The Role of Technology in Transforming Banking Operations and Payment Systems in Nigeria

Abstract
Introduction

Technology has played a major role in accelerating the development, effectiveness and

proliferation of banking services across the globe. E-banking, channels, switching, connectivity, Core

banking systems and ERP’s among others have made banks offer seamless services to customers and

supported in internal operational excellence within banks. As technology continues to advance at a rapid

pace, the banking industry has been quick to adopt new tools and techniques to enhance the customer

experience, increase efficiency, and improve security. From mobile banking to blockchain, technology is

changing the way we interact with financial institutions and manage our money. In a country as diverse as

Nigeria, where millions of people are underserved by traditional banks, technology is playing a vital role.

It's bridging the urban-rural divide, overcoming infrastructure challenges, and unlocking new

opportunities.

On November 24, 2022, the Central Bank of Nigeria (CBN) launched the Payments System Vision

2025 (PSV 2025), presenting a five-year strategic roadmap designed to transform the Nigerian payments

system. The PSV 2025 aims to enhance the adoption of electronic payments, improve the system's safety,

reliability, and resilience, incorporate new products and participants, foster financial inclusion, and

catalyze economic growth and development in Nigeria.

Table 1: 10-Year Nigeria Payment Trend

Volume in Volume in
2012 2022 Percentage Increase
Cheques 12,161,694 16,907,129 39.02%
NEFT 28,941,559 88,468,437 205.68%
ATM 375,513,154 1,506,991,903 301.32%
POS 2,587,595 3,885,782,065 150069.64%
WEB 2,276,464 14,063,927,436 617697.05%
MMO 2,297,688 1,926,293,135 83736.15%

Source: Central Bank of Nigeria

As can be seen from the table, there has been a geometric increase in the volume of electronic

transactions. The migration to electronic modes of payment by bank customers has driven enhancements

of banking platforms to scale for volumes. The offset from these investments is increased revenue and

reduction in operational cost that supported manual modes of payment – cash and cheque.

Evolution of Banking Operations in Nigeria

The history of banking in Nigeria can be traced back to informal contribution arrangements. In

these systems, a person known as the "collector" would gather money from a group of individuals, the

"contributors," and keep it until an agreed-upon maturity date. This informal system was overtaken in

1892 by the African Banking Corporation, a South African bank that started operations in Lagos. A year

later, the British Bank of West Africa (BBWA) began as a Trust Fund led by Sir Alfred Jones, and it started

full banking operations in Lagos by 1894, opening a branch in Calabar by 1900. Before electronic

banking, banking transactions were conducted using desktop computers, and some argue that the era of

computerization with mainframes and minicomputers marked the beginning of technological innovation in

the banking system. According to the Central Bank of Nigeria's 2017 report, ATMs were the most used e-

payment method, accounting for 78.2% of transactions, followed by Point of Sales (PoS) terminals at

14.3%, mobile payments at 4.7%, and web transactions at 2.8%.

The 21st century has seen significant innovations in the banking sector, enhancing self-service

platforms through ATMs, e-funds transfers, telebanking, smart cards, e-data interchange, and e-home and

office banking. Technology has revolutionized both intra and inter-bank transactions, allowing customers

to access banking services and products from the convenience of their phones and laptops.

Role of Technology on Banking Operations in Nigeria

Technology and innovation will continue to push the frontiers of change and improvement across all

sectors and segments of human endeavour. The trajectory of development and transformation in banking

services that we have seen so far has resulted in progress made in driving reduction in operating cost,

fraud reduction and continuous improvement in customer experience.

The implementation of the cashless policy, referred to as a cashlite economy by Edesiri and Promise

(2013), succeeded due to technological advancements in the sector. This shift not only decreased the

physical movement of cash, thereby reducing robbery risks, but also increased bank revenues through

transaction charges. The availability of alternative banking channels in Nigeria has boosted bank

profitability by reducing the necessity for in-person visits to bank branches (Offei and Nuamah-

Gyambrah, 2016; Polatoglu and Ekin, 2001).

