Do We Finally Have a Business Case For Multiple Payment Rails In Nigeria?

One of the biggest challenges with working within the payments ecosystem in Nigeria is you tend to see things differently. For instance; while all most people see is a POS agent at a junction, the first thing that usually comes to mind when I see a POS agent is “Who is acquiring those transactions?”. When I see a mobile payments application (from an unlicensed fintech), the first thought is “Who is their wallet API provider?”, and when I see a pay with bank transfer implementation on a payments gateway, my first idea is “What is informing their choice of this specific service provider?”. This is why when news of certain fintechs being a reliable fallback option when bank networks were failing in the heat of the cash scarcity dilemma came to light (considering most fintechs runs on the same real-time rails (NIP by NIBSS) the banks process transactions with), I figured one or more of three things were happening:

1. Banks were having issues with their core banking: A core banking is at the heart of every bank’s operations, it is basically the central operational point for all banking transactions and is the module that controls debit and credit updates within a bank. The theory that the sudden increase in transaction volumes (984% QoQ growth in transaction volumes) overwhelmed the core banking of most banks and caused a lot of transactions to fail makes a lot of sense. In all likelihood, there are banks who probably run on outdated core banking software (which is usually not the case with new-age fintechs), and that may be a key reason for failures on their end.

P.S: replacing a bank’s core banking is not very simple, it’s a very delicate process that takes time and requires expertise. I’d liken it to a heart transplant – if you did a heart transplant, there’s a risk of death, but if you had the option of managing a heart condition with medications and drugs, you’d probably want to take that option. This Twitter user also alluded to core banking failures being at the heart of Zenith Bank’s issues.

Zenith Bank was notorious in Industry IT circles for using a Core Banking Application (and other key IT platforms) the were different from what the rest of the players used. This gave them an edge in that folks hardly poached their tech staff because the domain experience… /1 https://t.co/685PEUoO79

— Chief Mickey Haller (@ajulunzewi) February 8, 2023

Side note: Zenith Bank recently announced a revamp of their software stack.

2. Certain fintechs have multiple settlement account arrangements:The Nigerian payment system is designed in such a way that banks play a very key role in transaction processing primarily because they act as key sponsors to other non-bank financial institutions who want to process transactions on the Nigerian real-time payments rail.

Certain fintechs (depending on their licensing type) use settlement accounts across banks to process transactions. If a fintech has multiple settlement accounts across multiple banks when their customers wants to process fund transfers to a bank they have a settlement account with, that transaction can be structured as an on-us transaction that runs on the bank’s internal system (no need to pass through an interbank payment rail).

For instance, if Fintech A has a settlement account with a couple of banks of which Access Bank is one of them, and Fintech A’s customer wants to send money to someone with an Access Bank account, Fintech A will pass an instruction to Access Bank to debit their (Fintech A’s) settlement account within Access Bank and subsequently credit the beneficiary (who is also an Access Bank customer).

Transactions of this sort are cheaper, faster, and in most cases rarely fail (they are internal ledger updates within the bank). Executing this however has huge reconciliation implications and every reconciliation person reading this is probably hoping their boss doesn’t see this, but I digress.

3. Some fintechs run on other third-party rails: NIP is not the only real-time payment processing rail in Nigeria. While other fintechs like Remita (via RITS), Interswitch, and eTranzact have other solutions in this market, NIP is the most dominant player, primarily because of its high efficiency and cordial relationship with the banks. NIP is also the default payment processing engine for most banks in Nigeria.

There are however alternative payment rails that other fintechs may have been riding on, and If these fintechs didn’t have multiple settlement arrangements across multiple banks, and banks weren’t having issues with their core banking, this would probably be the major reason they were able to process transactions while the banks were failing at their ends.

SINGLE POINTS OF FAILURE

At the SystemSpecs Maiden Tech Innovation Series Titled Cashless Policy: Sustaining Digital Payments Beyond the Currency Redesign, the MD of Remita, said and I quote –

“In summary, we just had a national UAT for cashless, so we need to ask who was the product manager, where was the national operating center, where was the national crisis center” – ‘DeRemi Atanda

The occurrences of the last couple of weeks (failing digital transactions etc.) were basically a User Acceptance Test to show if we’re ready for a fully cashless economy. We aren’t. And amongst a list of reasons, one of them is our overarching reliance on a single interbank payment rail.

NIBSS (Nigerian Interbank Settlement System) is one of the most important players in our fledgling payments ecosystem. NIBSS provides the much talked about NIP (NIBSS Instant Payment service) product that powers real-time payments across multiple banking providers nationwide. On a global scale, NIP is ranked as the 6th real-time payment rail by transaction volume, just behind the United Kingdom and steps ahead of the United States. In 2022 alone, NIP processed what amounted to N387trn (US$840.5bn) in transaction value and 5.2 billion in transaction count.

