The Regulation of Payment Cards in Nigeria:
an overview and issues for discussion
Dr. Damilola Olajide
University of Aberdeen UK
Initiative for Public Policy Analysis (IPPA)
Prepared for the workshop: “Engaging stakeholders in the economic
regulation of payment cards in Nigeria”, 27 March, 2012.
Disclaimer: The opinions expressed in this presentation are the exclusive responsibility of
the author and do not necessarily reflect those of University of Aberdeen or IPPA.
Objectives

To provide an overview of the regulation of the payment
cards in Nigeria.

This will allow us to identify issues for further discussion
in the stakeholder engagement process.

We will examine current practice and evidence of
distortions:
Market structure: Competitiveness, concentration, etc.
 Market imbalances: acquiring rules and costs, fees
structure, etc.

Some lessons from previous presentations

International experience with regulation:
◦ Payment cards market is one of the most regulated industry E.g.
Australia, USA, UK, Hong Kong, Brazil, Mexico, Canada.
◦ Targets of regulation include:
 Interchange fees
 Merchant surcharging rules
 Entry barriers, etc.

Evolution of payment cards in Nigeria:
◦ High initial adoption level has not been sustained overtime.
◦ Usage and adoption rates have been significantly low due to
insufficient information and the largely unbanked segment of the
population.
◦ Little headway with credit card channel.
Emerging question

What sort of public intervention (economic regulation) will
improve adoption of card usage by consumers and card
adoption by merchants?

To address this questions we need to understand:
◦ How the payment cards market works
◦ Evidence of market failures (distortions, and imbalances) in current
practice.

The economics of payment cards market relates to:
◦ an understanding of how the market works,
◦ the relevant type of markets, and
◦ the interrelationships between parties in a payment system.

Analysis emerging are used to discuss the economic regulation
of the industry.
The payment cards market as two-sided market

Cardholders (consumers) and Merchants (POS) represent two
different demand structures to be satisfied at the same time.

One side of the market consists of cardholders and card issuers, the
other side consists of merchants and acquirer.

The relationships between the two markets are interdependent . The
demand from one side is dependent on the demand of the other
side (externality).

The card networks (card schemes/switches) play an important
intermediating role of balancing the two sides of the market,
through which each side have access to each other’s market.

The balancing act creates economic value by providing incentive to
facilitate and encourage participation of both sides of the market.
An illustration (E.g. N100 transaction)
Cardholder
Uses card to purchase
good/service (N100)
Submits transaction
for authorisation
Levies card charges
or gives rewards
Issuer bills
cardholder (N100)
Issuer
Merchant
Card
Network
Merchant pays fees
to acquirer (N0.50)
Merchant receives
N98.25
Acquirer pays interchange fees
to issuer (N1.25)
Acquirer
Issuer approves transaction &
transfers N98.75 via network to
Acquirer
Card network brings issuing and acquiring markets together for a fee.
Importance of interchange fees (IF)
•
Why does the interchange fee generate so much issue in the
regulation of a payment cards market?
• IF is not a price per se, but a mechanism for balancing the two sides
of the market, in such a way that:
 Issuers are able to recoup cost without imposing higher fees on
the cardholder,
 Merchants compensate issuers for the costs incurred in
providing the payment service.

The IF should be set so as to be able to balance the costs of provision
with the benefits of usage to the merchant.

The economic role of IF is to shift costs between issuers and
merchant acquirers, which enhances the value of the payment system.
Results from the literature on IF regulation (i)

IF is a balancing mechanism, not a price per se. IF is efficient when
the total transaction demand for card services (determined jointly
by cardholder and merchant), is equal to the total transaction costs
of providing those services by both the issuer and the acquirer.

Merchants operating at the same level playing field (competitive) is
required for IF to be social optimal, even if issuer and acquirer
exercise market power.

If merchants in different industries receive different benefits (e.g.
due to transaction volume or value), a change in IF will generate a
trade-off between cardholder benefits and merchant acceptance.
Some merchants may refuse card payments.

IF is neutral, irrespective of whether merchant, issuer or acquirer
has market power.
The Nigerian model (CBN 2011 Guidelines)
Merchant
Cardholder
NCS
PTSA
Issuer
PTSPs
Acquirer
Nigerian model deviates significantly at the acquiring side of the
market, but offers potential benefits, but at extra costs to merchants.
Table 1: Distribution of card products and card
product concentration
No. of banks
CR4 b
CR2
21
43.5
0.272
53
19
0.509
0.321
Credit cards
33
9
0.606
0.364
Naira Denom.
43
10
0.605
0.326
$' Denominated
32
20
0.406
0.281
Dual currency ($ & N)
15
6
0.867
0.667
No. of card
offering
products a
products
All
92
Debit cards
Note: a Figures compiled from information on card products available on bank websites as at 31
July, 2011;
b
CR4=share of 4 banks in total no. of cards. This can be multiplied by 100 to
give percentage (%)
The market structure indicators

Issuing market is characterised by horizontal product differentiation. Same
card offered in different features:
◦ Benefits issuing banks, improve quality and delivery of service, but may
create entry barrier to non-bank issuers.
◦ May bias cardholder perception of card products.
◦ May contain hidden costs to customers.

Evidence of competition through product differentiation, (rather than
prices?)

Evidence of market concentration is weak generally, but concentration is
observed for credit cards and dual currency cards are concentrated.

Credit card is the most productive of all cards, but least provided.

Acquiring side of the market is characterised by duplication of functions.

