.