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Electronic Banking in Nigeria

Electronic Retail Payment Systems: User Acceptability and Payment Problems in Nigeria 1. 1 Introduction The world has witnessed an upsurge of electronic payment instruments meant to facilitate trade and simplify payments. (Abor, 2004) Before the introduction of electronic payment into the Nigerian banking system, all customers had to walk into the actual bank to do transaction of all kinds. Customers had to queue up and spend more hours to talk to a teller to make their transactions. (Abor, 2004) The inconveniences caused by these long queues can discourage someone to make payment.

For many years, bankers, technology specialists, entrepreneurs, and others have advocated for the replacement of physical cash and the introduction of more flexible, efficient and cost-effective retail payment solutions. Countless conferences and seminars have been held to discuss the concepts of cashless and “chequeless” society. (Bank for International Settlement, 1998) Electronic retail payment has been designed to help individual customers and companies as well as the banks itself in eliminating or reducing some of the problems inherent in the settlement and payment process. Federal Reserve Bank of New York, 1996) Customers can pay their bills without having to actually move to the bank’s premises. They may also have access to their account information and even transfer money to other accounts in the comfort of their homes. Nigerian banks are making huge investments in technology to upgrade their infrastructure, in order to provide new electronic information-based services. Electronic services such as online retail banking are making it possible for individuals and small institutions to take advantage of new technologies at quite reasonable costs. (Abor, 2004)

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In Nigeria, electronic retail payments are being continuously developed, to replace or reduce paper-based payments. Many new payment services have come into existence in recent years, most of which are based on technical innovations such as card, telephone and the Internet. (Abor, 2004) 1. 2 Definitions of Electronic Payment Systems Due to the nature of electronic payment systems, there have not been a widely or universal definition for it. But attempt to bring some few notable definitions given by some writers. These range from now-familiar automated teller machines (ATM) to Internet bill payments.

According to Humphrey et al (2001), electronic payment refers to cash and associated transactions implemented using electronic means. Typically, this involves the use of computer networks such as the Internet and digital stored value systems. The system allows bills to be paid directly from bank accounts, without being present at the bank, and without the need of writing and mailing cheques. E-payment can be defined as ‘payment by direct credit, electronic transfer of credit card details, or some other electronic means, as opposed to payment by cheque and cash’. Agimo, 2004) It was also defined as “a payer’s transfer of a monetary claim on a party acceptable to the beneficially” (European Central Bank, 2003). According to Kalakota & Whinston (1997:153), “electronic payment is a financial exchange that takes place online between the seller buyer and the seller. The content of this exchange is usually the form of digital financial instrument (such as encrypted credit card numbers, electronic checks, or digital cash) that is backed by a bank or an intermediary, or by a legal tender. ”

For the purpose of this presentation, the term “electronic payment” refers to as convenient, safe, and secure methods for payment of bills and other transactions by electronic means such as card, telephone, the Internet, EFT, and etc. Electronic payment gives consumers an alternative to paying bills and debts by cash, cheque, money order, etc. Its main purpose is to reduce cash and cheque transactions. According to Pariwat & Hataiseere (2004), for the achievement of effective and efficient retail payment systems, the following considerations that shape the choice of payment method for consumers and businesses should e taken into account; the convenience, reliability and security of the payment method, the service quality, involving such features as the speed with which payment are processed; the level and structure of fees charged by financial institutions; taste and demographic; and technological advances which have improve the speed, convenience and flexibility of different payment systems. 1. 3Factors Affecting Payment Choice 1. 3. 1 Customers’ Wealth/Levels of Income Consistent with Kwast and Kennickell (1997) research, wealth has an important role to play in terms of consumer’s decisions on payment choice.

Consumers’ wealth may influence payment choice and the availability of payment instruments that one can choose. For instance, while wealthy consumers may be able to fund their obligations generally, consumers that experience brief financial shortfalls may not find electronic bill payment desirable as a payment instrument. (Mantel, 2000) In such a situation, the consideration of the risk factor will let some consumers to avoid using pre-authorized electronic bill payment. 1. 3. 2 Educational Level On the bank customers’ survey, we also focused on education, because this might affect the demand for electronic banking products.

