Nigeria is Africa’s largest economy in terms of nominal GDP and also the most populous country. However, 80 million Nigerians do not have access to financial services, a report jointly released by the Microfinance Information Exchange and MasterCard Foundation revealed. It does not mean 80 million Nigerians do not carry out financial activities; they more or less rely on the informal financial instruments.

Their reliance on the informal financial instruments which involves acquiring loans from moneylenders, landlords, or a companions limits their ability to get the benefits of carrying out financial activities through the formal financial sector. Overall, financial inclusion has been poor in Nigeria. So was the case in many African countries.

However, in recent times, mobile money has brought in a revolutionary change in the continent and countries like Kenya have embraced the change. Data released by the Central Bank of Kenya revealed that mobile money transactions in the country stood at $38.5 billion last year, a 10 percent increase when compared to 2017. The face of Kenya’s financial sector changed after the establishment of M-Pesa in 2007. By the end of 2017, 83 percent of Kenya’s population had access to financial services, according to its apex bank.

But compared to Kenya, Nigeria does not have a similar story. The launch of the first mobile money service in Nigeria dates back to 2009. Over the years, a dozen new mobile money service providers have popped up in Nigeria. Around 90 percent of adults in Nigeria claim they have a mobile phone as well as a SIM card, however, mobile money hasn’t boomed in Nigeria as of yet.

The primary advantage mobile money enjoyed in Kenya over Nigeria was the regulator’s adoption of a wait-and-see approach at inception. Secondly, M-Pesa, the global poster child of mobile money in Kenya, was launched by the dominant telco in Kenya, and was able to piggyback on their already existing network of airtime distributors, thus eliminating the need to build out an extensive distribution network. Also, M-Pesa rode on the wave of political unrest in Kenya. During the 2007 and 2008 election crisis, there was political unrest that resulted in road closures and this affected the financial flows.

How mobile money is impacting banking in Nigeria

Authorities in Nigeria have finally amended rules and regulations that previously prevented wireless carriers to transfer cash. Around 50 million Nigerians still do not have a bank account, and the central bank finally realised that it must rely on wireless carriers in the country to improve financial inclusion.

Finally, telecom companies in Nigeria will be able to collect money, carryout payments, issue cash cards, and also provide financial advisory services. Under a new scheme introduced by regulators in Nigeria, telecom companies can apply for a payment service bank licence.

In July, MTN secured a licence from the Central Bank of Nigeria to provide financial services in the country. MTN Nigeria’s Yello Digital Financial Services will provide financial services in Nigeria such as money transfers. However, some experts believe it is the banks in Nigeria who will most benefit from it.

According to the terms and conditions of the licence, MTN Nigeria will have to tap into those Nigerians who still do not have a bank account. As a result, a lot of data about the unbanked Nigerian population will flow into the country’s banking sector. This data will help the banks in Nigeria target the ones who are unbanked and bring them under the banking umbrella.

Nigeria’s mobile wallet and payment market

At present in Nigeria, even though cash transactions still continue to be the most preferred choice for Nigerians, mobile money is seeing steady growth as well. Currently, there are 21 licenced mobile money services providers in the country. Paga, which was launched in 2009, continues to dominate the market with more than 8,000,000 users. However, the number is very small given that Nigeria is Africa’s most populous country.

Experts predict the mobile money market will grow substantially in the next five to six years in Nigeria. The market is expected to grow at a compound annual growth rate (CAGR) of 25.6 percent to reach $73 billion by 2025. Its mobile wallet segment, which is also experiencing strong growth, is also expected to grow at a CAGR of 25.7 percent between 2019 and 2025.

Besides issuing mobile banking licences to telecom companies in the country, the Nigerian Central Bank has taken the help of the Shared Agent Network Expansion Facility (SANEF) to improve financial inclusion in the country. The central bank aims to achieve a minimum of 80 percent financial inclusion by 2020. However, currently, 53 percent of the adults in Nigeria still do not have access to financial services.

Why is it important for Nigerians?

With the Central Bank of Nigeria determined to accelerate financial inclusion in the country, mobile money may prove to be the tool to do so. Around 90 percent of adults in Nigeria claim they have a mobile phone but most of them do not use mobile money services for various reasons. One of the major reasons that Nigerians do not use mobile money is the lack of infrastructure. Secondly, many prefer to use cash as a mode of transaction because the person they do business with prefers cash as a mode of payment. Also, many Nigerians are sceptical when it comes to giving up carrying transactions through cash.

It is highly important for Nigeria to improve the mobile money infrastructure in the country as more and more Nigerians will have access to financial services and they will come under the formal financial sector. This will ultimately accelerate Nigeria’s financial inclusion.

At the same time, the growth of mobile money in Nigeria will also help the country tackle its unemployment problem. With the issue of more licences, more players will enter the mobile money market in Nigeria. This will lead to the creation of various jobs within the sector.

Why mobile money concept is not successful in Nigeria

While mobile money has revolutionised how Kenyans deal with their money, make deposits, receive money or save money, Nigeria has failed to duplicate the same despite being the largest economy in the continent. It’s not just Kenya, but other African countries such as Uganda, Tanzania, Rwanda, Botswana, Senegal, Cote d’Ivoire and neighbouring Ghana have benefitted from the introduction of mobile money in their economies. Mobile Money has helped these countries stimulate financial inclusion.

The introduction of the Bank Verification Number policy in 2016 in Nigeria did not help either. According to the policy, every Nigerian who owns a bank account was required to link their biometric details with their bank account. This policy was introduced by the government so that every transaction carried out in the country could be traced. However, this led to Nigerians distrusting the financial sector and abandoning their savings out of fear of being interrogated.

