US embassy cable - 03LAGOS524

UNCLAS SECTION 01 OF 04 LAGOS 000524 
 
SIPDIS 
 
 
E.O. 12958: N/A 
TAGS: ECON, EINV, EFIN, NI 
SUBJECT: DON'T SHOW ME THE MONEY; NIGERIA GOING 
CASHLESS 
 
1. SUMMARY:  As in many developing economies with high 
inflation and a devalued currency, consumers in Nigeria 
often must bring literally bags of money to the store 
to make even routine purchases.  Checks are used almost 
exclusively for business-to-business transactions, and 
credit cards are accepted almost nowhere. Recently, the 
use of pre-paid debit cards (known here as smart cards) 
has been on the rise, and marketers hope the trend will 
continue.  In fact, the U.S. Consulate General in Lagos 
recently began accepting a smart card as the exclusive 
payment method for nonimmigrant visa transactions, and 
the British High Commission has followed suit.  Two 
brands of smart cards backed by bank consortia are 
leading the market, each with its own unique market 
niche.  These novel businesses, along with others in 
the finance industry that are considering ways to bring 
revolving credit to the country, are banking on the 
radical concept that a significant part of the Nigerian 
economy may become cash-less in the coming years.  END 
SUMMARY. 
 
 
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A BAG OF MONEY FOR A BAG OF GROCERIES 
------------------------------------- 
 
 
2. Nigeria remains almost exclusively a cash-based 
economy.  Checks are not used at the consumer level, 
but rather are the province of business-to-business 
transactions.  Credit cards are used almost nowhere, 
both because of fraud concerns and because revolving 
credit is not widely offered by Nigerian banks. 
Occasional ATM machines can be found, but debit cards 
are not in use.  Consumers in Nigeria must thus use 
cash for almost all transactions, whether it be the 
purchase of a bag of ground nuts from a street hawker, 
the purchase of a family's groceries in a supermarket, 
or the purchase of a used vehicle from a neighbor. 
Adding to the inconvenience, Nigeria's highest 
denomination bill is the 500 Naira note; just under 
four dollars.  Accordingly, Nigerians and expats alike 
are accustomed to carrying small sacks of cash for any 
single purchase ranging several hundred dollars or 
more, for their weekend shopping, or for any in-country 
travel.  Payday for Nigerians also commonly involves 
the transfer of small bags or bricks of cash. 
 
 
3. A new and growing financial product is slowly 
changing the way Nigerians approach transactions. 
Smart cards were launched in Nigeria almost five years 
ago and are becoming increasingly available and 
accepted for use, particularly in urban areas.  Smart 
cards are reusable plastic cards containing an embedded 
computer chip that records and manages a pre-loaded 
balance of funds from which debits are deducted. 
Industry sources report that smart card technology was 
first widely utilized in France for secured access to 
buildings.  The use of a computer chip to store and 
manage data is considered less vulnerable to 
unauthorized manipulation or to information theft than 
the magnetic strips most commonly found on credit and 
debit cards and access passes in the United States. 
And while forms of disposable smart cards are used in 
Europe and elsewhere for a variety of consumer 
transactions, Paul Lawal, the Managing Director and 
Chief Executive of the Nigeria Inter-Bank Settlement 
System (NIBSS), told Econoff that the use of 
reloadable, chip-based smart cards for financial 
transactions is unique to Nigeria. 
 
 
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THE PRODUCT AND THE PLAYERS 
--------------------------- 
 