For example, Kwast and Kennickell (1997) have illustrated how education play important role in determining household use of e-money products. Kwast and Kennickell concluded that the US market for such products is still highly specialized, with the demand coming almost entirely from higher income, younger, and more educatedhouseholds that have accumulated significant financial assets. Educational levels of customers determine whether consumers will adopt electronic payment or not. Studies have shown that highly-educated people patronize electronic payment products than less-educated people.

The technicalities involved in some electronic payment transactions discourage less educated customers to patronize its use (Annon, 1999). 1. 3. 3 Employment Levels Those employed who receive their pay through the banks are more likely to use electronic means of payment. Employees, through their constant contacts with banks are more exposed to payment products, and are therefore, likely to patronize the products. According to Ferguson (2000), more than half of the workers in the US, in 2000 receive a direct deposit of their pay through the Automated Clearing House (ACH). 1. 3. Personal Preferences Another factor influencing payment instrument choice pertains to customers’ personal preferences. The following six general consumer preferences were identified: (1) control and customer service; (2) budgeting and record keeping; (3) incentives and low cost; (4) convenience; (5) safe, easy and convenience; and (6) privacy and security. In our analysis of the empirical data, we may highlight these preferences but not in detailed. 1. 3. 5 Transaction-Specific Factors Transaction-specific is another factor that influences consumer decision-making in payments.

This relates to the specific nature of the payment being made, where it is being made, and how the consumer views their relationship with the merchant. (Mantel, 2000) The use of a particular payment instrument may depend on the value of the bill (whether it is large or small). Also the availability of payment infrastructure determines the choice of payment instrument (Mantel, 2000). 1. 3. 6 Marketing Campaigns Another factor that influence consumer decision-making relate to marketing campaigns.

Increased use of electronic payment instruments are believed to have been achieved through large-scale consumer marketing campaigns funded by some financial institutions. The marketing activities employed by the financial institutions are expected to aid utilities by educating consumers as to the benefits, ease of use, convenience, and security of paying bills electronically (Mantel, 2000). 1. 4 Recent Trends in Electronic Payments In this section, we will provide a brief background to some of the rapid emergence of methods which use electronic means to make payment.

Some of the new techniques represent automation of existing methods of payment, whereas others are new or revolutionary. 1. 4. 1 Card Payments Automated Teller Machine (ATM) ATM is a combined computer terminal, with cash vault and record-keeping system in one unit, permitting customers to enter the bank’s book keeping system with a plastic card containing a Personal Identification Number (PIN). It can also be accessed by punching a special code number into the computer terminal linked to the bank’s computerized records (Rose, 1999).

Mostly located outside of banks, it can also be found at airports, shopping malls, and places far away from the home bank offices, and offering several retail banking services to customers. First introduced as cash dispensing machines, it now provide a wide range of services, such as making deposits, funds transfer between two or more accounts and bill payments. (Abor, 2004) Electronic Purses/Wallets There are two categories of e/wallet, these are; a) E-wallets that store card numbers. This is a virtual wallet that can store credit card and debit card information.

Other information that can be stored on this card is passwords, membership cards, and health information. Some of the e-wallets make it easier for consumers to buy goods using the card. b) E-wallets that store card numbers and cash. The second category of a digital wallet is where consumers store digital cash, which has been transferred from a credit card, debit card or virtual cheque inside their e-wallets. It operates like having a virtual savings account where charges are made for ongoing purchases, particularly micro-payments. Electronic Funds Transfer at Point of Sale (EFT/POS)

EFT/POS is an online system that involves the use of plastic cards in terminal on merchants’ premises and enables customers to transfer funds instantaneously from their bank accounts to merchant accounts when making purchases. It uses a debit card to activate an EFT process (Chorafas, 1988). It actually comprises two distinct mechanisms: debit and credit cards. Credit Cards This is a plastic card that assures a seller that the person using it has a satisfactory credit rating and that the issuer will see to it that the seller receives payment for the goods or items delivered.

