A shift in consumer behavior and macroeconomic factors is driving Nigerian banks to favor local card schemes like Verve over international options such as Visa and Mastercard, according to a report by Muktar Oladunmade on TechCabal.
Before the COVID-19 pandemic, Nigerian fintech companies discovered a successful customer acquisition strategy by issuing foreign debit cards. These cards, often provided at little to no cost, enabled customers to withdraw cash from ATMs and make purchases at supermarkets. This strategy boosted customer spending, leading to higher transaction fees for fintech companies.
"No regular Nigerian was going to spend their money from your bank if they did not have your card," a former banker told TechCabal.
However, the COVID-19 pandemic brought about restrictions on in-person shopping, a cash crunch in Nigeria in 2023, and cash shortages at bank ATMs. These changes have reduced the reliance on card payments and increased the popularity of bank transfers.
In light of these new realities, fintech startups and banks are rethinking their card operations. All Nigerian commercial banks, except for Guaranty Trust Holding Company (GTCO), now issue Verve cards, a scheme operated by Nigerian payments company Interswitch. First Bank, Nigeria’s oldest bank, has issued Verve cards to over half of its card customers. OPay, a Chinese-backed fintech, has distributed 13 million Verve cards, while Moniepoint has issued around 4 million. Since the end of the COVID-19 pandemic in 2021, Verve has captured 54% of the Nigerian card market.
The devaluation of the naira has made switching from international card schemes, which charge in USD, more appealing due to the increased cost of FX-denominated bills. With complex pricing strategies, Visa and Mastercard fees vary based on the financial institution's size and region. These schemes also require financial institutions to meet several conditions, including a $2,000 monthly implementation charge, opening an offshore account, renewing contracts annually, and providing substantial collateral. Additionally, Nigerian banks incur fees for logging disputes through international card schemes' resolution channels.
International card schemes also prevent non-deposit banks from directly connecting to their networks, forcing fintechs and smaller banks to partner with commercial banks already on card schemes. For instance, Kuda partnered with Zenith Bank to launch its first debit cards.
Despite significant investments from Mastercard and Visa in the continent's fintech industry—totaling at least $700 million—local alternatives like Verve and Afrigo are gaining traction. Both companies declined to comment on the situation.
The switch to local card schemes is also influenced by customer spending habits. With inflation reducing spending power, the ability to make global payments offered by international card schemes is relevant to only a small percentage of customers. "The majority of fintech customers use cards for POS transactions. They are not shopping on Amazon or online outside the country," an employee at a Nigerian card scheme told TechCabal.
Nigeria's worst cost of living crisis in three decades has further reduced customer spending and interchange fees, posing a challenge for fintechs that rely on high transaction volumes to break even with cards. Under Governor Godwin Emefiele, the Central Bank introduced Afrigo, a local card scheme aimed at helping banks save costs. Fintechs, keen to stay in regulators' good graces following a six-week ban on onboarding new customers, see adopting Afrigo as beneficial.
The rise of online transfer payment methods has led Nigerian fintechs to develop products facilitating bank transfers. Stripe-owned Paystack recently launched two pay-by-transfer products, with bank transfers accounting for 58% of its transactions in Nigeria in 2023, up from 28% in 2022. These transfers offer better margins than card payments by eliminating the multiple processors involved in card transactions.
Card operations require significant scale to be profitable due to logistics, manufacturing, technology, regulatory costs, and fraud risk. While international card schemes have considered collecting fees in naira, years of FX restrictions and $20 limits for global payments have popularized virtual cards. For many customers, as long as the cards work at stores, restaurants, and POS stalls, the change is seen as negligible.
This analysis, based on reporting by Muktar Oladunmade for TechCabal, highlights the evolving landscape of card usage in Nigeria amidst changing economic conditions and consumer behaviors.
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