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Cablegate: Don't Show Me the Money; Nigeria Going

This record is a partial extract of the original cable. The full text of the original cable is not available.



E.O. 12958: N/A

1. SUMMARY: As in many developing economies with high
inflation and a devalued currency, consumers in Nigeria
often must bring literally bags of money to the store
to make even routine purchases. Checks are used almost
exclusively for business-to-business transactions, and
credit cards are accepted almost nowhere. Recently, the
use of pre-paid debit cards (known here as smart cards)
has been on the rise, and marketers hope the trend will
continue. In fact, the U.S. Consulate General in Lagos
recently began accepting a smart card as the exclusive
payment method for nonimmigrant visa transactions, and
the British High Commission has followed suit. Two
brands of smart cards backed by bank consortia are
leading the market, each with its own unique market
niche. These novel businesses, along with others in
the finance industry that are considering ways to bring
revolving credit to the country, are banking on the
radical concept that a significant part of the Nigerian
economy may become cash-less in the coming years. END


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2. Nigeria remains almost exclusively a cash-based
economy. Checks are not used at the consumer level,
but rather are the province of business-to-business
transactions. Credit cards are used almost nowhere,
both because of fraud concerns and because revolving
credit is not widely offered by Nigerian banks.
Occasional ATM machines can be found, but debit cards
are not in use. Consumers in Nigeria must thus use
cash for almost all transactions, whether it be the
purchase of a bag of ground nuts from a street hawker,
the purchase of a family's groceries in a supermarket,
or the purchase of a used vehicle from a neighbor.
Adding to the inconvenience, Nigeria's highest
denomination bill is the 500 Naira note; just under
four dollars. Accordingly, Nigerians and expats alike
are accustomed to carrying small sacks of cash for any
single purchase ranging several hundred dollars or
more, for their weekend shopping, or for any in-country
travel. Payday for Nigerians also commonly involves
the transfer of small bags or bricks of cash.

3. A new and growing financial product is slowly
changing the way Nigerians approach transactions.
Smart cards were launched in Nigeria almost five years
ago and are becoming increasingly available and
accepted for use, particularly in urban areas. Smart
cards are reusable plastic cards containing an embedded
computer chip that records and manages a pre-loaded
balance of funds from which debits are deducted.
Industry sources report that smart card technology was
first widely utilized in France for secured access to
buildings. The use of a computer chip to store and
manage data is considered less vulnerable to
unauthorized manipulation or to information theft than
the magnetic strips most commonly found on credit and
debit cards and access passes in the United States.
And while forms of disposable smart cards are used in
Europe and elsewhere for a variety of consumer
transactions, Paul Lawal, the Managing Director and
Chief Executive of the Nigeria Inter-Bank Settlement
System (NIBSS), told Econoff that the use of
reloadable, chip-based smart cards for financial
transactions is unique to Nigeria.


4. Smart cards are generally offered and administered
by consortia of banks. They are designed to make
transactions easier and safer for consumers by
providing an alternative to regularly carrying and
producing large quantities of cash. Smart cards are
similar to debit cards used in the United States,
except the card is generally not associated with
deposits kept in an open account. Instead, a consumer
obtains a card at a bank and loads a sum of money onto
it. The card carries the issuing bank's logo, and
transactions are associated with that bank. When the
consumer makes a purchase at a participating vendor,
swiping the card and entering a personal identification
number (PIN), the vendor's card-reader debits the
balance on the card and stores the charge. The vendor
periodically takes the stored data from the reader to
the bank or other card issuer that the vendor
contracted with to receive payment from the charges.
The bank or issuer then settles all outstanding charges
across the consortium through the NIBSS. When the
consumer spends the balance loaded onto the card, he or
she simply reloads a new balance at the issuing bank.
Vendors are charged a fee per transaction, usually a
percentage of the transaction amount. For example, the
US Consulate General is charged 1.25 percent per
transaction for its use of smart cards for visa
transactions. But banks and other card issuers make
most of their profit from smart cards by using the
"float" generated, that is, by earning interest on or
investing the value of the deposits made by their
cardholders when loading the smart cards, before
charges are made and cleared.

5. Three companies offer smart cards in Nigeria, each
with a unique market niche. The current leading smart
card brand is ValuCard, which was first introduced
nearly five years ago and is accepted by a wide variety
of stores and restaurants throughout Nigeria. ValuCard
is backed by a consortium of approximately 40 banks,
including many of the largest and oldest in Nigeria.
ValuCard boasts that its consortium represents 90
percent of the country's banking system, and has over
3,000 vendors in 50 cities nationwide. Using software
developed by the Irish company CardBase Technology,
ValuCard offers perhaps the simplest but most limited
product available, in that the card is primarily a
reloadable payment method using a PIN, while other
cards offer a variety of payment services and options.
Further, the ValuCard customer can load his or her card
only at a branch of the bank from which the card was
issued, not from any ValuCard dealer. However,
ValuCard offered the first card on the market, is
backed by the largest banks in the country and employs
an extensive marketing campaign, making it the leading
brand in Nigeria. ValuCard is gradually expanding the
capabilities of its card, but remains focused on the
essential nature of its product. Paul Lawal of the
NIBSS estimates that ValuCard services 60 percent of
the smart card market.

