How Nigeria’s economic boom could be down to improved payment systems

Lagos skyline

With Nigeria having recently eclipsed South Africa as the continent’s biggest economy, it is worth taking a look the nation’s progress from the perspective of a service that is indispensable to the modern way of life — electronic payments. And electronic payments, in turn, depend on suitable telecommunications and banking infrastructure.

The pace of change in Nigeria is remarkable and, having been in the country for frequent periods around the early 2000s as part of the birth of the modern payments industry in that country, change is nowhere more noticeable than in the retail banking sector. Having recently returned there this year in a payments consultant capacity, the benefit of such an extended hiatus is the comparison of two distanced snapshots: the differences are quite stark and immediately noticeable.

From a largely cash-based society 10 years ago, where wads of cash or travellers’ cheques were a necessity for visitors, and where you’d be lucky to find a single MasterCard machine (which would connect directly to America), today ATMs and credit card Point-of-Sale (PoS) devices are everywhere.

A decade ago, there were almost no electronic payment systems at all. The few ATMs were “through-the-wall” types at bank branches, and there was little, if any, remote or even inter-bank connectivity. By the same token, telecommunications were pretty poor; a walk on the streets would reveal why, with telephone wires festooned on poles, or attached in an entirely haphazard fashion to the side of buildings. Companies generally established their own connectivity using microwave towers, rather than depend on the speed of government to improve communications.

From a herd of nearly 100 banks, each operating within a limited fiefdom, the Central Bank of Nigeria promulgated policy in 2005 that saw the sector consolidated down to just the 22 currently in play. This process is regarded as a definitive case study for the success of down-scaling (the goal being to align with the modern trend of moving from a banking system dominated by many small and relatively unstable banks, to a system with a few bigger and more reliable banks). South Africa arguably went through a similar exercise in the retail banking sector a couple of decades ago. But this exercise has another, more organic effect on customers.

In the case of ATMs, the absence of an interlinking switch, which would allow customers from a bank in one area to withdraw cash from a bank in another, was hampered by a large and cumbersome pool of possible member banks. Together with the consolidation of the organisations, such a facility — considered indispensable for modern banking — was introduced. Similarly, credit card machines just didn’t exist en masse and were not widely available, relying as they do on a connection from the merchant to the card issuer (the bank) and the payment system provider.

These connections, of course, depend on telecommunications infrastructure.

Lagos bridge

A sense of perspective is required where Nigerian telecommunications is concerned. The country has a population of nearly 170 million people, but it has just over 2.5 million landlines today. It is thanks to the revolution of mobile telephony that the foundations for better payment systems were laid — today, there are 164 million GSM lines and nearly 15 million CDMA (3G) connections.

With all this happening in the banking and telecommunications sectors, something else started to occur which has almost certainly played a role in helping Nigeria to its position as the continent’s biggest economy. More people were getting “banked”, or gaining access to banking services. Transaction volumes have been increasing exponentially — and when people are banked and transactions begin to flow freely, the economy benefits due to increased consumer participation in both the retail and retail-banking sectors.

The positive effect of a modern, well-managed payments system manifests in various ways. For example, those who have been to Nigeria’s capital, Abuja (especially a decade or more ago), will remember chaotic roads mostly in a state of disrepair; traffic jams on a colossal scale; and an almost complete absence of traffic lights.

Roads are to an extent a picture of what’s going on in a country. Today, the situation couldn’t be more different. New tarmac can be seen everywhere. Traffic management is vastly improved (although getting off “The Island” sees the traffic can still be a challenge). There are high-rises climbing into the sky. People from the regions go to Abuja to spend their holidays. Even the airport terminal is undergoing a wide-scale upgrade.

The Nigerian retail economy no longer depends on cash alone, but has the payments systems to support modern means of transacting, delivering improved security and convenience and easing the process of doing business, both locally and foreign-investment based.

The situation is geared for continued strong growth in the foreseeable future — and that means Nigeria is an economic power to be reckoned with.

Liam McDermott


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