In Pursuit of a Cashless Africa: Learning from Nigeria’s Struggle to Accelerate its Transition to Digital Finance
The use of cash for payments is dwindling globally, accounting for only 18% of point-of-sale transaction value in 2021. At the same time, the electronic payments industry is burgeoning, with transactions growing by 19% that same year, in line with pre-pandemic rates. In Africa, while cash remains king at 93-95% of transactions (as of 2020), its dominance is gradually diminishing as the use of mobile money and other electronic payment forms increases. Indeed, it is estimated that domestic electronic payments revenues will grow at about 20% per year through 2025.
Given this momentum, is it feasible to imagine a cashless continent?
Many stakeholders certainly hope so, given the multiple benefits of widespread adoption of digital payments — and there are reasons for optimism on this front. But many challenges remain, some of which have been highlighted by events that have played out in Africa’s largest economy over the past year.
The Evolution of Africa’s Payments Landscape
The evolution of payment forms in Africa has been ongoing for the past couple of centuries, as transactions slowly shifted from trade by barter, to the use of cowries, and then to the adoption of coins and notes. In recent years, the proliferation of mobile devices, along with the continent’s poor banking infrastructure, have made Africa fertile ground for explosive growth in mobile money use. According to the GSMA, in 2022, two thirds of the globally processed $1.26 trillion in mobile money transactions occurred in sub–Saharan Africa. Capitalizing on this momentum, several African countries — including Kenya, Nigeria, Rwanda and others — have publicly stated an interest in a cashless economy.
However, a basic building block for achieving this ambition is for individuals and businesses to have access to financial services. And the reality is that different African countries have seen vastly different levels of progress when it comes to financial inclusion and the adoption of digital financial services. For example, while only 51% of Nigerian adults have access to a formal financial services account, 83% and 77% of adults in Kenya and Rwanda respectively have formal access, thanks largely to the prevalence of mobile money and other non-bank formal financial services.
Despite this varying progress at the country level, there has been a lot of region-wide progress in expanding financial inclusion in Africa. Yet cash still retains a hold on payment transactions across the continent. For instance, a housewife in rural Nigeria is more likely to make a cash payment for meat and vegetables in the market because it seems like the easiest thing to do. She does not have a bank account, and once she makes her payment, she can leave immediately with her goods. Her transaction has hidden costs inherent to the use of cash, including the risk of loss or theft, the time the business needs to spend counting and reconciling transactions, and the expense the government incurs to print and distribute that cash. However, the cost and inconvenience of having a formal bank account often outweigh any of the perceived benefits of digitization, so her cash transactions persist.
Indeed, the predominant use of cash has obscured the true economic picture in African countries, since the cash-based informal sector is difficult to measure. Informal economies’ dependence on cash is also limiting these businesses’ growth. It is preventing them from building a credit rating, excluding them from access to financial services such as loans, which can help them expand. It also forces them to spend time on inefficient processes related to handling cash, while making them and their customers vulnerable to security risks. And it is preventing them from fully participating in the global economy, as international transactions are largely conducted electronically.
A cashless Africa would bring several benefits to these businesses and the communities where they operate. More people would have access to financial services, reducing poverty and promoting economic growth. Transactions would be faster and more efficient, making businesses more competitive. Governments would save money on the printing, storage and distribution of physical currency notes. Tax revenues would also increase, as it would be easier for governments to collect taxes and curb evasion. Finally, there would be improved security and reduced crime and corruption since transactions would all be traceable.
Going cashless makes so much sense, so why does it remain a challenge? A noteworthy example from earlier this year might shed light on some of the challenges.
Learning from Nigeria’s Struggle to Accelerate its Cashless Agenda
In October 2022, Nigeria announced it was redesigning its naira currency notes. Residents were instructed to bring their old naira into banks and exchange them for new notes before the deadline at the end of January 2023. But there was no outright exchange of new banknotes for old currency denominations, with the provision of only a fraction of deposited funds being made available to bank customers in physical notes. Instead, Nigerians were encouraged to transact electronically — and since only half of the adult population had a financial services account and 80% of payments are in cash, this proposition was a risky one. The fallout may provide some insight into the practicalities of going cashless in African countries.
