Recently I started seeing a spike in the number of inquiries made by friends, fintechs, and random other people about Mobile Money in Nigeria. And it’s not because they are suddenly having altruistic ideas for financial inclusion. Something must be cooking!
Let’s get the basics right Mobile money is a form of banking where your account number is your mobile number. It’s as simple as that. Any other definition is an oversabi. After the successful debut of mPesa in Kenya, many countries tried to launch their copycat mobile money system.
At the start of the mobile money madness, CBN gave out 23 licenses, 10 of which were by banks.
After a flurry of activities, things chilled. Banks subsequently developed acute amnesia about their licenses went back to their bread and butter: Commercial Banking.
Why and how mobile money failed will always be contentious. I have written about it, others have different opinions. The one thing we ain’t arguing about though is the fact that mobile money failed to hit the sweet spot.
New interests in Mobile Money The emergence of fintechs has thrown open new possibilities of what can be done with moribund mobile money licenses. Most fintechs within the payment space are having a lorry load of challenges connecting to banks. For example, a common request would be funding of payment transactions from bank accounts for which banks haven’t provided any simple APIs to work with. Those doing savings and personal financial management want to keep money in a legal way and also allow topping off investments from bank accounts. That is another problem.
Just like the way banks repurposed USSD codes meant for mobile money in 2014, fintechs are circling around banks to see how mobile money can be repurposed for better things.
We all go broke at different times, and the natural thing would be to turn to our bankers. After all, we have been putting our meager savings in there for a while; and one good turn deserves another, right? Wrong!
You are probably rolling your eyes now because we all know that Nigerian banks hardly lend to individuals no matter how compelling the case is. Yes, I know a few connected or lucky souls get loans that don’t come from your account going into debit because of SMS alerts. I also know a few banks, such as Access Bank, will readily give you loans under 30 seconds. These are outliers, and 2 trees don’t make a forest. The official numbers paint a grim picture.
According to the National Bureau of Statistics (yes, they keep tabs!), loans to individuals, which averages N88,000, constitutes just 0.7% of all loans while the ones to awon baba alaye of N1B and above is 82% of all credits Nigerian banks have advanced.
We can both see that it would be easier for a polygamous camel, with its harem of fat camel wives with luscious humps, 100 baby camels, and 3 side-chicks camels, to stroll through the eye of a needle than for you and me to walk into a bank and walk out with our loans.
Everyone who’s got least a D in Economics knows that credit is the grease of every economy and the cogs are the individual spenders, while SMEs are the backbone. So why are bankers bent on keeping Nigeria from attaining great heights? I guess this is the reasons why bank CEOs get bashed at every turn for the poor state of the economy. It has become unpardonable as they deliver multi-billion profit year on year.
It seems the bashing, name calling, and mudslinging doesn’t work on the bank CEOs anymore. They just don’t care.To rub salt into injuries, the few times banks want to give you a loan, they demand so much documentation and collateral that people are stumped “if I had this much collateral and documents, I wouldn’t even come for a friggin’ loan!”.
So, let’s go get our pitchforks and deal with these evil bankers! Not so fast; there are at least two sides to every story.
Let’s do a walk back and ask ourselves, why does anyone even set up a bank in the first place? To make tons of cash! Shareholders ain’t Father Christmas. Nobody goes through the pain of setting up a bank for charity. And the way banks make money is simple. They take money from those who have excess cash or who want to save and lend part of it to those who need money. The gap between the interest they pay the savers and what they charge the borrowers is their profit (after paying off your cousin’s salaries and the cost of the ATM withdrawal you made at another bank’s ATM).
If banks only make money when they lend, why ain’t they lending to me and you yanfuyanfu? Obviously, if the money won’t come back, they can’t lend it because if they can’t pay the savers when they come for their money, kasala go burst.
There are two critical things lenders look out for when thinking of handing over cash to you; ability to pay and willingness to pay.