In a bid to discourage cash transactions and at the same time encouraging more electronic-based transactions, the government in 2012 introduced a cash-less policy. As per the policy, the government charged a cash handling charge on daily cash withdrawals over N500,000 for individuals and N3,000,000 for businesses.

But all these policies seem to have failed in Nigeria. When it comes to mobile money, Nigeria is classified alongside Morocco and Egypt as sleeping giants by experts.Some of these headwinds are constraining factors limiting mobile money growth and success. They include insufficient infrastructure, inadequate knowledge about the underserved, financial literacy and consumer education and identity poverty. In the northern regions of Nigeria where exclusion is highest, infrastructure like power, roads and even mobile network connectivity are deficient and have significant implications on mobile money access and quality.

Some of the other challenges faced by Nigerians include their ability to access national identity documents. All the Nigerians who are not a part of the financial sector are not necessarily poor. Some of them may be cash-rich but they do not have access to national identity documents and their inability to fulfil mandatory customer due diligence (CDD) requirements are challenges they face in spite of the tiered KYC regulation. Also, awareness of mobile money in Nigeria is under 5 percent. Consumers can’t adopt what they don’t know or understand.

With regard to this, Dr. Olayinka David-West, from the Operations, Information Systems and Marketing Division of Lagos Business School and the academic director at the Enterprise Development Centre (EDC) of Pan-Atlantic University, told International Finance that, “I would like to introduce a new perspective – mobile banking – that has been remarkably successful. Nigeria is a mobile-first market and so, while mobile money (using a wallet as the store of value) has not been widely adopted, mobile banking on the other hand has. Mobile banking solutions provide access to bank accounts using either mobile apps (available on smartphones) or unstructured supplementary service data (USSD) protocol (available on all phone types). Mobile banking’s popularity continues to rise year on year, based on transaction figures reported by the Nigerian Inter-bank Settlement System (NIBBS). Hence, I can narrow the perceived failure of mobile money in Nigeria to the lack of acceptance of the wallet as a store of value.”

How regulators promote mobile money in Nigeria

With authorities making amendments to rules and regulations and introducing new policies, telecom companies in Nigeria can provide financial services which were once limited to banks. Telcos in Nigeria can now apply for a payment banking licence and carry out all banking activities such as collecting deposits, making payments, issuing cash cards and also providing financial advisory services.

While MTN has already acquired a licence from the Central Bank of Nigeria, Bharti Airtel, another telecom giant in Nigeria is also in line to acquire a licence. Over the years, many in Nigeria have argued whether the decision to provide payment banking licences to telcos is a good idea. But the current Nigerian government has realised telecom companies should be allowed to provide financial services, especially after witnessing the mobile money revolution in Kenya.

Many banks in Nigeria also feared that the entry of telecom companies as payment banks would hurt their business and they will end up losing their customer base. This led to years of lobbying by the Nigerian banks which delayed the Nigerian government’s decision to issue payment bank licences to telecom companies.

The National Communications Commission and the Central Bank of Nigeria finally signed a memorandum of understanding in 2017. A year later, authorities revealed the guidelines for the licencing and regulation of the payment bank licences.

How can MTN make mobile money work?

In a bid to tap into the mobile money sector, MTN Nigeria’s subsidiary Y’ello Digital Financial Services Limited launched its mobile money services in the country called MoMo agents.

Y’ello Digital Financial Services Limited has been issued a super-agent licence, which allows them to manage and sustain a network of financial service agents and provide services on behalf of licenced financial services providers. This is very different from the Payment Service Bank licence which is a recent development within the Nigerian financial service industry and allows licencees to offer payments and remittance services, issue debit and prepaid cards, deploy ATMs and other technology-enabled banking services.

To avail the services, all the user needs to do is send a free text. As a response, the user will get a list of active MoMo Agents near him, through a text message. To send money, the user pays the MoMo agent the sum who in return generates a code. The receiver can walk up to another MoMo near him and collect the transferred sum with the help of the same code.

Dr. Olayinka David West told International Finance, “As such, MTN’s entry into the financial services industry is still early. The super-agent licence is a good foundation for the company to build out its financial services distribution network which is critical to the success of any mobile money operation.”

MoMo has been a success story for MTN in other markets especially Ghana. Experts predict that the launch of MoMo in Nigeria will prove to be significant for MTN. Besides funds transfer, through MoMo, a user purchases data and airtime, and pays bills.

During the launch, the company said it will roll out about 500,000 MoMo Agents across all 36 Nigerian states. MTN, which is the biggest telecom company in Nigeria, acquired a licence to provide financial services from the Central Bank of Nigeria earlier in July.

When International Finance asked how mobile money operators in Nigeria create profitable operations, Dr. Olayinka David-West said there are five important parameters the operators in Nigeria must understand.

First, They need to understand that the mobile money business is a long term investment and requires patient capital to get to profitability. They also need to understand the market they serve and provide compelling value propositions to meet the needs of customers. This can only be done by using the appropriate customer segmentation frameworks to inform the design and delivery of their services, Dr David-West said.

Distribution is important, according to Dr David-West. Providers should consider extending their business to the areas where exclusion is highest, especially the northern regions and rural areas. The uniqueness of the Nigerian market requires mobile money operators to think creatively about customer acquisition and retention. They also need innovative business models that will optimise their reach while reducing operating costs.

Operators in Nigeria also need to forge strategic partnerships that will enhance the reach of their services, reduce their cost to serve, improve affordability as well as their value proposition.

Dr. Olayinka David West added that the quality of the service needs to be good enough to provide a positive experience for the consumers and hence, reduce customer churn. This means operators need to invest in efficient IT platforms with appropriate interfaces and an overall positive user experience.