This represents the automated capture of data about purchases against a revolving credit account (Pierce, 2001). Debit Cards These were a new form of value-transfer, where the card holder after keying of a PIN, uses a terminal and network to authorize the transfer of value from their account to that of a merchant. Introduced more recently, debit together with credit cards represent the most rapidly growing method of payments in several OECD countries (Pierce, 2001). When a payment is made through a debit card, the funds are immediately withdrawn from the purchaser’s bank account.

The advantage is that the buyer has the funds to make the purchase and paid for right away, so there’s no credit card shock when the statement arrives in the mail (Pierce, 2001). Smart Cards A smart card is a plastic card with a computer chip inserted into it and that store and transacts data between users. (Smart Card Basics, 2004) The data, in a form of value or information is stored in the card’s chip, either a memory or microprocessor. “Smart card-enhanced systems are in use today throughout several key applications, including healthcare, banking, entertainment and transportation. (Smart Card Basics, 2004) One of the features of this card is that it improves the security and convenience of transactions. The system works in virtually any type of network and provides security for the exchange of data (Smart Card Basics, 2004). 1. 4. 2 Mobile According to Zika (2005), “a mobile payment is an electronic payment made through a mobile device (e. g. , a cell phone or a PDA). ” This uses a mobile device to initiate and confirm electronic payment. In the field of payments, mobile phones opportunity is seen in the embedded SIM (smart) card used to store information of users.

The advantage of not needing to use other devices such as modems, point of sale terminals, and card readers for mobile payments is also quite clear. (Zika, 2005) Costello (2003) envisaged that further developments in the mobile payments content were inevitable in the near future. Mobile devices might be used in micro-payments such as parking, tickets, and charging mobile phones. 1. 4. 3 Telephone Banking Telephone banking or tele-banking is a form of virtual banking that deliver financial services through telecommunication devices.

Under this mechanism, the customer transacts business by dialing a touch-tone telephone connected to an automated system of the bank. This is normally done through Automated Voice Response (AVR) technology” (Balachandher et al, 2001). Tele-banking has numerous benefits for end users. For the customers, it provides increased convenience, expanded access and significant time saving. Instead of going to the bank or visiting an ATM, retail banking serves the same purpose for customers to get the services at their offices or homes.

This saves customers time and money, and gives more convenience for higher productivity (Leow, 1999). 1. 4. 4 Personal Computer Banking (Home Banking) This term is used for a variety of related methods whereby a payer uses an electronic device in the home or workplace to initiate payment to a payee. In addition to computer technology, it can be performed using the telephone and IVR2 (Chorafas 1988). “PC- Banking is a service which allows the bank’s customers to access information about their accounts via a proprietary network, usually with the help of proprietary software installed on their personal computer”. Abor, 2004) It is used to perform a variety of retail banking tasks, and offers the customer 24-hours services. “PC-banking has the advantage of reducing cost, increasing speed and improved flexibility of business transactions” (Balachandher et al, 2001). 1. 4. 5 Online/Internet Payments This is the means by which customers transact business with a bank through the use of the Internet network. Customers can access their bank accounts and make transfers through a web site provided by the bank and complying with some rigorous security checks.

The Federal Reserve Board of Chicago’s Office of the Comptroller of the Currency (OCC) Internet Banking Handbook (2001), describes Internet Banking as “the provision of traditional (banking) services over the internet”. The Internet is able to offers instantaneous settlement of transactions and the prospect of a highly cost effective payment system for low value transactions. The Internet has the potential to reach majority of customers since it can disseminate “advertising material” through World Wide Web home pages and product databases (Neuman & Medvinsky, 1996). 1. 4. 6 Electronic Cheque

Electronic cheques are used in the same way as paper cheque – the clearing between payer and payee is based on existing and well known banking settlement system. The only difference between paper and electronic cheques are the dematerialization of the payment instrument which is passed on via computer networks like Internet in the later technology. ECheck proposed by Financial Services Technology Consortium (FSTC) is an example of the electronic cheque. (United States Department of the Treasury Conference, 1996) Electronic cheques also known as e-cheques are virtual cheques that allow consumers to use Internet in making cheque payments.