Ability to pay refers to the capacity of your cash flow to pay back according to the repayment schedule, the probability of your business to grow as to generate enough revenue to pay, etc. This is where complex models are used to check you out. For example, it’s a standard practice that you must not use more than 33% of your monthly salary to pay back loans because irrespective of the sincerity of your heart, anything more could impair your day-to-day ability to pay back. Therefore, when banks ask for your statement of account, payslips, invoices, contracts, blah blah, this is what they want to calculate.
If you ask for much more than a bank think you can pay back, they will reduce it or the bad ones will kick your scrawny ass out of their office.
Willingness to pay back loans is a big deal, and it is so fundamental to credit that if you get this wrong, you are dead. I mean deader than a joint of beef. If the ability to pay back is impaired, a loan can be restructured, and it happens every time. However, when borrowers don’t want to pay back, hell boils over.
Willingness to pay back is a function of a working society and I ain’t sure if Nigeria can be classified as working, per se. In other countries where individuals get easy access to cash, you are in so much trouble if you don’t pay back. In fact, nobody needs to warn you to respect yourself. In places like Dubai, it’s even a criminal offense not to pay back: you skip your loans, you find yourself a lovely prison studio apartment.
Nigeria, being a place where law and order is an illegal alien, banks go around this issue by demanding collateral, things they can sell on Jumia or Balogun market if you don’t pay back. And not only do they request these, they do extensive checks on the documentation to ensure it actually belongs to you and that you haven’t pledged it to another bank. Stories of fake documents used for loans are twelve a kobo.
Crosschecking validity of documents in Nigeria is extra difficult as our governments are not automated. Just try to confirm land titles and vehicle authenticity and you can have an idea of the stress.
Since these processes are painful, long and super annoying, Nigerian banks quickly wised up to save their energy for higher ticket loans. Why spend 2 weeks on documentation for a N100,000 that you only make N2,500 on when you give someone for a month at 30% per annum? It would take precisely the same efforts to document an N1B that you make N2.5M at the same rate.
Of course, loans go bad for small and big borrowers. While we hear of the bigger boys with bad loans, the percentage (count) of smaller loans going bad is higher. Banks can afford to get a Senior Advocate of Nigeria to go after the big boys to get their money back and trust me, lawyers are not cheap and don’t do promos. What is the cost-benefit analysis of sending lawyers after a N75,000 loan when the amount in question isn’t enough to even pay the lawyer for a day’s job?
The good news is that fixing willingness to pay, that is to make it extremely painful and expensive for borrowers to default, can be easily fixed. The bad news is that it takes so many political balls only few would attempt it because it would hurt a lot of politicians. We don’t even need the FGN to do any law, there should just be a regulation between banks, backed by the CBN, that if you don’t pay your bills, you should be banished from the financial system. No need to take you to court or send lawyers after you.
If that happens, expect banks to start lending easily without going through too many documentations. They know you will pay back. Easy credit will allow people to have access to good things (consumer spending) while paying back over months. Mortgages will become available. Builders will build more and cheaper as there is a ready flow of buyers. Suppliers of labor and materials to builders will sell more.
Multiply that for every sector of this damned economy and you can only imagine how we will rule Africa.
Now that is a million-dollar question! Even though the National Population Commission (NPC) estimates that there are currently about 198 million Nigerians (as at 2018), the truth of the matter is that nobody knows.
When the head of the population commission in 2013, Festus Odimegwu claimed that no credible elections have ever been conducted in Nigeria, he lost his job (some say he resigned, others say he was fired).
So, if we cannot trust our census figures, how else do we estimate Nigeria’s true population? In this article, we will attempt to estimate that amount by using the following proxies
Number of active phone users
Number of unique bank verification numbers (BVNs)
Number of unique internet users.
Before we proceed, a few interesting notes about Nigeria’s population:
What is the major cause of the on-going population controversy? Many are quick to make reference to Federal allocation. However, since the discovery of oil, the 13% derivation has played a bigger role in determining the allocation that each state gets. So perhaps the biggest benefit of huge population figures is for elections.
