Deepening Financial Inclusion with Domestic Payment Scheme

Obinna Chima writes the proposed domestic card scheme which is expected to be launched in January next year, would among other benefits, promote financial inclusion and help retain value locally

A study carried out in five continents by the Anthemis Group, a London-based digital financial services investment and advisory firm focused on re-inventing financial services for the 21st century that was published in 2020, had revealed that domestic card schemes and infrastructure are beneficial to the local economy despite the globalisation trends.

The report also found that such cards also come with significant social benefits.

In addition, the report titled: ‘National Payments Scheme Report,’ showed that routing domestic card transactions via a local switch has the potential to lower costs, create services more suited to local market needs and minimise significant outflow of foreign exchange.

It showed that based on the data collected from five continents, cost to the economy by using a domestic scheme compared to an alternative International Card Scheme (ICS) could be as low as 25 per cent.

It also found that although unit transaction costs tend to be higher in smaller markets due to lack of scale (average transaction cost in a market of 100mn transactions per year market was approximately 40 per cent higher compared to a one billion transactions per year market), the above cost reduction aspect broadly remained the same.

“The biggest reason to use a domestic scheme is that in most markets less than five per cent of cardholders ever transact internationally, but the ICS charge assessment fees on 100 per cent of transactions.

“This does not appear to be fair. Most Central banks are in favour of low-cost domestic payment schemes as an aid to economic efficiency and believe that such schemes and local infrastructures provides a significantly lower cost option; they all stated that there is insufficient transparency in cost information from International players,” DailyFT quoted the report to have stated.

These clearly are some of the reasons why the Central Bank of Nigeria (CBN) in collaboration with the Nigeria Inter-Bank Settlement System (NIBSS) and the Bankers Committee are working towards launching a National Domestic Card Scheme effective January 16, 2023.

There is no doubt that over the years, Nigeria has made noticeable progress in its desire to create a robust payment system through several reforms targeted at restoring confidence in the system.

Indeed, a sound payment system infrastructure, where operators and customers can transact business with confidence and convenience, trust and timeliness, underpins many of these reforms.

In 2007, the CBN launched the Payment Systems Vision 2020 which identified series of recommendations to increase the resilience of the payment system infrastructure and work-streams to encourage the usage of electronic payment methods were inaugurated. Since then, the country has continued to introduce initiatives that would help simply payments and deepen financial inclusion.

Nigerian domestic market, while enabling African and international interoperability, allowing banks and other institutions to offer a variety of solutions including debit, credit, virtual, loyalty and tokenised cards amongst others.

Nigeria remains Africa’s largest and most vibrant economy and the pace of digitisation and innovation, alongside the expansion of mobile penetration and the proactive policy initiatives of the CBN have driven the accelerated adoption of digital financial services.

With this, the country joins a growing list of countries including India, Turkey, China, Sri Linka and Brazil, as leading examples – which have launched domestic card schemes and harnessed the transformative benefits for their respective payments and financial systems, particularly for the underbanked.

The Chief Executive Officer, NIBSS, Mr. Premier Oiwoh, stated that the new initiative would enhance financial inclusion and create solutions to improve card ecosystem innovation in Nigeria. 

Just like it is obtainable in other jurisdiction, the card scheme is also expected to foster innovation within the

According to Oiwoh, “the domestic card scheme is a scheme that has been the brainwork of the CBN and it is being deployed to improve the payments landscape across Nigeria.

“So, part of the proposition that this domestic card scheme will be creating is that it drives acceptance and efficiency, reduce operating costs of a card operation in the country and also the provision of unique, reliable services because other features or other products will be layered on this card.

“Uniquely, this card will be configured to address the unique ecosystem issues that we have to help improve payments across the nation.”

He added: “We also expect the card to provide affordable pricing, the charges will certainly be lower because it is expected to be charged for in naira as against foreign currency.

“We also expect more local contents; contents uniquely for the Nigerian landscape which will support micropayments and credits, e-government, identity management, transportation, the health sector and agriculture in terms of payments.

“We expect this to reduce the dependency on cash across the landscape and help promote the cashless initiative by the central bank.”

He further said the operational effectiveness of the card was expected to be robust and should drive a lot of innovation and validation, end-to-end visibility to improve fraud management, and a better dispute resolution process around the current card operating system.

He added: “It would improve sovereignty and security of our data and operations which would be locally based. It will also help and drive financial inclusion across the federation.

“These cards as I said with the platform and then lots of products will be layered across ranging from debit cards, virtual cards, debit cards, non-interest cards which will specifically address the needs of the Muslim segment of the country, then identity card. Any form of card scheme can be layered on top.”

For the CBN Director, Corporate Communications, Mr. Osita Nwanisobi, the card scheme could also be leveraged as a platform for the seamless dissemination of government-to-person payments and other social impact initiatives, enhancing financial access and supporting the growth of a robust and inclusive digital economy.

He also stressed that domesticating the card scheme would further enhance data sovereignty, enabling the development of locally relevant products and services and reduces demands on foreign exchange.

Osita said, “The CBN recognises the significant benefits from delivering Africa’s first central bank-driven, domestic card scheme, which, when delivered at scale, has the potential to become the largest in Africa, and one of the largest in the world.”

The report by Anthemis Group, in citing examples from other countries, stated that Sri Lanka launched its National Card Scheme in June 2019, with the primary objective of significantly reducing the cost of domestic card payments where the scheme is operated by LankaClear under the guidance of the Central Bank of Sri Lanka (CBSL).

The lower cost structure to operate the scheme resulted in lower scheme fees and interchange fees, which are regulated by CBSL.

Also, in Turkey, BKM the domestic infrastructure provider developed the BKM Express wallet that met the needs of the Turkish banks.

“In the UK, there is a determined push by Vocalink the local payment processor and the national ATM network to make the Zapp scheme the preferred solution for mobile payments.

“Moreover, RuPay in India, which has already issued more than 590 million debit cards, is promoting the use of a range of segmented products including debit cards issued under the Pradhan Mantri Jan Dhan Yojana initiative for financial inclusivity,” the report added.

It noted that the preferred option for domestic schemes to enable international acceptance was via a co-branding arrangement with the international schemes.

LankaClear decided to partner with Japan Credit Bureau (JCB) to implement NCS, as they are one of the six ICSs who are part of a worldwide EMVCo alliance.

Also, one of the deterrents for acceptance of card payments by the merchants has been the high commission or Merchant Discount Rate (MDR) charged by the banks. Based on fees charged by the ICSs, this could be as high as three per cent. This is a real roadblock to popularise the card payment acceptance by the SME sector merchants, as their profits from goods sold is comparatively low.

One of the key benefits of domestic card schemes is their ability to significantly lower the MDR for domestic card payments. Even though the fees earned by the banks would be lower, they have a higher gain by more merchants accepting such domestic card scheme payments.

From the foregoing, domestic card schemes would significantly lower transaction cost on the usage of payment cards and would be a veritable solution in enhancing transactions.