The buyer fills out a form (that looks like a cheque on the screen) with the necessary information, and then clicks the “send” button. The information then goes through a computer or a transaction service, depending on which way one chooses to accept check payments. 1. 4. 7 Digitized ‘E-Cash’ Systems E-cash payment system takes the form of encoded messages and representing the encrypted equivalent of digitized money. One key attraction is that it avoid the time and expense associated with becoming an approved credit card accepting merchant.

It does not require the use of intermediary; therefore anyone can effect payment directly. However, most present schemes require the direct involvement of a bank for its system of digital cash issuance. According to Crede (undated), “a bank is integral to the scheme, since it is required to hold collateral and to provide ultimate settlement of e-cash to more directly convertible currencies. ” 1. 4. 8 Digital P2P Payments Bank-based P2P3 system allows users to send money from bank accounts and credit cards electronically. It employs e-mail services to notify recipients of an impending funds transfer.

Most bank-based P2P requires the sender to register with the P2P site. Most of the providers allow users to move money a limited amount of money around the world. P2P e-mail payments are offered mainly through Yahoo! , the Postal Service, and some banks. Example of companies that offers P2P payment services is MasterCard which enable users to use digital wallet to make payments from a credit or debit account to any person in the world, in their local currency, directly into their bank account or as a check mailed to that person. 1. 5 Positive Benefits for using E-Payment

The use of e-payments has had some benefits for consumers in a form of choice, convenience, cost reduction, control, and trust, some of these cannot be provided by the conventional payment methods. For the economy, it promotes economic growth through fundamental benefits such as: increasing levels of security and consumer empowerment; greater economic transparency; increasing economic stimulation; widened participation in the banking system; enhancing transactional efficiency; and expanding payment channels. The benefits derived from using e-payment cannot be over-emphasized.

Its ability to control payment for goods and services over time allows buyers to pay now, pay later, or prepay. For consumers, it saves their time and brings convenience; easier than cash because no change or exact amount of cash is required; schedule payments give more control and flexibility over payment activities and improve efficiency; the integrated system supports easy overview of payment activities over time, among other benefits. 1. 6 Barriers to Retail Payment Systems in Nigeria It has long been clear that electronic payment products offer a series of enefits to all parties-Governments, consumers, merchants, and financial institutions. For about two decades now, business journalists and economists have heralded the coming of a paperless society in which electronic payments will replace the use of cash and paper cheques in retail transactions. Although tremendous improvements in telecommunications and computing have facilitated the development of safe, electronic retail payments, neither the number nor volume of paper-based transactions has dropped appreciably in most economies worldwide. Nigeria is of no exception.

While prospects for electronic payments in Africa and in particular Nigeria continue to improve, problems persist. There are a number of impediments of different dignity for the use of electronic payment products. This section seeks to highlight on the various barriers to the efficient and effective use of the electronic payment products in Nigeria. 1. 6. 1 High Cost of Access Before users can engage in electronic retail payments they must invest in devices that give access, and then purchase that access to the networks that constitute the Internet.

In an attempt to connect to the Internet and other networks, users in Nigeria need to overcome potential barriers such as high cost of Internet access, lack of local loop infrastructure and high cost of international interconnection. Cost of research and development is militating against electronic retail payments in Nigeria. It has therefore been identified that merchants are not willing to invest in terminals, thereby denying potential customers access to the use of electronic retail payment systems.

The central problem confronting the developers of this electronic payment system according to consumers and retailers is whether, given the small size of the market, the investment will be recoup within the foreseeable time span. This problem looks more pressing because the market is characterized by a great diversity of players. 1. 6. 2 Confidence and Security There is lack of adequate security with the use certain electronic payment devices like card payments. The lack of security when processing transactions over the Internet is posing a great threat to its adoption.

