Building Nigeria’s digital payments infrastructure: The path to economic growth

In recent years, Nigeria has seen a great deal of improvement in its digital payment infrastructure. This improvement can be attributed to the country’s ever-growing fintech space, technological advancements, and seemingly innovative government policies. Advanced payment solutions (electronic bank transfers, point-of-sale (POS) terminals, and eWallets) are steadily growing. In March 2023, mobile transactions in Nigeria grew by 215% from March 2022, with Nigerians transferring a total of N4.1 trillion in the process. 

Over the years, the Central Bank of Nigeria (CBN) has introduced policies and guidelines, such as the “Payment System Guidelines,” to help push Nigeria towards a cashless society. These policies and others like them have laid a stable foundation for Nigeria’s digital payment infrastructure and have contributed to Nigeria’s economic growth and development. However, as with all foundations, a solid infrastructure has to be built on top of them. 

Despite the advancements, the growth of the digital payments sector is yet to realize its full potential due to structural failings such as delayed and failed transactions, incessant network issues, poor dispute resolution, and a lack of proper technology. For instance, two-fifths of the failed transactions that led to customer disputes in the first quarter of 2023 were left unresolved. 

Background: state of digital payments in Nigeria

Over a decade ago, Nigeria began its march towards a cashless society with a desire to emphasise digital and electronic transactions more. Since then, significant developments have been made in terms of the overall digital payment infrastructure. For instance, according to a report published by ACI Worldwide in partnership with GlobalData and the Centre for Economics and Business, Nigeria leads Africa in terms of real-time and digital payments. 

Furthermore, the report shows that Nigeria ranks 6th in the world’s most developed real-time payment markets, with 3.7 billion real-time transactions in 2021. It is apparent that digital payment has become a strong part of Nigeria’s current payment landscape, and it seems the only way is up. For example, real-time transactions are expected to hit 8.8 billion in 2026, an 18.6% CAGR over the next 5 years. 

Despite these advancements, Nigeria’s digital payment infrastructure experienced significant setbacks in early 2023 due to the federal government’s Naira Redesign Policy, which was introduced to further the government’s objective of transforming Nigeria into a cashless society. Nigeria’s online banking system experienced a significant increase in use during this period, which resulted in a surge that the current digital payment infrastructure was not ready for.  

In the first quarter, Nigeria’s total instant payment transactions went from N38.77 trillion in January to N48.33 trillion in March, a 24% increase. This increase also coincided with a high rate of failed transactions, with 40% of failed transactions where customer accounts were charged yet to be resolved. It is apparent that Nigeria’s current digital infrastructure is not ready to handle a surge in transactions head-on. 

This further hindered the federal government’s progress in achieving a cashless society and made the government backtrack on this policy. A more robust digital payment infrastructure would have helped make it foolproof against surges or any other events that may have otherwise put a strain on it. A robust digital payment infrastructure can also significantly contribute to Nigeria’s GDP, facilitating economic growth. 

The benefits of a robust digital payment infrastructure

Nigeria’s current digital payment infrastructure has contributed significantly to the country’s GDP. The general utilisation of digital and real-time payment services in Nigeria helped the nation realise $3.2 billion in economic output in 2021. There are many other benefits that come with having a well-developed digital payment infrastructure, and they include: 

• A safe, reliable, and secure method of payment for everyone. A robust digital payment infrastructure allows bank customers to manage their everyday financial transactions via electronic payments, eliminating the need to visit a local bank branch. With a robust digital payment infrastructure, merchants can also save a lot of time and money.
• A robust digital payment infrastructure helps improve job creation. With a stable infrastructure, companies can build tailored financial solutions on top of the infrastructure, which will require many hands. In this manner, the nation’s unemployment rate is certain to drop.
• One of the major goals for many countries in our ever-advancing digital age is creating a financially inclusive society. Financial inclusion allows for financial products and services to be easily accessible to customers and businesses that have previously been excluded from these products and services. This is especially important for developing nations such as Nigeria, where a significant portion of its population cannot access traditional banking services. The benefits of financial inclusion are far-reaching and can help in the areas of poverty reduction, employment generation, wealth creation, and improving welfare and general standard of living.
• Transparency is one of the hallmarks of a good digital payment infrastructure. A robust digital payment infrastructure can provide greater transparency and traceability of financial transactions. This helps to minimise fraud and corruption and boost confidence in financial systems.

Furthermore, a sturdy digital payment infrastructure will help ease Africa’s present remittance issues. One of the biggest problems with international remittances in the African market is affordability. For example, the average cost of remittances in sub-Saharan Africa is 7.8% higher than that of the rest of the world. According to the data, Tanzania and Nigeria were the two African nations with the highest remittance costs. It costs about $54 and $38 to receive remittances worth $200 in Tanzania and Nigeria, respectively. 