6. SmartPay is the second leading brand of smart card
in Nigeria. The U.S. company Retriever Payment Systems
holds a 98 percent interest in SmartPay, which has been
on the market for about three years. SmartPay is
backed by a consortium of over 30 banks, but most are
medium and small banks with limited geographic focus.
Only a few banks participate in both SmartPay and
ValuCard. Where ValuCard centered its development on
consumer marketing and vendor distribution, SmartPay
focused its initial efforts on the software it uses for
transactions and offers a product of greater
versatility. In addition to a reloadable, PIN-based
payment card, SmartPay offers a PIN-less function that
allows consumers to give their card to others to use up
to a relatively low-value ceiling (about $40). For
example drivers may purchase fuel on behalf of their
employers without entering a PIN. SmartPay cards can
be reloaded at any bank in the consortia, and SmartPay
offers debit card, ATM and credit functions to some of
its customers. Even though the SmartPay product is more
versatile and multifunctional than ValuCard, it has
suffered from a lack of marketing and is only now
attempting to garner a larger percentage of the smart
card market through strategic partnerships such as
foreign diplomatic mission consular services.

7. The third player in the Nigerian smart card industry
is SecureTrust. SecureTrust was also founded some
three years ago by the former IT manager of ValuCard,
after his ideas for what he felt was superior
technology were ignored by the industry leader. He
focused his fledgling company's product development on
the technology of the smart card, using product design
and software developed by Visa and Proton Technology of
Belgium. SecureTrust remains a very small player; it
is backed by only two or three banks, and is not used
by many consumers or recognized by many vendors.


8. NIBSS estimates that the use of smart cards for
financial transactions has increased roughly 30 percent
in the last 18 months. However, data on the size of
the smart card market is conflicting. While the
Managing Director of SmartPay states that the current
market totals only 100,000 cards, ValuCard asserts that
by the end of 2002 it had issued 180,000 cards.
ValuCard also claims an impressive and steady increase
in the value of its transactions per year since 1999,
when it recorded transactions worth 300 million Naira
($2.4 million). ValuCard reports that consumers used
its card for transactions worth one billion Naira ($8
million) in 2000, six billion Naira ($47.6 million) in
2001, and over 16.6 billion Naira ($131.7 million) in

9. Still, according to NIBSS, 80 percent of consumer-
level transactions involve cash transfers, and 15
percent are paid by check, leaving smart card companies
vying for a very small slice of Nigeria's market
transactions. Nonetheless, NIBSS Chief Executive Lawal
notes a definite upward trend in the use of smart cards
amongst the educated population, which tends to have
more disposable income. Along with mobile phones and
imported clothes, Lawal observes that educated,
professional Nigerians are using smart cards as a
status symbol, and predicts the demand for cashless
transactions will continue to rise amongst this
important segment of consumers as they become
increasingly accustomed to the use of credit and debit
cards in the United States and Europe. Noting this
trend, Lawal told Econoff that financial institutions
in Nigeria are developing plans for revolving credit
accounts, and NIBSS is studying the telecommunications
infrastructur requirements and improvements needed in
the country to sustain debit card transactions.

10. The U.S. Consulate General Lagos began accepting
ValuCard as the exclusive method of payment for
nonimmigrant visa fees in December 2002, in addition to
its use for occasional warehouse disposal sales and
fees associated with the Educational Advising Center.
Similarly, the British High Commission in Abuja
launched a ValuCard payment system on March 4, 2003.
Both of these developments will cause a significant
increase in the issuance of smart cards, as each
country's diplomatic mission in Nigeria services tens
of thousands of applicants each year, and card issuers
are pitching other missions to follow suit. Smart card
issuers also hope that the acceptance of ValuCard by
foreign missions will translate into an increase in the
number of vendors accepting their cards, as consumers
across socio-economic strata become aware of the
product and demand the service from merchants.

11. COMMENT: There are limits to going cashless in
Nigeria. The unofficial economy -- the street vendors,
hawkers, and product and service providers who come to
their customers' homes and whose marketing is
exclusively word-of-mouth -- is a major part of the
Nigerian economic structure and social fabric. Until
smart card readers are made available to these
merchants and craftsmen, cash will remain the
overwhelmingly predominant method of payment in
Nigeria. Also, Econoff has heard complaints that smart
card readers are inoperable frequently enough that
consumers feel the need to carry cash anyway and simply
use their smart card where possible.

12. COMMENT CONTINUED: Nonetheless, if demand does
continue for this product, banks may develop the
infrastructure needed to support other products and
services such as revolving credit accounts and debit
transactions. To do so would require extensive build-
outs to Nigeria's weak telecommunications
infrastructure, but and the rise of GSM use has made
land-line repair and expansion a low priority. Before
credit and debit become widely used, Nigeria will
require further anti-fraud advances, both in prevention
and prosecution. Today, even where credit cards are
accepted, mostly in a few hotels in Abuja and Lagos,
most residents and visitors to Nigeria dislike using
them for fear of financial crime. If security
improves, increased electronic transfers of funds could
help reduce petty corruption and embezzlement because
less cash would change hands, and law enforcement could
better monitor and trace transactions.

13. COMMENT CONTINUED: In the meantime, smart card
companies may continue to see large increases in the
value of transactions. Even if the number of
transactions or cards issued remains relatively limited
in scope or grows flat, more people will use cards for
big-ticket items like vehicle purchases. Any
significant or prolonged currency depreciation should
make smart cards even more attractive to consumers.
Ultimately, like most business opportunities in
Nigeria, there is money to be made in the smart card
and related services industry, if companies accept the
challenges of weak infrastructure and vulnerable
security. END COMMENT.


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