Evolution of Payment Card in Nigeria; Analysis of transactions at channels Olusegun Sotola Initiative for Public Policy Analysis Prepared for the workshop: “Engaging stakeholders in the economic regulation of payment cards in Nigeria”, 27 March, Disclaimer: The opinions expressed in this presentation are the exclusive responsibility of the author and do not necessarily reflect those of IPPA.

Introduction  This analysis is based on volume and value of transactions at POS (offline and online), Web/Internet, Mobile Payment and ATM: o The analysis is on card issued by commercial banks in four party system framework o There are no data on proprietary/retail card  Though ATM are mostly use for cash withdrawal, its impact on the entire electronic payment transactions in Nigeria suggests the need to include it in this analysis

Payment card at evolution  At inception, card transactions were done at ATM and POS (offline) only: o Up to 2005, all POS are offline o Offline POS was phased out in 2006 with the emergence of online POS  ATM was the most used channel in term of volume (with up to about 99.6% of transaction volume.  There is an inverse relationship between ATM and POS transaction (While one has a high volume, the other has high value of transaction).  What are the cause(s) of this?

Share of Transaction YearATM Volume (%) ATM Value (%) POS Volume (%) POS Value (%) Source: author’s calculation. Tab.1: Shares of transaction at evolution (%)

What are the cause(s) of this?  The data suggests that POS are elitist; only for the elite class: o The nature of the merchants and the cardholders and the type of goods and services.  ATM suits the need of the middle class o Moreover there were massive ATM deployment.

Payment card shares of transactions in Nigeria (%) .. ChannelTransactio n ATM Volume Value (N’m) POS (offline Volume Value POS (online Volume Value Web/ Internet Volume Value Mobile Payment Volume Value (N’m) Total Volume Value (N’m) 100 Source:

Shares total transaction value (%) in

Shares in total transaction volume (%)

ATM transactions overshadow other channels Apart from the high transaction value for POS at take-off, over 90% of card related transactions are at ATMs. Why is this?: – Stakeholders in the financial system stimulate the use of ATM than any other payment channels: – ATM deployment was growing at a faster rate than other channels (156.3%) ; – Commercial banks aggressively stimulate the use of ATM card relative to other channels. The growth in the use of ATMs provide indication that other channels could be adopted if appropriate policy are made to stimulate their usage.

ATM dominance of Card transaction Contd The continued dominance of card payment by ATM shows that Nigerians have high preference for cash transaction. This trend will continue until direct effort are made to stimulate the use of card for direct transaction; e.g. by: – addressing the fears of consumers and merchants: fraud, delayed settlement, etc. – massive deployment of POS terminals and get people to be familiar with it. – introduce incentives for merchants and card holders

Online payment Trends ◦ Except at take-off where POS has high value of transaction (97%), online channels have failed to establish itself as an acceptable mode of transaction for both merchants and cardholders. ◦ POS and web/internet payments have not shown any steady growth pattern to suggest their becoming acceptable payment channels. ◦ Transaction at POS have been in perpetually decline since 2006; in 2010 its share of transaction is 0.5 in terms of volume and 1.2 for value, from 46.6% and 93.4% in 2004.

Online payment trend (ctd)  Though web/Internet payment has generally seen some modest and steady growth since 2006, however, its share in total transaction has not been significant and the changes over time less impressive.  Over the years, POS and Web/internet payment have higher shares of value of transactions than their shares of volume.  Mobile payment: While its share of volume of transaction is declining, it shares in the value of transaction is growing slowly but steady. Volume from 4.8% in 2008 to 0.6% in Value from 0.1% to 0.6% over the same period.

Changes overtime (%) Channels Transactions ATMVolume Value (N’m) POS (offline) Volume Value (N’m) POS (Online) Volume Value (N’m) -1, Web/ Internet Volume Value (N’m) Mobile Payment Volume Value (N’m)

Observed trends Across all the channels, there are always huge growth at initiation, usually followed by significant drops subsequently. – E.g., changes in the first year of transaction volume for ATM, POS (offline), POS (online) and web/internet were 402%, 118,913%, 493% and 306%, respectively. – These fell to 189%, 0.78%, 183% and 77% in the following year, respectively. What are the possible explanations?

Observed Trends (ctd)  All online payment channels tend to have larger shares of value than their corresponding shares of volume of transaction.  The fact that this observed trend continued overtime in the data set suggests that: o Online payment channels are being patronised by a set/class of people who could consummate transactions with high monetary value. o Merchant adoption is largely elite-driven. o That is; merchants for goods that are mostly consumed by the rich, overseas purchases, a lot of cards are denominated in foreign currency, etc.

Conclusions 1) There is limited access to payment card market in Nigeria. CountryNumber of POS Brazil2,224 per 100,000 Nigeria13 per 100,000 Uganda453 per 100,000 South Africa1,063 per 1000 Source: CBN 2011

Conclusion (ct 2) Though there are plans to deploy 40,000 POS terminals. Penetration when 40,000 POS terminals are deployed will be: CountryNumber of POS Nigeria38 per 100,000

Conclusions (ctd.) ATM has remained the dominant channel of card transaction. Little headway with credit card channel. Credit cards has the highest benefit compared to other channels. What sort of public intervention (regulation) will improve adoption of card usage by consumers and card adoption by merchants? Will restrictions on withdrawals improve card usage and adoption by merchants? Awareness campaign should address: – the fears of merchant and cardholder E.g. fraud, settlement delay, dispense errors like in ATM etc.

Thank you