Internet fraud is on ascendancy in Accra, the national capital. The youth through dubious means lay hands on credit card numbers of other people and ultimately using them to make bulk purchases from online marketing sites like e-bay and others. With credit and debit cards, consumers cannot detect fraud until their statement of accounts arrives but credit card companies and banks do not insure against fraudulent use of their cards. Hence consumers bear the full responsibility of any debts fraudulently accrued (Nigeriaweb, 2004).

Security, confidence, reliability and efficiency are fundamental features of any electronic payment solution. Security makes consumers more inclined to trust and to use a newly developed electronic payment solution. The OECD (1997) stated that in developed countries, “it was only after the credit card industry assured users that their exposure to criminal misuse of cards was limited that confidence in that form of payment developed. ” Since electronic retail payments relies heavily on credit cards for identification and payment, the credit card companies refusal to insure its customers against fraud will inhibit its adoption.

More so, the lack of rapid development of the payment solutions is the security measures surrounding deposit transfer systems. There is lack of adequate implementation and monitoring of payment systems security. From the consumers’ and retailers’ perspective, the crucial criterion for the success or failure of a payment product is confidence. However, doubts as to the applicability of existing laws and regulations increase the perceived risk of using electronic retail payment products. 1. 6. 3 Telecommunication Infrastructure

The telecommunication infrastructure in Nigeria is underdeveloped. But for electronic retail payments to thrive, this infrastructure is a primary requirement. The telecommunication services are generally of poor quality, which impedes against the development of retail payment technologies. The speed and quality of line is unsatisfactory, especially outside metropolitan areas. 1. 6. 4 Lack of Knowledge and Skill Both consumers and business enterprises have limited knowledge of what services exist, how they operate and what benefits to be derived.

Due to high level of illiteracy, most of the people do not recognize the economic importance of electronic retail payments. Most Nigerians especially the aged, lack the skills and knowledge required to ensure efficient and effective use of the system. Our investigation showed that only a few number of the adult population have computer knowledge and skills. The low level of knowledge in the payment devices and how each of them works has led to low patronage of the existing retail payment products.

Information on practical issues with regard to handling, confidence-related issues on security, integrity and consumer law issues concerning internal and external trade are necessary to increase patronage. 1. 6. 5 Acceptance and Network Externalities For electronic payments to be a success there should be user acceptance. Any medium of exchange should be generally accepted. It is identified that, consumers seem to have strong preferences for paper payment vehicles, partly because of the high degree of familiarity.

Even the few electronic stores prefer to a large extent payments with cash on delivery. More restricted is the possibility of payment with modern payment means, such as prepaid cards. This fact demonstrates the general mistrust and lack of faith that characterizes the Nigeriaian consumer public with regard to electronic retail payments. Furthermore, this work reveals the hesitation of the financial intermediaries and other companies in Nigeria to invest in the creation of innovative products that will be based on modern payment means.

This is motivated by the fact that their acceptance is expected to be low and will not justify the increased required investment. Besides, consumers are reluctant in replacing cash and cheques with electronic innovations like the stored value cards because of low network externalities. Network externalities occur when the benefits a consumer expects to receive from a good or service depends on the number of consumers already using the commodity. This implies that, a consumer’s benefits from having a card depend on how many businesses will accept it in payment for goods and services.

However merchants will refuse to invest in the systems needed to accept the cards until they are assured of enough customer demand to justify the expense. This work reveals that this interdependency of demand will remain an obstacle until the innovation achieves the critical mass, either in its own time or with the help of policy makers. The interdependency of demand means that the market for the network good must attain a minimum size in order to achieve a sustainable equilibrium.

Economides & Himmelberg (1995) refer to this minimum size as the network’s “Critical Mass”. 1. 6. 6 The Special Challenge of the Unbanked One of the greatest challenges to electronic retail payments in Nigeria is the ability to encourage the millions of currently unbanked persons to be part of the mainstream financial system. According to the Nigerian Chronicle (2004), only 5% of Nigeria’s 20 million populations had bank accounts. However, his troubling paradox was the low interest payments on customers’ savings vis-a-vis their increased lending rates.

