Naira nullified: Killing cash in an economy that runs on cash

DFSLab estimates based on official data from NIBSS and the Central Bank of Nigeria. Accessed 21 April 2023.

We also looked at the longer-term trends in the official data (not shown here), which suggest that the impact of demonetisation policy on payments digitisation in Nigeria is already much larger than the “COVID pandemic effect”.

While this data paints a clear picture of what’s happening on the supply side, we are still missing data to clarify what’s happening to consumers. It’s part of the DFS Lab mission to create new data and insights of the tech ecosystem, so in March our team conducted a rapid survey of ~1,000 respondents in Nigeria to assess what the picture on the ground looks like. As far as we know, this is the first assessment of digital payments’ usage behaviour, following the onset of the country-wide cash crunch. It’s important to note that the data reflect the behaviours of the more digitally included and urbanised population, given that our rapid survey was delivered through WhatsApp channels.

Five key data-driven reflections emerged from our analysis:

1. Digital payment penetration is high (amongst those with mobile phones). Just over 90% of respondents said they make digital payments at least once a month. That said, we were very surprised by the high frequency of usage: as many as a third of respondents said they made a digital payment on at least a daily basis.
2. In-store merchant payments are dominated by bank transfers. Two out of three respondents reported using bank transfers to pay for goods or services in merchant stores, indicating just how reliant last-mile customers and MSMEs are on the central switching infrastructure for banks.
3. The poor are more reliant on CICO. Our survey also revealed that those living in poverty are more likely to be dependent on CICO networks for daily transacting, compared to middle- or high-income segments of the population. Consequently, they are more likely to have been adversely affected by the surge in CICO transaction costs during the cash crunch.
4. USSD failures are more likely to impact women than men. Women are more likely than men to use USSD-enabled payment methods for making in-store merchant payments. This implies that higher USSD and network failure rates could be disproportionately impacting women customers.
5. Poor customer support, fraud and KYC are major hurdles to payment digitisation. Just over 40% of respondents cited that they have concerns and challenges with making digital payments, with the top 3 barriers cited as: poor customer support, fraud and insufficient documentation (ID, proof of address).

Unsurprisingly, the demonetisation policy in Nigeria has led to a significant shift in the behaviour of last-mile customers from traditional banks to mobile and fintech. As we noted above, mobile payment volumes were up by a staggering 605% year-on-year in 2023 Q1!

Fintech payment solutions—especially hybrid and agent-based models—from Opay, PalmPay, MTN’s MoMo arm, Paga and others have gained substantial ground in the market riding the same wave as mobile. Digital and mobile wallets have emerged as popular payment methods among customers, as evidenced by the remarkable surge in Google Play app downloads (per data we sourced from Crunchbase and Apptopia).

For people that are digitally enabled, we’ve seen closed-loop wallet systems (which don’t depend on NIBSS) being taken up as a rival to cash. The ability of providers like OPay, etc. to guarantee instant payments has shifted consumer trust in fintechs, and this shift in behaviour is likely to persist to the detriment of the banking sector, in our view. Additionally, we think the policy-induced tailwinds will continue to carry them forward.

The immediate impact of demonetisation on the supply side and on consumers is real and significant. But a number of important questions remain including whether the impacts we see are permanent or temporary impacts that will subside with time.

On the supply side, providers—banks, super agents, and the broader fintech community—are having to navigate a very uncertain policy environment which could curtail investment in Nigeria’s ecosystem. That said, the traction we’re seeing in mobile payment channels suggests that fintechs and mobile players may have a window to take market share and be more disruptive going forward (if they can get the margins to move in tandem with the uptick in volumes, that is).

On the demand side, we see a big risk that the most vulnerable and poorest of Nigerian society are being left behind and that their livelihoods are disproportionately impacted by aggressive demonetisation policy. This is likely to remain the status quo until systems are improved to be both reliable and low-cost. It’s too early to tell as to the true extent to which inequality may be widened, but it’s a big question we have on our research agenda at DFS Lab. Trade-offs from a development perspective will need to be carefully managed!

It remains to be seen how developments such as the growth of Africa’s domestic e-payments market, the e-naira and the CBN’s regulatory framework for mobile money services, as well as open banking will address these challenges in the longer term.

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