 
4. Smart cards are generally offered and administered 
by consortia of banks.  They are designed to make 
transactions easier and safer for consumers by 
providing an alternative to regularly carrying and 
producing large quantities of cash.  Smart cards are 
similar to debit cards used in the United States, 
except the card is generally not associated with 
deposits kept in an open account.  Instead, a consumer 
obtains a card at a bank and loads a sum of money onto 
it. The card carries the issuing bank's logo, and 
transactions are associated with that bank.  When the 
consumer makes a purchase at a participating vendor, 
swiping the card and entering a personal identification 
number (PIN), the vendor's card-reader debits the 
balance on the card and stores the charge.  The vendor 
periodically takes the stored data from the reader to 
the bank or other card issuer that the vendor 
contracted with to receive payment from the charges. 
The bank or issuer then settles all outstanding charges 
across the consortium through the NIBSS.  When the 
consumer spends the balance loaded onto the card, he or 
she simply reloads a new balance at the issuing bank. 
Vendors are charged a fee per transaction, usually a 
percentage of the transaction amount.  For example, the 
US Consulate General is charged 1.25 percent per 
transaction for its use of smart cards for visa 
transactions.  But banks and other card issuers make 
most of their profit from smart cards by using the 
"float" generated, that is, by earning interest on or 
investing the value of the deposits made by their 
cardholders when loading the smart cards, before 
charges are made and cleared. 
 
 
5. Three companies offer smart cards in Nigeria, each 
with a unique market niche.  The current leading smart 
card brand is ValuCard, which was first introduced 
nearly five years ago and is accepted by a wide variety 
of stores and restaurants throughout Nigeria.  ValuCard 
is backed by a consortium of approximately 40 banks, 
including many of the largest and oldest in Nigeria. 
ValuCard boasts that its consortium represents 90 
percent of the country's banking system, and has over 
3,000 vendors in 50 cities nationwide.  Using software 
developed by the Irish company CardBase Technology, 
ValuCard offers perhaps the simplest but most limited 
product available, in that the card is primarily a 
reloadable payment method using a PIN, while other 
cards offer a variety of payment services and options. 
Further, the ValuCard customer can load his or her card 
only at a branch of the bank from which the card was 
issued, not from any ValuCard dealer.  However, 
ValuCard offered the first card on the market, is 
backed by the largest banks in the country and employs 
an extensive marketing campaign, making it the leading 
brand in Nigeria.  ValuCard is gradually expanding the 
capabilities of its card, but remains focused on the 
essential nature of its product.  Paul Lawal of the 
NIBSS estimates that ValuCard services 60 percent of 
the smart card market. 
 
 
6. SmartPay is the second leading brand of smart card 
in Nigeria.  The U.S. company Retriever Payment Systems 
holds a 98 percent interest in SmartPay, which has been 
on the market for about three years.  SmartPay is 
backed by a consortium of over 30 banks, but most are 
medium and small banks with limited geographic focus. 
Only a few banks participate in both SmartPay and 
ValuCard.  Where ValuCard centered its development on 
consumer marketing and vendor distribution, SmartPay 
focused its initial efforts on the software it uses for 
transactions and offers a product of greater 
versatility.  In addition to a reloadable, PIN-based 
payment card, SmartPay offers a PIN-less function that 
allows consumers to give their card to others to use up 
to a relatively low-value ceiling (about $40).  For 
example drivers may purchase fuel on behalf of their 
employers without entering a PIN.  SmartPay cards can 
be reloaded at any bank in the consortia, and SmartPay 
offers debit card, ATM and credit functions to some of 
its customers. Even though the SmartPay product is more 
versatile and multifunctional than ValuCard, it has 
suffered from a lack of marketing and is only now 
attempting to garner a larger percentage of the smart 
card market through strategic partnerships such as 
foreign diplomatic mission consular services. 
 
 
7. The third player in the Nigerian smart card industry 
is SecureTrust.  SecureTrust was also founded some 
three years ago by the former IT manager of ValuCard, 
after his ideas for what he felt was superior 
technology were ignored by the industry leader.  He 
focused his fledgling company's product development on 
the technology of the smart card, using product design 
and software developed by Visa and Proton Technology of 
Belgium.  SecureTrust remains a very small player; it 
is backed by only two or three banks, and is not used 
by many consumers or recognized by many vendors. 
 
 
----------------------------------------- 
NOWHERE TO GO BUT UP - A VERY LONG WAY UP 
----------------------------------------- 
 
 
8. NIBSS estimates that the use of smart cards for 
financial transactions has increased roughly 30 percent 
in the last 18 months.  However, data on the size of 
the smart card market is conflicting.  While the 
Managing Director of SmartPay states that the current 
market totals only 100,000 cards, ValuCard asserts that 
by the end of 2002 it had issued 180,000 cards. 
ValuCard also claims an impressive and steady increase 
in the value of its transactions per year since 1999, 
when it recorded transactions worth 300 million Naira 
($2.4 million). ValuCard reports that consumers used 
its card for transactions worth one billion Naira ($8 
million) in 2000, six billion Naira ($47.6 million) in 
2001, and over 16.6 billion Naira ($131.7 million) in 
2002. 
 