According to NIBSS, electronic payment transactions in Nigeria surged by 55 percent, reaching

N600 trillion, up from N387 trillion in 2022. Additionally, the total value of point of sale (PoS)

transactions for 2023 was N10.73 trillion, marking a 27.85 percent increase from the N8.39 trillion

recorded in 2022.

Role of Technology on Transformation of Payment Systems in Nigeria

Nigeria is among the countries where real-time payments offer substantial economic growth

opportunities. In 2021, these transactions saved businesses and consumers an estimated $296 million.

Over the years, Nigerian banks have integrated NIP into their various channels, including internet

banking, bank branches, kiosks, mobile apps, USSD, POS, and ATMs. According to ACI Worldwide,

Nigeria is leveraging real-time payments to boost economic growth and financial inclusion. In the global

ranking of the most developed real-time payments markets, Nigeria placed sixth, following South Korea

(7.3 billion), Brazil (8.7 billion), Thailand (9.7 billion), China (18.5 billion), and India (48.6 billion).
Advances in technology and the emergence of machine learning, artificial intelligence (AI), robotics, big

data, and other innovations have disrupted the conventional banking model. Over the past 15 years, the

integration of technology into banking operations has led to a significant transformation in financial

inclusion in Nigeria. The proportion of formally served adults has more than doubled, while the number of

adults relying solely on informal providers and those financially excluded has halved.

Challenges of Technology in Banking Operations and Payment Systems in Nigeria

At inception, the activities of technology in banking and payment systems were viewed as competing with

the product offerings of incumbent players in the financial services sector, including traditional banks.

Over time, banks recognized the need to embrace the disruptive force fueled by the creative innovation of

these technological advancements. However, both banks and these new technologies still grapple with

certain challenges that hamper their operations.

1. Susceptibility to Cyber Attacks

Financial losses in Nigeria’s banking sector have been enormous as a result of fraudulent

operations. The value of fraud in 2023 was put at N300 billion ($833 million), a significant

increase from the N273 billion ($762 million) lost in 2022. According to Kaspersky Lab, over 40%
 of Nigerian FinTech companies lacked adequate cybersecurity measures, leaving them vulnerable

to malware, and other types of cyberattacks.

2. Limited Infrastructure

According to the World Bank, Nigeria's digital and financial infrastructure is currently insufficient

to support a swift transition to a cashless economy. This inadequacy, combined with the fact that

only 51 percent of adults have a bank account, exacerbates the situation, hindering the country’s

progress toward broader financial inclusion and economic modernization. However, Nigeria's

infrastructure is often inadequate, leading to frequent power outages, poor network connectivity,

and transaction failures.

3. Capital Raising Challenges

The absence of a reliable platform for technology firms in banking and payment systems to raise

capital for expansion has stalled many from progressing beyond the ideation stage. Most of the

funds raised come from foreign investors, with little participation from local investors.

4. Regulatory Challenges

There is an absence of regulatory structures that stipulate registration requirements and a statutory

body that oversees the activities of these technological advancements in banking and payment

systems in Nigeria. This lack of regulation creates an uncertain environment for both innovation

and operation.

Recommendations

1. Strengthening Cybersecurity Measures:

Effective utilization of technology in Nigeria's banking and payment systems necessitates robust

cybersecurity measures. Stakeholders such as the Chartered Institute of Bankers of Nigeria (CIBN),

regulatory bodies, and financial institutions to implement stringent cybersecurity frameworks.

2. Enhancing Digital Infrastructure Resilience:

Addressing critical infrastructure deficiencies is paramount for the sustainable deployment of banking

technologies. Strategic investments in digital infrastructure projects are essential to enhance power

supply reliability, improve network connectivity, and bolster overall system resilience.

3. Professional development

To meet the evolving demands of technological innovation in banking, initiatives aimed at enhancing

professional competencies are critical. Initiatives such as the Professional e-Payment Certification

Programmeby CIBN can elevate industry standards and cultivate a skilled workforce capable of

driving sustainable growth and innovation in Nigeria's banking landscape.