Challenges withBuilding  Robust Digital Payments Infrastructure

There are a number of challenges that make building a digital payment infrastructure a difficult affair. The cost, technical complexity, and stringent regulatory requirements of the technologies required for the development of a robust digital payment infrastructure in Nigeria have created an environment where only a few players have the resources to operate. 

Additionally, challenges such as fraud, chargebacks, cross-border compatibility, and expensive technical integration further complicate the process. Moreover, there are some Nigeria-specific difficulties, such as insufficient financial and technical literacy, that exacerbate the complexity of the process.

For most companies, the combination of these challenges makes it difficult to justify developing a payment infrastructure. Although the benefits of building a robust infrastructure are numerous, operating in the product layer and building on top of already existing infrastructure represents an easier path to success.

In such cases, digital payment service providers like banks, fintechs, and mobile money operators may partner with companies that offer payment infrastructure services to connect with other providers and create a financial services ecosystem. 

Case Studies: why Zone fits the description of what Nigeria and Africa needs

In addition to the challenges mentioned above, lack of trust in payment systems and the huge population of unbanked are major issues to be tackled. These will require reaching the unbanked and minimising failed transactions, two areas where much work remains to be done. According to a KPMG report, 1 in 3 adult Nigerians had no access to financial services like payments, receipts, savings, or credit as of the end of 2020. 44.6% of the 106 million Nigerian adults had bank accounts, while 35.9% were financially excluded from banking services. 

In the first quarter of 2023, when (according to data published by the Nigeria Interbank Settlement System) Nigeria experienced a 44.6% surge in digital transactions, the surge led to a rise in failed transactions due to the lack of a sturdy digital payment infrastructure. According to checks conducted by the Guardian, as of April 2023, 70% of customers who visited the bank were there to resolve issues with failed digital transactions. 

It is becoming clear to industry players that these problems can best be solved by integrating blockchain technology into the system, thereby providing a more robust digital payment infrastructure that can be more easily relied upon. Blockchain technology is a relatively recent technology that makes use of a decentralised, distributed, and open digital ledger to record transactions across numerous computers. It records these transactions in a way that makes it difficult for changes to be made retroactively, which can build trust. This definition doesn’t quite do justice to the superiority of this technology, but to keep things simple, it should suffice.

The implementation of blockchain technology will resolve issues of delayed payment transactions, a lack of transparency, and distrust in the current system. While the use of blockchain technology in payment processing and money transfers is somewhat new, it has the potential to completely reshape the payment landscape and transform digital payment infrastructures into a driving force for economic growth. 

Zone has developed Africa’s first Layer-1 blockchain network for payments, which, unlike traditional systems that rely heavily on intermediaries, offers a direct and secure transaction approach, mitigating vulnerabilities and enhancing efficiency. 

Zone acquired its Payment and Switching Licence from the Central Bank of Nigeria to further its impact on Nigeria’s digital payment infrastructure, making it the first regulated layer-1 blockchain network for payments in Africa. The license will allow Zone to enable payments and acceptance of digital currencies for banks, fintechs, and OFIs through its blockchain-based payment infrastructure network. The switching license also gives Zone direct access to key players in the payment system, including the NIBSS-hosted Nigeria Central Switch and the numerous card payment schemes.

The impact of Zone’s blockchain technology can already be seen in ATM transactions, its first use case. As of February 2023, just 3 months after launching its blockchain-based solution, the startup was processing $1 million in daily transaction volume for 16 Nigerian banks. Obi Emetarom, the startup’s CEO, told TechCabal that Zone achieved this by improving the reliability, consistency, and speed of transactions and the reconciliation process for ATM transactions.

In an ever-evolving, digitally driven world, the adoption of blockchain technology is necessary to meet the growing demands of the modern era. This forward-thinking approach offers not just an improvement but a transformation of outdated systems. As we navigate the digital age, it is important that we reshape our infrastructure to embrace efficiency, security, and innovation. By doing so, we not only adapt to the present but also prepare ourselves for a future defined by rapid technology advancements and the need for organisations and countries to remain globally competitive. 

Conclusion:

The importance of creating a robust digital payment infrastructure cannot be overstated. The ability to exchange money seamlessly is an important ingredient needed to grow and develop any nation’s economy. For this to happen, there needs to be a collective effort from the private sector, government, and development partners to overcome the hurdles placed before them. 

The government has the duty to create a more enabling environment for the creation of innovative technology by introducing inclusive policies and should avoid making regulations that frustrate technological advancements and suppress innovative ideas. Furthermore, stakeholders within the payment system should rub their minds and share knowledge so as to solve the problems our current digital payment infrastructure is currently facing. 

Companies such as Zone, which currently spearheads the development of Nigeria’s and Africa’s first blockchain payment infrastructure, have a pivotal role to play in investing and developing cutting-edge solutions that drive the digital payment infrastructure forward. They must foster innovation maintain high standards of cybersecurity and most importantly, build trust among users. 

See also: Mobile App Revolution and the Transformation of Digital Payments in Nigeria