State of Financial Inclusion in Nigeria: Is 2020 Off to a Rocky Start?

The much anticipated year 2020 is finally here! A year that is more or less one of reckoning for the Central Bank of Nigeria (CBN) and the financial services industry.

We closed out 2019 with a series of curious industry developments. Amidst several regulatory decisions that are certain to affect financial inclusion progress, we witnessed a review of retail bank charges for ATM withdrawals and bank transfers (NEFT and NIP), disaggregation of merchant settlements and an upgrade of the BVN.

In this article, we offer our own perspectives on these developments and possible implications for financial inclusion.

Revised fees and charges for banking services

In December 2019, the CBN, reviewed charges and fees for banking services. Particular highlights include the downward review of charges for subsequent withdrawals from another bank’s ATM (after the third withdrawal) to N35 from N65 (a 53.8 percent price slash). We also saw a review of cost of electronic bank transfers, to a tiered structure from a flat fee of N50.

What does this mean?

Given that the associated costs to access financial services (pecuniary and non-pecuniary) has been a deterrent to financial inclusion, these revisions are a step in the right direction. As the digital revolution transforms the banking and payments industry, we anticipate attendant benefits of further reduced costs, convenience and speed which are meant to enhance financial inclusion.

The price reviews, we believe, will also encourage customers at the bottom of the pyramid to embrace digital payments more often and we’ll see money stay digital for longer.

As for bringing excluded citizens into the formal ecosystem, cheaper interbank transfers is a good value proposition but may not be compelling enough to switch - after all, cash still works! For that, alternate strategies are necessary (for example customised product offerings, messaging, delivery channels etc).

Disaggregating merchant settlements

Legally, deposit money banks (DMBs) and non-bank financial institutions must deduct a N50 stamp duty charge on eligible transactions above NGN 1,000 (the 2020 Finance Act raised the threshold to N10,000). Prior to the CBN circular mandating banks to unbundle merchant settlements and charge applicable taxes and duties on individual transactions, such settlements were aggregated and charged wholesale.

What does this mean?

Let’s paint a picture. For a merchant conducting 500 transactions a day, the new arrangement means he would be paying N50 on every transaction over N1,000.

N50 x 500 transactions = N25,000/day in stamp duties. Whereas, prior to the circular, the merchant was paying and absorbing N50 for the same 500 transactions.

Also note, this N50 is in addition to the merchant service charge (MSC) of 0.75 percent (capped at N1,200), recently reviewed downwards to 0.50 percent (capped at N1,000).

Predictably, the fallout was negative. Merchants began looking for ways to avoid paying this extra cost. Most merchants transferred the extra cost onto the customer. Some responded by swapping out their POS machines and reverting to cash payments while others limited acceptance of POS to payments above a certain threshold or even opting for direct e-transfers to savings accounts.

This doesn’t bode well for the CBN’s cashless policy especially if regulatory directives result in major actors swapping out digital solutions for cash.

BVN 2.0

It’s 2020 and identity management is still a national issue. Many Nigerians remain identity poor, unable to fulfil KYC requirements. The CBN has taken different steps to mitigate this, including tiered KYC. Among the diverse CBN interventions aimed at mitigating this is the introduction of BVN 2.0 which was recently updated (and split) into two classes — BVN Lite and BVN Premium. The BVN Premium is the BVN Nigerians have known since 2014 when it was rolled out. BVN Lite on the other hand, is a stripped down version of the BVN that requires collecting fewer customer data points.

What does it mean?

BVN Lite is an attempt to reduce the cost and burden of data collection. This could enhance the speed at which BVNs are issued. BVN 2.0 resonates with the World Bank’s Identification for Development (ID4D) principles for building identity systems. Building a robust and inclusive digital identity system at the national level is resource intensive. By staggering the data collection process over a period of time, we can mitigate the capital requirement.

It is also interesting that the number of BVNs that have been issued seems to have exceeded the number of NINs. The most recent numbers for NIN stood at about 36.6 million while BVN stands at 40.4 million today. So, apparently, our banking system now has a larger identity database than any other industry, including the National Identity Management Commission (NIMC) which is backed by law. Is this a cause for concern?

Either way, the BVN remains an underused database. Diverse use cases exist for the BVN that could be explored to further enhance not only access to finance but also other social services as well. Aadhaar in India is a prime example of the varied possibilities a national digital identity database affords an emerging market.

In Conclusion

2020 is a milestone year for the industry. Aside the 2020 deadline set in the National Financial Inclusion Strategy document, it is also a measurement year where the financial sector deepening agency, Enhancing Financial Innovation & Access (EFInA) will present its bi-annual Access to Finance report.

It is not yet clear just how far along the industry is and how close (or how off) we are to the mark, especially in light of these reviews by the CBN. We do know however that the road to 80 percent inclusion will require considerably more effort by everyone.

Here’s to an inclusive 2020.