This work reveals that the predominant reason for low patronage of banking products is due to lack of sufficient income to be able to afford the costs of conventional accounts. More so, most of the unbanked in Nigeria are not payment recipients like their counterparts in the developed countries, hence their marginal benefit for holding the account is lower than the marginal cost. Besides, most of the banks have an interest penalty for their customers who withdraw below the banks minimum deposit requirements. All the above problems have led to the underdevelopment of the banking industry in Nigeria. 1. . 7 Uncoordinated Banking System The current banking system in Nigeria where each and every bank is doing its own thing is not the best for the country. With an uncoordinated and un-concentrated banking system, it has been more difficult for Nigerian banks to cooperate and switch to electronic than in other developed countries such as Canada, Finland, France, and Australia. The provision of banking infrastructure for electronic payment system cannot be left to only one or two banks. The cost involved is high, but with a consented effort from all the major banks, it will be within their reach. 1. 6. Operational Disruptions There are risks such as operational disruption that affect the stability of electronic payment system. Numerous examples exists that is caused by failure of operations – for instance, the computer problem that caused the Bank of New York a whooping $22 billion overdraft in 1985; a roof collapse after a heavy snow, resulting in a shutdown of an Electronic Data System facility for processing ATM transactions, affecting more than 5000 ATMs in the US in 1993; the disruption of the operations of the Internet as a result of the “worm” virus in 1987; and a host of other disruptions. McAndrews, 1996) Due to the network nature of electronic payment instruments, the disruption or interruption of a facility supporting the system can caused a breakdown of the whole payment system. Such incidents may serve to discourage consumers. It could therefore not be overemphasized that, the challenge of the unbanked is a daunting one, to which the banking sector has not devoted much attention and resources. 1. 6. 9 Attitude to New Products The problem of reaching a critical mass is explained by the reluctance of people to use new schemes until a sufficient relative number of their associates use them.

It is difficult to convince customers to switch providers especially if they are not particularly dissatisfied with the systems they have been using. 1. 7Conclusion As elaborated earlier in this study, the retail payment systems in Nigeria during the past few years have undergone progressive technological developments, but have also remained highly paper based and inefficient. The outcome of the study shows that cash transactions continue to play a significant role in almost all countries and in particular Nigeria.

Even the developed countries are making every effort to ensure a cashless society and Nigeria cannot wait to embrace this concept. As consumers seek out new ways to do business, the market must provide innovative electronic payment solutions that can eliminate or reduce some of the problems they faced. Banks will have to determine what kind of electronic payments services best fit their customers’ needs, and which could lead to smooth operating payment systems. There are also numerous problems in processing cash and cheques that electronic payments can eliminate.

Both cash and cheques are labor-intensive – must be physically transported and counted, and risk loss or theft throughout their processing. 1. 8Recommendations Government needs to ensure that the cost of telecommunications, hardware and software are made cheap, which will involve examining existing taxes and import duties. New technology and changes in the banking laws can produce change. Therefore, there is the need for the government to remove barriers to innovation, including regulatory barriers to pave way for rapid development of the electronic payment systems in Nigeria.

The emergence of electronic payment systems raises a whole range of both legal and regulatory issues that needs to be taking a look at. An effective national low value electronic payment system will certainly remove what is currently a major obstacle to the expansion of general business activities. The emergence of an electronic payment system which is easy to use, cheap to process, and boost trade, is likely to have a range of only partly anticipated side effects. For example, it could result in the creation one currency for the Economic community of West African States (ECOWAS) which the countries are yearning for.

There is the need for banks to educate consumers about all of their payment system options and the pro and cons of each. Consumers will need to be informed about the potential liability for the use of new types of electronic payment, so they can understand how it differs from cash. Although, Nigeria can learn valuable lessons from the experiences of other countries, the country must develop its own payment system. Simply importing another country’s electronic payment system without adjusting for geography, infrastructure, banking and legal structures, business practices, culture,


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