Cards, PoS are good, but not nearly as embedded finance

Cash as a mode of payment is inefficient. Most people like it because it is what is available and quite frankly, even the card industry has limitations, and especially in developing economies like Nigeria.

How many times did you complete a purchase, hand over your card for payment and it returns that dreaded response; ‘Declined’? Not always due to insufficient funds, yet, it happens with a lot more frequency than many people can deal with. If cards are to be the means of bridging financial inclusion, then it is going to be much worse.

But why does this matter? To perform a PoS transaction in Nigeria today, one would need to at least own a Debit card, but what is equally interesting is that they would also need to have a bank account in the first place to be issued that card. This presupposes they would have been ‘financially included’, but more than 60 percent of adults (in the rural area) are unbanked, and 44 percent are completely excluded from any form of financial service. These are supposedly those the aggressive push for financial inclusion through things like PoS agents should serve. The odds are better but not fantastic in the urban settings either.

For instance, the use of PoS through ‘cash agents’ is becoming popular, but really, only because more viable alternatives have not been widely deployed. Yet, what is more interesting is, this strategy is expected to drive financial inclusion in rural areas where formal banking services are absent. And in urban areas too, where not everyone feels comfortable disclosing their card details.

Only one-third of rural adults are banked, compared to two-thirds of adults in urban areas, with rural adults more likely than those in urban areas to continue relying exclusively on informal financial services, as noted in the EFInA Access to Financial Services in Nigeria 2020 survey.

So, how would card driven transactions meet the needs of millions of unbanked and financially excluded people?

In the first four months of 2022, cashless transactions saw a 44 percent increase (year-on-year) to hit N117.33 trillion, according to data from the Nigeria Inter-Bank Settlement System. Cashless transactions, which are captured through the Nigeria Instant Payment System and Point of Sales terminals, showed Electronic channels were used 1.88 trillion times in the first four months of 2022, a 44.26 percent increase from the 1.3 trillion times they were used in the corresponding period of 2021.

Clearly, there is interest to adopt electronic payments and if this is achieved through more efficient systems, such as embedded finance, transaction volumes will likely multiply. The Central Bank of Nigeria (CBN) had also said in a document on why it is promoting the Cashless Policy, that there was a need to help Nigerians migrate from a cash-based economy to an electronic-driven economy.

The e-BillsPay, an electronic bill payment platform that facilitates the payment of Bills, Fees, Levies, Premiums, and Subscriptions etc. by the banking public through electronic payment channels provided and managed by banks, has continued to see an increase in transactions in recent years.

NIBSS’ data, according to media reports, showed a surge in the usage of e-bills pay after the onset of the pandemic. In the first four months of 2019, N189.50 billion was paid through e-BillPay channels; in the first four months of 2020, N363.87 billion was paid through these channels. The data shows sustained growth in the channel of payment as N716.99 billion was paid between January and April of 2021, while N923.24 billion was paid in the corresponding period of 2022.

These e-BillsPay touch points include bank branches, Internet banking, mobile banking, USSD, and agent networks.

What is instructive to note is that, with N923.24 billion already done in e-bills payments in 2022 through existing channels that do not include the 38.1 million financially excluded Nigerians, the possibilities for more are truly endless. Imagine a world with embedded finance more widely adopted, and people able to spend with more ease, then transactions volumes could easily double or more.

With embedded finance, merchants would not even have to worry about the menace of ‘fake alerts’. Embedded finance is one of the ways to deal with this as no user can trick another with carrying out a transaction on the platform. The reconciliation process is such that alerts cannot be generated unless value has actually been transmitted; in this case, money.

And for the umpteenth time, who says you need cash payment in advance for a transaction? Therefore, while the current payments as captured by NIBSS are likely to have been entirely with cash up front, there are millions of individuals who are credit worthy enough to have services or bills paid without providing cash immediately. This would only be possible through embedded finance, and would not only boost transaction volumes but also ensure average users are able to get services when needed without cash being an obstacle.

After all, your purchase history with a dealer should be sufficient to determine your credit worthiness. You buy XY goods frequently and have been paying promptly, so why can’t you get a credit line?

If this article were to be published in a newspaper, for instance, they would be in a better position to offer financial services to their vendors, who daily sell at the bus stops and whose activities they are in a better position to understand than whatever bank that vendor may be using. If that newspaper offers an embedded solution through an app for its vendors, it would be empowering them to have access to more financial services, even as they continue doing business and in better control of their finances.

As the vendors prosper, spend and make money easily through this solution, guess who also gains in the end? Yes, the newspaper as well. Not card, or cash would create the win-win situation for all players; from customers to businesses and even the financial inclusion goal in Nigeria. It is embedded finance.

Ope Adeoye, chief plumber at One Pipe, a company building a platform that makes it possible for fintech operators to partner with banks and large corporates, holds an engineering degree from University of Ilorin, and certificates from Lagos Business School and a Stanford CPD