> Posted by Prateek Shrivastava, Global Director, Channels & Technology, Accion

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The National Assembly of the Federal Republic of Nigeria passed the Central Bank of Nigeria (CBN) Act in 2007. The Act included provisions for the creation of the CBN to ensure monetary stability, issuing and maintaining legal tender, and promoting the implementation of best practices including the use of electronic payment systems in all banks across Nigeria.

In the same year, the CBN developed the Financial System Strategy 2020 wherein the need for electronic financial services (amongst many other reforms) to make Nigeria a competitive economy was identified. Since 2008, the CBN has been extremely active in developing and implementing guidelines and frameworks to support the digitization of financial services (for example, all banks and microfinance banks need to have core banking systems, and the use of ATMs is governed) including mobile money and agent banking. The Guidelines on Mobile Money Services in Nigeria were approved and published in June 2009. Most recently, the CBN has also released a licensing framework for “super agents” that banks and other regulated financial services providers can use to bring services to the markets and streets in Nigeria.

Nigeria’s mobile money market hosts about two dozen licensed mobile money operators (MMOs) that include banks and others, which, in spite of their array, have proven inadequate in terms of country coverage and active adoption.

In the recent words of Dipo Fatokun, Director of the Banking and Payment System Department of the CBN, “Expectations of mobile money [in Nigeria] have not fully been met.” Annual mobile money transactions in the country in 2014 exceeded N5 billion (US$25 million), while in Kenya and Tanzania total annual transactions in 2013 were US$22 billion and US$18 billion.

A report from EFINA published in 2014, a full five years after the CBN guidelines for mobile money were put in place, shows that only 800,000 Nigerian adults currently use mobile money, representing less than one percent of the adult population. Today, even arguably the most successful entity, Pagatech Nigeria with its innovative use of technology and strong management team, is advertised sporadically on the streets of Lagos and even less further afield. Awareness is low and therefore adoption is low.

In my opinion, this lack of progress can be attributed to two key issues:

  1. The unintended consequences of CBN’s approach to implementing the mobile money guidelines; and
  2. The lack of understanding on the part of the financial institutions of mass-market digital financial services;

I discuss each of these points in some detail below.

First, the unintended consequences of CBN’s approach to implementing the guidelines:

  • The treatment of mobile network operators (MNOs): Significantly, Nigeria’s mobile money guidelines exclude MNOs from becoming licensed mobile money operators. Whether this specific exclusion, given the MNOs’ customer reach and brand recognition in the country, is a good idea or not is debatable. Personally, I understand the reasons why CBN took this path. However, recently, recognizing the sheer market power of the MNOs and the aim to push the mobile money industry forward, the CBN has given approval to mobile network operators to function as “super agents” for banks and licensed mobile money operators. For example, in 2014, Globacom was given the green light to launch “GloXchange”, a mobile money super agent network planning to “create 500,000 mobile money agent outlets throughout the country”. The effort is in partnership with Firstmonie (a subsidiary of First Bank Nigeria), Ecobank, Stanbic IBTC, and Zenith Bank. MTN has also done work with various banks such as GTBank (whom MTN initially supported to qualify for an MMO license) and Diamond Bank’s Y’ello account. Regardless of the current status of these MNO projects, I, like Fatokun, think these “super agent” initiatives will help to kickstart the growth of Nigeria’s mobile money and digital financial services industry, addressing the potential demand of Nigeria’s nearly 65 percent unbanked population.
  • Reluctant investors: For the banks and others included in the regulatory fold as mobile money providers, the CBN’s drawn-out process for granting licenses has been a major obstacle for raising funds. Consider the following:

Back in 2009, the CBN released its mobile money regulations and in 2010 they invited applications from potential mobile money operators. In March 2010, 40 or so applied, and in August 2010, 18 were given an approval in principle with a mandate to build a business and run a pilot for three months starting in December 2010. Only those that met the targets of the pilot would be approved and authorized to operate. Only two of the piloting operators hit the pilot targets by the deadline of March 31, 2011. In April 2011, the CEOs of all the “approved in principle” MMOs, myself included, were invited to a meeting with the CBN in Lagos, where we were informed that rather than approving the two companies, the pilot deadline would be extended to June 30 to give the others time to catch up. Eventually, in August 2011, 16 operators were authorized. In 2013, an additional eight were authorized, with the main reason for this being the original 16 had not delivered on what they had set out to do.