According to Bloomberg, about 90% of transactions in Nigeria’s informal economy are conducted using cash, in other words, Nigeria has only digitized 10% of its transactions – To be clear, NIP is a stable solution that works 99.9% of the time, but in a world where 50% of transactions occur digitally (5x more pressure on NIP), do we wait for NIP to bulk under pressure (as it may have done these past couple of weeks) or do we need to provide redundancies to ensure our payment systems stay up and running regardless of who has a downtime? I think the latter is the better option.

Our heavy reliance on NIBSS for payment processing puts a lot of fintech players under pressure when things tend to go wrong. Some months back, PiggyVest, a leading digital savings and investment platform in Nigeria couldn’t process disbursements to its customers. At the root of the problem was an issue at NIBSS end, unfortunately, customers don’t know what NIBSS is, what they know is I saved money with you, I need to withdraw and now you’re speaking gibberish because that’s what NIBSS means to a person who urgently needs his N50,000 (US$108) and you’re telling him stories.

Beyond the core payment processing engine failing, a downtime on other ancillary services on the NIBSS platform can also influence payment processing. A good example is the Name Inquiry service – payments in Nigeria are so designed that if a beneficiary’s account number and bank name are not verified on the database, those transactions will not go through, this helps avoid transfers to the wrong account – make person no see your wrong transaction call am miracle alert lol. However, this also means in situations where the Name Inquiry API is down, transactions will not go through, even though the payment engine is working just fine.

I’ll restate that NIP is an efficient service and works most of the time, but if Nigeria is going to build a cashless economy that runs on digital payments, digital payments cannot work most of the time, they need to work all the time. We need to build redundancies.

BUILDING REDUNDANCIES

The major reason we need redundancies is to foolproof our payments system. Another side reason may be to democratize opportunity. If I owned a switching company acting as a redundancy to NIP, just looking at the number of transactions processed on the NIBSS platform alone and trying to model what my revenue would look like, I would probably be driving a 2022 Mercedes G63 or a Tesla Model X by now, in fact, I’d be writing this article from the study of my private use US$2.5million Sujimoto Apartment, but I digress.

There are two ways the CBN can go around building redundancies within our payment system:

1. Open the Doors: There are presently 16 licensed switching and processing companies in Nigeria – a switching license allows you to extend your fintech business to offer products in the PSSP, Terminal Issuance, Switching, and Super Agency Business. Fintechs like Remita, Interswitch, Flutterwave, Paystack, and TeamApt are holders of this license. Most holders of this license use it to extend their offerings, but rarely ever to build a switch.

The challenge with building a core switch is that it requires more than just coding, it requires some kind of touchpoint with a bank’s core banking, and as we shared earlier, a core banking is the heart of a bank’s operations. The same way you will not just open your heart to anyone and fall in love with them (unless they drive a 2022 Mercedes G63, then you should probably be falling in love with them) is the same way banks do not just open their core banking to anyone to interface with.

A system that allows CBN to choose certain providers (maybe two players), give them stringent security and compliance criteria to meet, and MANDATE the banks to open up their systems for them to connect with will create more potential players for redundancy plays.

2. Mandate the banks: At a high level, the CBN has two key responsibilities – tell players what to do (in the best interest of the payment system) and mandate them to do it. I personally feel that things move forward quickly when the CBN mandates key players to do certain things as against keeping it open (like they did with crypto). This is also why I’m not bullish on CBNs recently released operational guidelines on Open Banking. While the document creates a clear standard for open banking implementation in Nigeria, it doesn’t mandate the banks (key API Providers) to do anything. In the UK where Open Banking is dominant, the top 9 retail and SME banks aren’t advised to adopt Open Banking, they’re mandated to, Open Banking in the UK is not a revenue conversation, it’s a compliance conversation.

In the same way, deposit money banks should be mandated to employ redundancies within their payment processes, and be allowed to choose from amongst the fintech players who already have these rails, and those who will hopefully be able to build in the future.

This doesn’t mean NIP will not continue to process the majority of transactions, it will, but in the few cases it fails, the banks will have a second and maybe third option to push transactions to in the advent of a failed transaction.

The banks can then build routing mechanisms on these redundancy options. So, for instance, if a transaction times out in 15 seconds, when a bank passes an interbank payment transaction through NIP, if by the 10th second NIP is still unable to touch the beneficiary banks environment, the bank can immediately route that transaction to its secondary switch to try and reach the beneficiary bank, if that fails and a third option is utilized, we can safely assume the beneficiary bank is having an issue, and that can be relayed to the sender along with the reversed debit transaction.

The implication of this is that fewer transactions will fail, and those that do fail will be because there was really no alternative way to get it processed.

CONCLUSION

The events of recent weeks have proven to us that beyond educating the masses and providing payment touchpoints, building redundancy into our payments system to withstand increased transaction volumes that emanate as a result of the cash-to-digital migration is a key next step to building resiliency into our payment ecosystem, and maybe, just maybe we may finally have a business case for building alternative payment rails in Nigeria.

Inspired By The Holy Spirit