Research has shown that although the absolute population figure has increased over time, the relative percentage attributed to each state (and region), have been exactly the same since 1963! For example, the South-West states have exactly 20% of the entire population, for both the 1991 and 2006 census figures. This is regardless the rapid urbanization to places like Lagos. Feyi Fawehinmi (popular Nigerian blogger and Guardian columnist) has been writing about this observation for almost a decade now – wonder who has been paying attention.
Do we have your attention now? If yes, let us see if we can make sense of our available data.
Number of active telephone users
To derive Nigeria’s population using number of active lines, we simply gross up the total number of active lines (160 million as at April 2018), by the proportion of phone users with dual sim cards. This gives an estimate of about 80 million people
Can this be the number of Nigerians? Of course not. If we assume our figures are correct, this could only be the estimated number of people with telephone lines in the country. The next logical question is what proportion of Nigerians use telephones? Very difficult question to answer. Our research revealed that there was no definite answer to this question. We did find out that there are about 21 million smart phone users in Nigeria though. But this does not advance our research in anyway. We are left to make other deductions from “census” related data. Who are the people who do not own telephones, and why do they not own telephones? Two simple but very broad reasons. The first is age, and the second is poverty. Therefore, if we eliminate those who are too young to own phones (bear in mind that this is very subjective, given that many kids own mobile phones), and we eliminate the absolute poor (on the assumption that they cannot afford mobile phones), we just might get a sense of the number of people in this country.
For the age range proportion, we will rely on the General Household Survey (GHS) conducted in 2012/2013 by collaboration between the National Bureau of Statistics (NBS), Federal Ministry of Agriculture and Rural Development (FMA&RD), the National Food Reserve Agency (NFRA), the Bill and Melinda Gates Foundation (BMGF) and the World Bank (WB). We find the GHS useful for in extracting “proportions and percentages”, because the study was carried out on 5,000 households. The proportions have since been used to generalize. For instance, let us assume that 38% of those surveyed were found to be below age 10, the figures are extrapolated and used to estimate the total number of children below age 10 in Nigeria (which gives a figure of about 75 million children below 10 years old, if we assume that the population of 198 million people is accurate).
We have not been able to find any specific source or study which references the age from which children start to use mobile phones in Nigeria. However, a study done by Influence Central (a marketing consultancy), found that the global average is about 10 years old. Another study carried out by the Interactive Journal of Medical Research, found out that some parents allow their kids to own phones from age 6. Age 6 appeared to generally be the lowest age we could find. Therefore, for the purposes of our study, we will eliminate the proportion of the population aged between ages 0 to 5 years old. Again, according to the GHS, this proportion is about 17.4% of the population surveyed.
We also inferred from the NBS study, carried out on the prevalence of absolute poverty in Nigeria between 2009. The World Bank defines extreme poverty as those living below $1.9 per day. Using the current Central Bank of Nigeria (CBN) exchange rate, that amount translate to over N211,000 in a year, which results to a monthly figure that is around the current minimum wage. It is for this reason we prefer the NBS definition of absolute poverty as those living below N55,235.20 a year, which translate to about N151 a day – a more realistic picture of poverty in Nigeria.
Based on the NBS, we will use the data to generalise for the population in relative terms. Hence, we will assume that the proportion of the population living below the poverty line is actually 62.6% as stated in its report, according to the poverty survey carried out
Now we have proportions for poverty and under-aged kids. What about the overlap of these two variables? The United Nations Children’s Fund (UNICEF) in conjunction with the NBS, estimates that of the total population of Nigerian children, 64% of them could be described as extremely poor[1]. Therefore, our proportion of kids who are poor and living in absolute poverty are about 22.5% of the population (62.6% – [64%*62.6%])
Using the number of unique active lines in Nigeria and taking all the above into the consideration, we come up with the following table:
Description
Proportion
Number of People
Kids below 5 years
17.4%
23,251,264.20
Absolute poor (excluding kids below 5)
22.5%
30,114,395.98
Unique phone users (estimate)
60.1%
80,262,295.00
Estimated Population
133,627,955.18
As you are aware, this number is just to get a sense of the population based on available information and does not represent an authoritative figure in any way. At best, we can “theorise” that based on the number of active phone lines (and other data points used), we expect Nigeria’s population to be between 99 million and 133.6 million.
