Why the promise of a cashless society is key to unlocking the Nigerian commerce growth opportunity
Cash is a uniquely expensive and inconvenient way to do business. However, shifting to a world of cashless payments is easier said than done, as many policymakers have discovered to their cost. The Nigerian Government is taking unprecedented steps to reduce the economic reliance on cash and promote digitally-driven commerce. Will its gamble pay off?
Along with Sweden and India, Nigeria has moved ahead of other countries in its efforts to reduce the reliance on cash to make commerce flow and drive economic growth. Most notably, in late 2022, the Government announced a cap on weekly cash withdrawals for both individuals and corporations, with punitive fees levied for those straying above the limits.
Since then, it has also announced a new domestic card scheme to rival foreign cards like Mastercard and Visa and further encourage digital payments. Of course, the perceived rush to change business and consumer behaviour has met with understandable resistance in some quarters. Cash reserves of the country’s newly redesigned paper currency have run low, while the traditional banking infrastructure has come under strain, resulting in markedly slower settlement times. Despite the growing domestic concerns, however, the Central Bank of Nigeria (CBN) has largely resisted efforts to slow down the pace of its economic transformation.
Why over-reliance on cash is a barrier to growth
Cash may have been around since the time of the Mesopotamian shekel over 5000 years ago, but its utility is dwindling for the modern economy. Compared to many digital payment solutions, cash is slow, cumbersome and unreliable. A reliance on cash remains a major barrier to growth in ambitious, high-potential markets like Nigeria: it makes volume business difficult, and cross-border, open commerce impossible. It prevents the accumulation of working capital to facilitate growth. It also comes with significant risks – everything from robbery to fire and flood.
Most pertinently, it is typically the smaller retailers and merchants who carry the steepest cost for being forced to trade in cash. Cash needs complex reconciliation by hand; transactions are slow and insecure, while capital is tied up rather than being used productively.
No wonder policymakers are pushing for digital payments – particularly given that microbusinesses and entrepreneurs present such a huge untapped growth opportunity for the domestic economy.
The latest in a series of cashless interventions
Under the current Nigerian Government policy, weekly cash withdrawals are limited to ₦500,000 (approx. $1,100) for individuals and ₦5,000,000 (approx. $11,000) for corporations. Individuals that breach these limits must pay a fee of 3%, with a 5% fee levied on corporations. The CBN has also limited daily withdrawals, part of a broader suite of measures dating back to 2012 designed to promote the domestic use of digital payments –in particular, the adoption of the country’s digital currency, the eNaira, but also internet banking, mobile banking apps and cards.
The Nigerian authorities have made their rationale clear – embracing digital payments boosts growth, reduces corruption, promotes financial inclusion and facilitates remittances. At the launch of the project, the CBN explained that, “An efficient and modern payment system is positively correlated with economic development, and is a key enabler for economic growth.”
The B2B distribution problem
However, despite undeniable progress, there continues to be an over-reliance of cash across the B2B retail distribution chain in Nigeria. There are a number of reasons: some large brands are reluctant to change a model that has worked well for them and kept out smaller challengers, while some of the bigger distributors have no incentive to change a system that allows them to control the relationship between brands and merchants – and charge fat margins to do so.
Unfortunately, this reliance on cash doesn’t work well for merchants, for consumers, or for all of the many brands and distributors who want to compete on a level playing field – an ‘open commerce’ system. Cash-based distribution invariably limits choice and pushes up prices. It makes accurate sales data and customer insights harder to come by, limiting the efficacy of local markets in matching supply with demand.
Even where brands have attempted to move away from using cash across their Nigerian distribution operations, they’ve done so by building proprietary, closed-garden digital ecosystems – creating a single online home for buying their products, but not for buying anyone else’s. This approach misunderstands how retailers and distributors want to operate. They’re already dealing with multiple brands every week and so if they’re going to be incentivised away from continuing to use cash, it has to be with the promise of a fundamentally better digital solution – for example, an open commerce marketplace where they can buy a wider range of products to suit their local customers’ needs.
Delivering value throughout the distribution chain
Digital payments present a clear pathway to growth for small Nigerian retailers and merchants. They provide far better visibility on all retail transactions, allowing for better stock management, they create verifiable trading data that can improve a merchant’s ability to access working capital via banks and financial services providers and, of course, they offer immediate reconciliation.
What’s more, allowing local retailers and merchants to go cashless has a significant positive effect throughout the distribution chain, allowing brands and their distributors far greater transparency into what is selling, where there may be untapped demand, how to price goods more effectively, and more besides. This is open commerce in action.
And with some open commerce platforms, it’s even possible to trade digitally without any reliance on the traditional banking establishment, with retailers uploading their existing cash at local collection points, giving them the digital currency they need to keep on purchasing without any delays in settlement time.
If the Nigerian Government gets its way, the distribution chain will be forced to digitise over the next few years. Alongside this, what’s needed now is greater market education, nudging progressive brands, distributors and retailers towards open commerce technologies rather than locking themselves into digital versions of their current, constraining relationships.