Same banks control both sides of the market.
Payment card imbalances

From a two-sided market perspective there
should be:
◦ correspondence between card usage and POS.
The ratio of cards per POS is very high.
◦ correspondence between both market sides. The
acquiring side of the market is distorted.
Card acceptance service stakeholders









Acquirers: banks & non financial entities to deploy POS terminals.
Payment Terminal Service Providers (PTSP): deploy, maintain and
support POS terminals.
Payment Terminal Service Aggregator (PTSA): comprises NIBSS owned
by all banks & CBN. Routes transactions on terminal to acquirer.
POS terminal owners (PTOs): banks, merchants, acquirers, PTSA,
PTSPs allowed to own their terminals.
Card issuers: restricted to deposit taking banks. Required to provide
sufficient information to card holders, e.g. limits, fees and charges.
Merchants: No-surcharge rule. Accept all cards issued in Nigeria
Cardholders: Allowed to opt-out of a card contract without a penalty.
Card associations/schemes: comprises of local switches (e.g.
Interswitch) and international card networks (VISA and MasterCard).
Switching companies: provide payment infrastructure and interconnect
issuing and acquiring banks. Can own cards.
Structure of fees and charges
Fees: Interchange fee plus fees paid by merchants to acquirer?
 Agreed between providers and banks
 1.25% of total transaction value or max. N2, 000.
 Large merchants such as airlines and hotels face different limits.

Stakeholder

Distribution of
fees/charges (%)
Issuer
30.0
Acquirer
32.5
Payment terminal owner
25.0
Local switch
5.0
Payment TSA
7.5
Different fees structure applies to foreign currency dominated
transactions.
Distortions (i): Acquiring side of the market

Acquire through PTSP, connect through PTSA.

Agency problem in the terminal ownership and deployment.
Bank, acquirer, merchants, PTSA, PTSPs can own terminal, but
only PTSP can deploy and maintain.

Restricted entry into PTSP. Anyone having relationship with the
issuing side of the market is excluded.

Acquiring costs is largely dependent on the competitiveness of
the PTSPs. Six PTSPs and restricted entry raises concern for
collusive pricing.

Evidence of duplication of processes and functions, which may
increase costs to end-users (consumers and merchants),
ultimately affecting usage and adoption.
Distortions (ii): issuing side of the market

The issuing side of the market is relatively less distorted:

Card associations/schemes are forbidden from undertaking
activities that are collusive, anti-competitive, etc.,

There is functioning no antitrust laws or a fully independent
antitrust agency to determine these behaviour when the need
arises.

Switches can only interconnect issuing and acquiring banks
through the PTSA and then National Central Switch (NCS).
Duplication of interconnectivity function. May raise costs to
issuers and ultimately to end-users( cardholders and
merchants).
Distortions (iii): Fees structure

The intermediating role of fees is unclear from the fees
structure. The role of card networks in setting the fees is
limited.

The fees structure does not balance the market.
Merchants incur additional cost of terminal acquisition
provided outside the market framework.

Where the issuer and acquire are the same as in most
banks, then the share of the fees is 62.5%, and 87.5% if also
owns POS terminal.
Distortions (iii): Fees structure (ctd)

Existing rule price discriminates between small retail
merchants and large merchants.
◦ The max. transaction for small retail merchants is N160,000
(i.e. 2000/0.0125), but large merchants such as airlines can
negotiate with acquiring banks.
◦ Potential retail merchants with sales over this limit are
effectively constrained.

All potential merchants should be allowed to negotiate
limits with their acquiring banks based on their type of
business.
Summary

The Nigerian payment cards market is undergoing rapid
development, making certain distortions and imbalances
imperative.

Evidence of concentration is weak, but some banks dominate
both sides of the market.

Important distortions include:
◦ Low POS adoption, implicitly constrained in the acquiring side.
◦ Debit cards are largely used at ATMs rather than for purchases at
POS.
Important imbalances include:
 Fee structure disfavour retail merchants.

Concluding remarks (i)

At present, setting fees by the Bankers Committee is an outcome
of a bargaining process rather than the ‘balancing act’. This will
always raise suspicion.

Regulating the IF will be complex and undesirable, but its
determination should be left to those who function to balance
both sides of the market.

If networks set the interchange fees, a removal of no-surcharge
rule can achieve the dual goal of enhancing card usage and POS
adoption.

An alternative to the removal of no-surcharge rule is to provide
incentive to potential merchants (e.g. tax relief) equal to the
additional costs imposed by the acquiring side of the market.
Concluding remarks (ii)

It is important to eliminate barriers to entry: e.g. PTSPs are only 6
serving the entire market.

A well functioning Credit Agencies will enhance credit card usage.
Credit card offers the greatest benefit to the population.

The proposed Ombudsman bill is not fully independent as it is
industry specific.

Need for a fully independent Federal Anti-trust and
Competition Commission: to determine evidence of anticompetitive behaviour. Complements the Ombudsman:
◦ Comprise experts in anti-trust laws and industrial economics, not
politicians. E.g. Office of Fair Trading UK is different from the
Financial Ombudsman.
Some questions for discussion

Which of the following changes in current practice will
you recommend in order to enhance POS adoption by
potential merchants?
(i)
(ii)
(iii)
(iv)
(v)
Merchants be allowed to surcharge a small fee on card
transactions.
An incentive such as a tax relief for potential merchants.
Reduce the proportion of fees in total value of a transaction
from 1.25% to 1%.
Payment Terminal Service Providers and Payment Terminal
Service should merge into a single entity and operate under
NIBSS.
The Bankers Committee should leave setting of fees to
networks.
The remaining questions are provided to you directly.
Thank you