One major limitation with the above analysis is the proportion used to account for the overlap. The number of children eliminated from the total estimation are aged from 5 years and below. However, the UNICEF study combines children aged between 0 to 14 years for its report. We have adopted this proportion in the absence of alternative data, as a similar report from the World Bank on poverty, classifies children in a similar manner, and the proportion is quite like the one used to determine the table above.
Number of Unique BVNs
Another way to estimate the number of people in Nigeria, is to extrapolate using the unique amount of Bank Verification Numbers (BVN) in the country. This proxy is particularly interesting because it is already filtered for duplicates, thereby doing away with further need for “fine tuning”. According to the CBN, there are about 33.2 million BVNs in Nigeria as at May 2018.
Description
Proportion
Number of People
Kids below 17 years
44.0%
45,956,873.32
Financially excluded adults
21.0%
27,377,358.49
Unique BVNs
35.0%
33,200,000.00
Estimated Population
104,447,439.31
The question now is, what proportion of the entire population is this? This was difficult data to acquire, as most estimates are derived from the population. We did find an independent survey carried out by Ericsson Consumer Labs in 2015, which revealed that only 53% of Nigeria’s population was part of its banking system. If we assume that this is representative of the entire adult population (as children were not surveyed for the purposes of financial inclusion), we would then have to eliminate the proportion of the population that are aged between ages 0 to 17 (as they are ineligible to own bank accounts). Based on the GHS, the proportion of the population of those aged below 14 years, are about 44% of the entire population. If we adjust these figures for these two population groups, we get another population estimate as follows:
Based on this estimation, the people in Nigeria could be anywhere between 59 million and 104 million.
Like the first estimation, this analysis has a fundamental limitation of isolating the children aged between ages 15 years to 17 years, as the presented in the GHS, only speaks to children aged between 0 and 14 years old.
This is the lowest estimate so far. Not surprising because the base for unique internet users, is smaller for mobile users and we have applied the exact same methodology. The limitation of this analysis is the same as the first. Additionally, this approach has the downside of applying the metric that 50% of mobile phone users have dual multiple lines, which indirectly implies that all internet users access the web using mobile devices. Another flaw with this approach is that it does not isolate internet users into categories, as some users will access the internet using their mobile phones, as well as their desktop computers. While we can attempt to make some of those adjustments here, it will only result in giving us a much lower figure than what we already have (which is the least of the three approaches). We will therefore proceed with the result of this analysis as is.
Are some of your estimates and “proportions” not very old?
That may be true. But even if we take the oldest data point we have used, which relates to poverty rates in 2010, it still yields some interesting results. To be very pessimistic, let us assume that all our findings above relate to 2010. We then apply the World Bank population growth rates between 2010 and 2018 (estimated). This gives us the following estimated figures for 2018:
Approach
2018
Population (Phone Users) (‘millions)
164.9373
Population (Unique BVNs) (‘millions)
128.9197
Population (Internet Users) (‘millions)
95.5565
So even if we assume that the figures above are correct, the highest number is still off by about 17% of the current 198 million, while the lowest figures are off by a staggering 52%.
Notwithstanding, there is a tendency for the first set of figures to be more representative of the true picture, because this study has made use of about 8 data points, and only one of them (the one relating to poverty) is more than 5 years. Some of the other proxies used are as recent as April 2018.
Case Study for other Countries: Canada and Ghana
To validate our methodology, we have tested it using data available for other countries. One of the countries is in Africa (Ghana), while the other is in North America (Canada). We have chosen Ghana because it is like Nigeria in several ways (socio-economically and culturally). We have chosen Canada because of its differences with Nigeria, both in terms of physical distance and developmental level. We will provide more insight into the rationale for our selection, as we examine each country in detail.