As you may know, mobile money operations (regardless of if they are bank-led, mobile operator-led or third party-led), require a lot of patient capital – mobile money deployments take years to become profitable. Funds are required to hire staff, build the agent network, ensure technology is robust, and run operations (call centers, field support staff, quality assessment, HR, accounting, etc). Also, a large marketing and advertising budget is required to attract people to the service. These investments are recovered through transaction fees from consumer and business-focused services. The effect of CBN’s approach to licensing many companies simultaneously, coupled with an untested high-risk market, resulted in the fact that none of the companies were able to raise sufficient funding since, to investors, all of the services looked the same. This contributed to flaccid mobile money services across the entire country. And indeed, over time, most investors that stayed away may feel “vindicated” that they took the right decision in 2011/12.

Second, the lack of understanding of mass-market digital financial services within the financial institutions:

  • Lack of understanding of the customer segment: Most banks in Nigeria are not retail focused, much less mass-market retail focused. Banks like Diamond Bank are doing more than others in the retail sector but these are exceptions to the rule. The average balance held by a Nigerian, according to most banks, is not more than N2,500 ($12) per annum. Like in most emerging markets, Nigerians who get paid into a bank account take their funds out at a teller or ATM and spend cash. Bankers cannot create the business case to serve these customers – the “float” interest income from the customer account liability does not cover the cost of acquiring the customer and managing the account. Due to this lack of “numbers stacking up” in the board room, banks do not even begin trying to create products for this customer segment.
  • Lack of understanding of mass distribution networks: Banks around the world are used to the “customer comes to us” model – come to the safe and secure bank branch or ATM to conduct your financial transactions. Due to the point made earlier about the lack of a business case for the average customer, most banks do not have multiple branches or ATMs. Along with ATMs, Internet banking, and mobile banking, in order to make mass-market digital financial systems work, an agent network is a key asset. Banks are not used to working with retail distribution networks. They are not like fast-moving consumer goods (FMCG) companies like Coca Cola that have long and well-served supply chains. The agency banking model and associated business case is not instinctively understood by bankers. An education exercise is needed to help bankers across Nigeria understand how to work together.
  • Lack of interest in sharing infrastructure: Banks in Nigeria are not comfortable with sharing infrastructure – be it technology or agents. They all (in my experience) want to own their own technology (and are less clear about owning an agent network, as pointed out earlier) – thereby driving-up the cost of deploying digital financial services and requiring greater investment to break-even. They already share settlement infrastructure (like NIBSS) and payment networks (Visa, MasterCard, and Verve). Perhaps a new and better approach for banks would be to use a shared mobile banking and payments platform. Using technology as an enabler, this would help make the business case for mass market financial services more attractive.

In conclusion, in order to push mobile money in the country forward, CBN regulators and bankers may want to consider the following actions:

  1. CBN to support the advertising of mobile money services and the corresponding agent networks in the same manner as has been done for point-of-service networks and banking cards;
  2. CBN to cull the number of licenses issued to four/five mobile money operators (as an aside: interoperability was mandated in the original guidelines, which made matters even more complicated, and amended in 2012, but this has yet to come to fruition);
  3. Like the Reserve Bank of India did with the Telecom Regulatory Authority of India, CBN to work with NCC, the Telco regulator, to remove anti-competitive behavior of the MNOs around USSD pricing and other areas;
  4. CBN to help remove the requirement from the various state authorities (LASAA) that levy advertising fees on agents for putting up posters promoting mobile money services;
  5. CBN to resolve the “Cashless Nigeria” penalty charges on large cash deposits by businesses (this has already begun);
  6. CBN to bring additional staff onboard who are able to work with digital service providers at an operational level and guide these providers and banks wanting to harness digital financial services;
  7. Bankers (or CBN) to create new / work with existing shared infrastructure to help reduce the cost of deploying digital financial services; and
  8. Bankers to work with FMCG companies (their existing customers) to leverage existing supply chains and retail networks to build new / support an existing agent network.

Does anyone know how we could influence and support the CBN to see to these changes? Have you seen other relevant solutions from other countries that could be reviewed by the CBN? It would be great to hear your thoughts in the comments section below…

Have you read?

Nigeria Sets Its Sights on Financial Inclusion

Regulatory Considerations for Latin America’s Mobile Money Market

Beyond On-Ramps and Uptake: Exploring Surprising Benefits of Mobile Money