 
9. Still, according to NIBSS, 80 percent of consumer- 
level transactions involve cash transfers, and 15 
percent are paid by check, leaving smart card companies 
vying for a very small slice of Nigeria's market 
transactions.  Nonetheless, NIBSS Chief Executive Lawal 
notes a definite upward trend in the use of smart cards 
amongst the educated population, which tends to have 
more disposable income.  Along with mobile phones and 
imported clothes, Lawal observes that educated, 
professional Nigerians are using smart cards as a 
status symbol, and predicts the demand for cashless 
transactions will continue to rise amongst this 
important segment of consumers as they become 
increasingly accustomed to the use of credit and debit 
cards in the United States and Europe.  Noting this 
trend, Lawal told Econoff that financial institutions 
in Nigeria are developing plans for revolving credit 
accounts, and NIBSS is studying the telecommunications 
infrastructur requirements and improvements needed in 
the country to sustain debit card transactions. 
 
 
10. The U.S. Consulate General Lagos began accepting 
ValuCard as the exclusive method of payment for 
nonimmigrant visa fees in December 2002, in addition to 
its use for occasional warehouse disposal sales and 
fees associated with the Educational Advising Center. 
Similarly, the British High Commission in Abuja 
launched a ValuCard payment system on March 4, 2003. 
Both of these developments will cause a significant 
increase in the issuance of smart cards, as each 
country's diplomatic mission in Nigeria services tens 
of thousands of applicants each year, and card issuers 
are pitching other missions to follow suit.  Smart card 
issuers also hope that the acceptance of ValuCard by 
foreign missions will translate into an increase in the 
number of vendors accepting their cards, as consumers 
across socio-economic strata become aware of the 
product and demand the service from merchants. 
 
 
11. COMMENT: There are limits to going cashless in 
Nigeria.  The unofficial economy -- the street vendors, 
hawkers, and product and service providers who come to 
their customers' homes and whose marketing is 
exclusively word-of-mouth -- is a major part of the 
Nigerian economic structure and social fabric.  Until 
smart card readers are made available to these 
merchants and craftsmen, cash will remain the 
overwhelmingly predominant method of payment in 
Nigeria.  Also, Econoff has heard complaints that smart 
card readers are inoperable frequently enough that 
consumers feel the need to carry cash anyway and simply 
use their smart card where possible. 
 
 
12. COMMENT CONTINUED: Nonetheless, if demand does 
continue for this product, banks may develop the 
infrastructure needed to support other products and 
services such as revolving credit accounts and debit 
transactions.  To do so would require extensive build- 
outs to Nigeria's weak telecommunications 
infrastructure, but and the rise of GSM use has made 
land-line repair and expansion a low priority. Before 
credit and debit become widely used, Nigeria will 
require further anti-fraud advances, both in prevention 
and prosecution.  Today, even where credit cards are 
accepted, mostly in a few hotels in Abuja and Lagos, 
most residents and visitors to Nigeria dislike using 
them for fear of financial crime.  If security 
improves, increased electronic transfers of funds could 
help reduce petty corruption and embezzlement because 
less cash would change hands, and law enforcement could 
better monitor and trace transactions. 
 
 
13. COMMENT CONTINUED: In the meantime, smart card 
companies may continue to see large increases in the 
value of transactions.  Even if the number of 
transactions or cards issued remains relatively limited 
in scope or grows flat, more people will use cards for 
big-ticket items like vehicle purchases.  Any 
significant or prolonged currency depreciation should 
make smart cards even more attractive to consumers. 
Ultimately, like most business opportunities in 
Nigeria, there is money to be made in the smart card 
and related services industry, if companies accept the 
challenges of weak infrastructure and vulnerable 
security.  END COMMENT. 
 
 
HINSON-JONES