Canada
Canada is the second largest country in the world after Russia in terms of Area, occupying about two-fifths of Norths America. Because of its enormous size, it is often referred to as one of the world’s most sparsely populated countries.
We use the table below to highlight major socio-economic and other differences between Nigeria and Canada:
We have also outlined some reasons below on why we believe the population figures in Canada are correct:
Statistics Canada, the official body responsible for statistics in Canada (which also conducts its census), is a member of the United Nations Statistical Commission (UNSC). UNSC is the highest body of the global statistical system. It brings together the Chief Statisticians from member states from around the world. It is the highest decision-making body for international statistical activities especially the setting of statistical standards, the development of concepts and methods and their implementation at the national and international level (United Nations, 2018).
Statistics Canada conducts a census of Canada’s population every 5 years. Such frequency minimizes the probability for errors and enables high degree of accuracy.
In addition to the census conducted every 5 years by Statistics Canada, there are about 350 active surveys on virtually all aspects of Canadian life. Such robust database of information, enables Canada to use other proxies to validate its census figures.
Based on our research, there have been little or no disputes regarding the total number reported by Statistics Canada as official population figures. We have identified only two instances of dispute: One relates to the drop of the Jewish population in Canada in the 2016 census, of which the bone of contention was the survey and questionnaire design/validity and not the total census figure. The second relates to an overestimation of the Metis Nation in Ontario, where the main issue was whether people identified themselves correctly or not, when filling the surveys.
In both cases of dispute, the aggrieved parties only had issues with the methodology and not the overall census. It is therefore safe to say that Canada’s official population figures are reliable.
Canada’s Population Determination
According to Statistics Canada, there are 35,151,728 people in Canada. We will therefore use the three approaches adopted to determine the population for Nigeria, to see if we can derive an estimate for the Canada’s population:
Number of mobile phone users
Using a similar methodology for Nigeria, we obtain the number of children who are not old enough to use mobile phones – we use our previous baseline age of five years old. We also include the population of the country that is poor, on the assumption that they cannot afford mobile phones. We add the two groups above to the number of active phone lines (after adjusting for those with dual sim: representing only 4% of the phone owners, as dual sim phones are less prevalent in developed countries), and we get the table below:
We also apply a similar approach here. First, we get the number of people who are not old enough to get a bank account. Secondly, we add the number (Statistics Canada, 2018)of adults who are not within the banking system. It is interesting to note that the number of financially excluded adults in Canada is over two hundred thousand people, which shows the financial sophistication of the country. Finally, we add the number of unique bank accounts to arrive at the following: (Statista, 2018)
Last but not least, we also use the number of internet users. Like the mobile users, we also isolate the age group of the population not old enough to use smart phones, and those that are poor as well. These are then added to the number of internet users in Canada to arrive at the following:
From the analysis above, we can see that all approaches are with the range of 34,559,348 and 36,371,449¸which is within range of the estimated population as provided by the official figures. The same limitations stated for Nigeria also applies for Canada.
Ghana
Ghana is a West African country bordering the Gulf of Guinea between Togo and Cote d’iviore. Ghana is considered one of the leading countries in Africa partly because it was the first black country south of Sahara to achieve independence from colonial rule and partly because it has considerable natural wealth.
We use the table below to highlight major socio-economic and other similarities between Nigeria and Ghana:
The last population Census in Ghana took place in September 2010. Since then, Ghana’s population figures have been based on estimates. According to World Population Review Ghana has an estimated population of 29,527,468 as at August 2018. We will attempt to determine Ghana’s population using the component method used for Nigeria; that is Number of Mobile Phone users, Number of Unique Bank accounts and number of internet users in Ghana.
