The Director, Banking and Payment System Department, Central Bank of Nigeria, Mr. Dipo Fatokun, at a recent forum organised by the Finance Correspondents Association of Nigeria spoke about issues in the electronic payment space such as the emergence of the block chain innovation, the role of the Bank Verification Number in tackling electronic fraud, among others. Obinna Chima presents the excerpts:
What are the inherent risks and benefits in block chains and Bitcoin technologies?
Block chain is an emerging innovation which is gaining traction in the payment system, banking and so many areas. The most prominent innovation on top of block chain so far is bitcoin, which people see as an alternative form or alternative currency that we all use. And it is beginning to gain so much ground across the world. How will it affect payment? Obviously, some people are already using it to make payment. Largely, the technology offers efficiency which means it is going to reduce cost of transaction, as a result of that you will see it that people are beginning to think that this will be a silver bullet for solving financial exclusion.
So we see those who are already thinking along that line. So we may see a situation where financial inclusion may be an advantage through block chain technology either using bitcoin or the central bank deciding to even have its own physical currency. As we know today we have other several currencies, digital currency as we call them that rival bitcoin. Up to a thousand of them or so, so when you think of that big stake out there, there is need for caution as usual because no one, there is no central bank or control to it.
I can build my own bank and do my payment as I like and nobody will know what I am doing. At the same time the risk is also there. We all know the issue of terrorism that we have, the issue of organised crime that can be excavated by such innovation without appropriate risk framework around.
However the advantages are there and there have been various reviews being done by even international banks, central banks around the world and of course CBN is not left behind. We are reviewing it and looking at how it can be of good use while also managing the risk that arises.
Some people see the emergence of financial technology (Fintechs) companies as a threat to the existence of banks in the e-payment space. How real is this threat?
To take it on a serious note Fintech has always been in the system. It is just that more prominence is been given to their roles and that is because most banks all over the world are now focusing on their core functions and leaving other functions to service providers some of which are now referred to as Financial Technology Providers. The need for collaboration between the Fintechs and the banks will always continue to be on the rise.
But the truth is none can displace the other. It is just that there will be more prominence for the Fintechs going forward. As I said in my presentation, in some jurisdictions Fintechs are being allowed or plans are on the way to allow Fintechs even to connect to the central bank which was the exclusive preserve of the banks.
But the question is even when such connections are made where will the money be? Because Fintechs are not licenced as financial institutions, they cannot take deposits. They can make payments out of bank accounts. They can only facilitate payment or make it easier but the banks will continue to play a very big role. When we talk of banking, most of us what we experience most times is payment.
We pay money and we receive money. Banks provide hundreds of services outside payment. They open letters of credit, they give you loan and you can only give loan if you take deposits. And there are other services they provide. For you to do that all these, you need to be a licenced financial institution. If you want to travel abroad you need a bank to get foreign services. In the payment space Fintechs will continue to be relevant and their relevance is going to increase.
But are they going to take out the banks? That is a dream that is not likely to come true. But a flip part to it which is also an advantage to the bank is that the prominent role the Fintechs will even make it possible for banks to provide services at a cheaper rate, as well as get to the nook and crannies where hitherto they would not be able to provide services. You know before a bank will need to create another branch, before it will provide services, you will need to work with the bank branch or even go to an ATM to have services from the bank. But that is changing. They are relevant. They will continue to play greater role in the payment system but they are not going to shove the banks aside.
There are concerns about risk of using USSD for e-payment transactions especially given the simplicity of the process. What is the CBN doing in this regard?
In fact, it is part of our regulatory requirement that any bank that is applying for a product licence of the use of USSD must also have special PIN. You find out that when some of the banks started to use USSD they only adopted a static Personal Identification Number (PIN) which is usually taken from the product. But we noticed that that is prone to fraud. That is because the last four digits that is in front of my card, anyone who wants to do a USSD fraud on my account may need to get the last four digit of my card.
Unfortunately, when you use an ATM and you get a receipt, have you ever noticed that the number that comes with your receipt is the last four digit of your card? So somebody does not even have to target my card. All you need do is monitoring me closely. If I get a receipt from an ATM, you get the number and with that can carry out unauthorised transactions from my account. So we said no, we cannot use static PIN irrespective of the source of the PIN it must be dynamic and that is one of the challenges or issues when it comes to the regulation of the bank. Because a bank that already set up a system for USSD using a static PIN and we now said no, stop using a static PIN, it must be dynamic. It means it needs to do a lot of changes.
On USSD, we did an investigation recently and discovered a particular fraudster. We worked with Nigeria Communications Commission (NCC) to identify him and we have his pictures and we have all his bank details. What he has been doing is to make transfer not into an account but to use that channel to recharge his phone.
And you know that there are some telcos that offer opportunity for one to sell airtime. So he has such a long list of recharge.
The risk in the use of USSD like any other payment channel is there, but the point is what we are doing to ensure that those risks are eliminated. It is the simplest method of financial inclusion there is no doubt because unlike an application on your smart phone that would need data before you can do any transaction, USSD can work where ever you can make or receive calls.
So if I go to my village and I want to pay someone who has a bank account I can use a USSD. Very soon we are going to issue a circular on the minimum regulatory requirement on the use of USSD. We have reached an advanced stage on that that we will be presenting to the board of Governors of the CBN soon.
The SIM swap process have become another loop hole exploited for electronic fraud. What are the regulators doing to checkmate this trend?
Some of the fraud we are still battling with is the issue of SIM swap. We have heard of instances where people would say for three days my phone did not work. And because many of us carry more than one phone, if one is not working, at least one will work. So, what they do is that they swap your phone. That is, they just walk up to a service provider and claim to be the owner of the line.
Most often, they have studied that number and they have collaborators, probably in the bank. And because the process for doing a change of SIM card is so loose, the telcom company would change the SIM card for the person and so he assumes the phone number. What does he do? He puts the SIM card in another phone and start using the USSD to make transfers out of the account into another account. So, we are working with the NCC to tighten the process of SIM card swap.
It may include biometrics and a unique number may be required. In Nigeria, we have consistently over the last three years reduced the value of electronic fraud. The game changer is the Bank Verification Number (BVN). It is not only helping us to identify who owns what, but going forward, just as it was announced by the Bankers’ Committee at the last meeting, the BVN would be used as an instrument to track fraudsters in the system. When electronic fraud happens, money is moved from one account to another account. That other account that money is moved to, the owner can be identified. And when such owners can be identified, they can be blacklisted or watch listed.
It means that fraudsters can be identified and if possible taken out of the system. So, the BVN is going to be a game changer in the respect. We are working on the final framework and when it is concluded, it would be issued to the industry.