A major effect of the naira redesign policy was that Nigeria faced an acute cash scarcity in February and March of 2023. Consumers were forced to adopt mobile banking and fintech apps to make payments, as there were long queues — sometimes overnight — at banks’ automated teller machines, and banking agents were charging exorbitant fees for limited cash withdrawals. As a result, banks did see a boom in electronic payments, but they were faced with more concurrent users for their mobile banking systems than their infrastructure could handle, and transaction failures skyrocketed. Complaints and disputes also increased, with call center volumes going through the roof. Businesses of all sizes suffered — and some failed — as customers were unable to make cash payments.
Switching companies — which facilitate and process interbank transactions — also struggled with the surge in transactions, and there was an increase in failures and disputes. Like mobile banking systems, they were dealing with an unprecedented increase in electronic transaction volumes. For example, while there were 561 million interbank fund transfer transactions in December 2022, traditionally the peak month, this rose to 1.1 billion by March 2023.
Even mobile network operators struggled with increased demand for their USSD channels from bank customers, who wished to transact without a smartphone or internet service. The entire country suffered tremendously, until finally a Supreme Court order reversed the naira redesign policy. Soon the old notes were back in circulation, easing the cash crunch that Nigerians had endured for several weeks. The court has required these notes to remain in circulation until Dec. 31 of this year.
There’s one overriding lesson from this failure: Nigeria’s government should have ensured that the technological infrastructure required to make this policy successful was in place before it tried to implement such a major change.
India carried out a similar demonetization exercise in 2016, but the country had some systemic capacity in place to handle the change, such as their government-backed payment app, BHIM, which enabled electronic transfers between bank accounts and allowed users to enter their unique, 12-digit Aadhaar ID number to make payments. This system did not require a smartphone or internet access, making it very inclusive. While Nigerians could have benefited from similar systems, especially if their capacity was sufficient to handle the spike in electronic transaction volumes, it’s worth mentioning that India still failed to fully achieve its demonetization goals of reducing cash in circulation, reducing money outside the banking system and stemming the flow of counterfeit notes.
This attempt by Africa’s largest economy to accelerate its cashless drive reveals a few gaps which need to be closed, if Nigeria or other African countries hope to achieve this goal. First, governments and private sector organizations must invest in robust telecommunications networks, widespread internet connectivity and effective payment processing systems to ensure that digital payments are available and accessible to everyone. Second, financial inclusion is critical — a majority of the population must have access to formal financial services, including bank accounts, digital wallets and payment cards. Third, there must be a concerted effort to spread financial literacy, informing the public about the benefits of using digital financial services, with guidance on how to use these payment forms.
As part of these efforts, African countries need to engender public trust in formal financial systems. Among other things, this would require an investment in effective security measures, such as encryption and fraud detection systems, to protect electronic payment systems from cyber threats. Dispute management systems must also be comprehensive and accessible. Additionally, governments must develop policies and regulations that promote innovation and competition, with the goal of improving the accessibility of electronic payment services. And partnerships between stakeholders must be encouraged, to drive interoperability and accelerate the adoption of electronic payments over cash. Payments can only work as part of a broader ecosystem: No individual provider is an island.
Going cashless is no easy feat, and it’s even more challenging in a region like Africa. Low incomes, limited access to financial services and a strong preference for cash are difficult obstacles to overcome. The good news is that there are several examples of countries, such as Estonia, Sweden and China, that have achieved (or are close to achieving) cashless status — and they each did so in different ways. Similarly, each African country will need to develop its own approach to expanding financial inclusion and digitizing payments, as part of a concerted regional effort by all stakeholders to lay a solid foundation for a cashless Africa.
Photo: A crowd gathered at a Lagos bank during Nigeria’s attempted shift to electronic payments in early 2023. Photo courtesy of Wikimedia Commons.