Number of mobile phone users
In using this estimate, we obtain the number of children below 5 years, who are assumed to be too young to use cell phones, then we obtain the proportion of the population that is living below poverty line, using the assumption that this group of people cannot afford mobile phones. However, this estimation is flawed in the case of Ghana because dual phone users are very prevalent. Unlike Nigeria where there is a sim registration process and an extrapolation of the number of unique phone users, in the figure for Ghana, there is double counting for people who have more than one phone hence the total figure is inflated.
Description
Proportion
Number of People
Kids below 5 years
13.5%
3,734,670.00
Poor Population (excluding kids below 5)
24.2%
6,675,042.00
Unique phone users (estimate)
128%
26,090,000.00
Total
36,499,712.00
Number of Unique Bank Accounts
Using unique bank accounts to estimate the population, we first get the number of people below 15, because they are not officially old enough to have a bank account. Next, we find the number of financially excluded adults. These adults are not within the banking system. Finally, we find the number of unique Bank account owners in Ghana. And add it all up to arrive at the following:
Finally, we will use the number of internet users in Ghana to estimate the population. Just like in the mobile user calculation, we isolate kids below the age of 5, because they do not have phones to use in subscribing to the internet. We also exclude the population of people living below poverty line because they also do not have the means or the device to subscribe to the internet. We then add this to the number of internet users in Ghana to arrive at the following:
From this analysis, we can see that all estimates using the three approaches are between 23,715,612 and 36,499,712. The figure using the mobile phone users 36,499,712 failed to consider, the number of dual seem users. This figure is above the official population estimate by 30.9%. The second estimate using the number of unique bank accounts is 29,310,655 and it deviates from the official population estimate by 0.73%. The final estimate using the number of unique internet users differ from the official population estimate by 19.7%. The same limitations stated for Nigeria also applies for Ghana.
Conclusion and Potential Implications
So, what does this all mean? Put simply we have been planning based on wrong figures. It could also serve as a pointer for investors looking to come into the country, as they are better able to make plans on a more realistic market size.
Meanwhile, we leave you with the following calculations based on our revised estimations. Perhaps these would aid better planning:
Without Growth
Approach A
Approach B
Approach C
Estimated Population
133,627,955
104,447,439
77,417,421
Metric
Population density
145
113
84
923,768
Mobile Phone Penetration (Unique)
60%
77%
104%
80,262,295
Internet Penetration (Unique)
35%
45%
60%
46,500,000
With Growth
Approach A
Approach B
Approach C
Estimated Population
164,937,295
128,919,716
95,556,503
Metric
Population density
179
140
103
923,768
Mobile Phone Penetration (Unique)
49%
62%
84%
80,262,295
Internet Penetration (Unique)
28%
36%
49%
46,500,000
[1] UNICEF Report on Nigeria – Global Study On Child Poverty And Disparities
Financial inclusion is a buzzword, but it’s also a real issue for third-world countries. Many things have been thrown at it, including the kitchen sink. As far as Nigeria is concerned, nothing seems to be working. Nevertheless, I believe that significantly reducing the cost of transactions, by making interbank transfers free, will break the exclusion barrier all through the invocation of the Network Effect.
The Network Effect, also known as Metcalf’s Law, says that the value of a network grows as the square of the number of its users increase. In simple English; when there are many people in a network, there is always someone you want to do aproko with.
Why am I so confident that this is possible? Well, I have the evolution of mobile telephony in Nigeria as a reliable basis.
Let’s learn from the telco revolution
Before MTN and Econet transformed mobile telephony in Nigeria, you would have imagined that we all used witchcraft to talk to ourselves. Apparently, we did! Or how would you describe 400K active lines for a nation of 126M disconnected souls?
However, what most people don’t know is that just before the GSM licenses were awarded, Nigeria had 6 GSM licenses issued by Obasanjo, and before then, 33 GSM licenses were given by the Dark Goggled General.
Many licenses and nobody was talking. The GSM providers felt telephones were for the middle-class and HNWI (High Net Worth Individuals, the fancy name for people who have hammered). Maybe that was true, but unfortunately, Nigeria never had many of the rich guys. The GSM providers failed spectacularly.
So, when MTN and Econet, the new kids of the block of 2001, started their operations, they came to the market with N20,000 SIM cards; only the middle-class and uber rich could get them. Apparently, some of them failed their networking classes and didn’t know about Metcalfe’s law. I’m happy there were remedial classes: MTN promptly introduced BOGOF and Econet brought Buddie to the masses. The market exploded; I finally got my SIM and phone, my friends got theirs, and we trade stories about girls. Nigeria was never the same again!
Just like telephony where you call those within your social and business circles to peddle rumors, close business deals, track errant staff, or check on your grandmother; transfer of money is also a social and business construct.
We thought telephones were for the rich
In the days when telephony was expensive and not for the poor, according to General David Mark, Nigerians thronged business centers to make local calls and cybercafes for international calls. For the trivial gist, they talk to their neighbors. Today, for the essential transactions such as transfers and bill payments that cost N50 a pop, they use their mobile apps and USSD codes. For small purchases of N10 to N1,000, they fish out dirty Naira notes from corners we can’t talk about to give their maiguards, bike men, Garri sellers, etc.
Why? Because it doesn’t make sense to use N50 to transfer N200.
My fancy friends in the e-trade argue about financial literacy, money stuffed in mattresses, etc. What they have not been able to explain to me is that even with poor literacy in Nigeria, how does everyone know how to use mobile phones: punch in airtime credit, dial numbers, and read digits of those calling them? Because when technology is demystified and pervasive, the knowledge becomes commonplace.
Ask yourself, when last did a new phone come with a manual even though it’s significantly more powerful than the dead-ass Motorola Talkabout of the early 2000s?
There is a history of transaction growth following price reductions
Back to cheap transfers, when the Central Bank of Nigeria crashed the cost of transfers from N100 to N50, the monthly transfers exploded from the measly 7M a month in 2016 to 58M in May 2018. The average transaction size dropped from N320K to N112K. In 2001, it cost N50 per minute to call; most people didn’t bother to call anyone. When the networks crashed the cost to Kobos per second, calls exploded.
Dropping interbank transfer to N5 for bank customers would do more magic than anyone could imagine. Not only that, making transfers of an amount less than N1,000 free means that the flow of money to the excluded would be free. When it is free to send money to my shoe shiner, he would learn how to receive it and also send it to others as well. After all, if he knows how to check his airtime balance, he will know how to check his wallet or account balance. And he would be able to send to his friends and his young wife in the village; all for free.
Bankers are scared because they think of the margins that would be wiped out. But, the addressable market is so huge, probably 100 times more, than what we have today. Instead of the 58M monthly transfers we are happy about, we could be talking about 5B transfers a month. Most of these would come from the N20 to N500 transfers that are small, trivial and extremely habit forming for even the least educated, as long as they have a phone and fingers to punch the keys.
Nigerian Banks of all shades, the CBN, international Development Finance Institutions (think WHO, DFID), Bill Gates, etc. have spent years and a lifetime trying to make Financial Inclusion work in Nigeria but the efforts haven’t yielded tangible fruits. Why not try making transactions cheaper? After all, nothing beats free.
This is the email that birthed Open Banking Nigeria. Sent just 2 minutes to midnight on June 1, 2017. Sent to those unfortunate to be my friends and so, are subjected to never-ending streams of half-baked ideas and utter madness.
It’s a very long read, so be warned!
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Good evening everyone,
At one time or the other, we all heard about how payments would be the next big deal. We have heard of big data, APIs, yeti, abominable snowman and all the rest. Unfortunately, many ideas, companies, and committees have been long on intentions but short on execution.
All of us in this email thread know what APIs can do and how payments can transform the lives of our customers, the fortunes of our companies and improve trade and transactions in the country.
However, things are not the way they should be: APIs are hard to get; tough to implement and even more difficult to integrate with.
The Challenge
There are many sides to this problem:
For the average Nigerian bank, many FinTechs are knocking on the door requesting APIs to do basic things such as payments, validating data, collections, etc. Many are developing custom APIs which don’t scale to other implementations. Keeping track of who is connected to what is a challenge. Monetization is a difficulty.
For FinTechs, (I suffered this over the last few months), convincing banks to allow connectivity is met with apathy, distrust, and unbearable burden. Each bank comes with custom integration methods and codes. Many banks never allow connectivity, so the world-changing solution dies when the Xth bank joins, two years after.
For risk managers, (you know yourselves!) the new craze of FinTechs, apps, and services is a disaster waiting to happen. The surface area for which a breach can occur expands with every new connection, and nevertheless, the product managers are blaming risk + control managers for being cogs in the wheel of progress.
The CIO that wants to implement a robust ESB solution, which adequately caters for different external applications connecting with core banking solution, is faced with complicated software that is expensive to buy, implement, support and integrate. By the way, nobody else in the industry knows how the software works and so when the smart cookie who runs it resigns, the solution is abandoned after two years of never-ending implementation.
So what is the Way Forward?
I have faced this problem in almost all the dimensions possible. However, my current experience in FinTech and as an outsider looking into banking has shown me how crippling this is for banks, FinTechs, risk managers, CIOs, etc.
However, my broad experience has also demonstrated that we stand, as a country, at a junction by which this problem can be solved simply, cheaply and everyone would be a winner.
It would be an open-source, non-partisan API standard for banks and other OFIs.
Why not PSD2 or Open Banking Project (UK)
The problems banks and FinTechs currently face also plaguing everyone in Europe, and they consequently came up with EU Government backed PSD2 and industry-led Open Banking.
Ordinarily, it would have been easy to fork their project for Nigerian banks. Unfortunately, their implementation could be expensive, complicated and time-consuming for anyone to implement.
Developing what works for our environment, regulation, our level of technical maturity, etc. may have a greater chance of success than wholesale adoption of international standards.
However, references would be made to international best practices where and when it suits the local objectives.
Problems the Open API Should Solve
This initiative should solve practical problems of payment interconnectivity for different industry player:
Banks: A non-proprietary API infrastructure which any of the FinTech and other partners can connect with simply and securely. It would be easy also to monetize the connections, set limits and enforce transaction integrity
FinTechs: With every bank adopting the interface, connecting to each would be a breeze. They can focus on building amazing solutions without wasting time and effort convincing each bank for connectivity and also developing extensive custom codes for each
Risk Managers: With a single doorway that provide a consistent interface and means for managing external integrators, risks can be reduced, and threats can be easily seen and controlled
Product Managers: FinTechs are not foes but friends who can multiply a bank’s transactions and together bring new sources of revenue, especially in the new regime of low transaction fees
Industry: The Open APIs will also provide a level playing field for everyone which ultimately allows innovation to grow while preventing bigger players from stifling others because of legacy connectivities and platforms
The Open Banking API Tenets
Non-partisan It will not favor any company, groups or sector over another. Contributions shall be accepted from everyone
Open and free for anyone to use The standard shall be free for anyone to use
Technology agnostic While the interface would be standard driven, how each bank, OFI, etc. choose to implement would not be dictated
Simple to implement It would favor simplicity over gimmicks or exoteric functionalities
Secure Security would be inbuilt from grounds up to engender confidence by companies, regulators, and other stakeholders
Starting Up
While the API standard would be open and free for anyone able to contribute, we all know that it has to start with something and with some people. Each of you receiving this email has been previously approached and selected for various reasons and skill set.
A draft document outlining objectives, design, and API definitions would be developed and released for additional inputs. The final document would be robust enough to be presented to the general public for adoption.
Key areas that need help would be for API design, security, scalability and regulatory.
Conclusion
It has been a long email and thanks for reading this far. Questions, comments and other contributions are welcomed.
