Alan Greenspan, the US Federal Reserve Bank Chairman from 1987 to 2006, wrote in his book, ‘The Age of Turbulence,’ about his greatest worry when September 11 happened in the US that ‘If you wanted to cripple the U.S. economy, you’d take out the payment systems. Banks would be forced to fall back on inefficient physical transfers of money. Business would resort to barter and IOUs; the level of economic activity across the country could drop like a rock.’
This gives an indication of how important an efficient national payments system is to the development and continuous growth of the national economy.
In fact, in payments system studies, it is widely acknowledged that a 10 per cent increase in the efficiency of the national Payments System will grow the GDP by at least one per cent, ceteris paribus.
This realisation has made every country to focus on the enhancement of the national payments system in recent years. For example, the UK Payments Council had responsibility for setting strategy for UK payment mechanisms from 2007 until 2015.
The South Africa National Payments System Act of 1998 was put in place to provide for the management, administration, operation, regulation and supervision of payment, clearing and settlement systems in the Republic of South Africa; and to provide for connected matters. Here in Nigeria, the Central Bank launched the Payments System Vision 2020 in 2008 and this major project is responsible for the huge modernization the national payments system has witnessed since 2008.
Cash, cheque, electronic fund transfers (direct credit and direct debit), cards and bill payments are all components of the national payments system which have all witnessed commendable improvements in Nigeria such that the Nigeria payments system is in an enviable state at the moment compared with the payments system of other advanced economies. However postpaid billing has given way to prepaid billing in Nigeria and this is doing a great damage to the national economy.
Problems with Prepaid Bills
Prepaid billing requires that the consumer makes payment ahead of the consumption of a service e.g. in the case of prepaid phone or prepaid electricity billing, the consumer has to lock cash down in form of service credits, and then draw down on the credit gradually as the service is consumed and the service is terminated as soon as the credit is used up.
On the other hand, postpaid billing permits the consumer to consume the service within a contracted period, typically a month, at the end of which the service provider will present a bill to the consumer who is at liberty to either pay in full or in part e.g. postpaid phones and postpaid electricity meters.
The prepaid billing system keeps float in the hand of service providers. In economics, float in this context is duplicate money present in the system between the time the consumer makes a prepayment and when he actually consumes the goods/services he paid for. Cummulative float amount in an economy like Nigeria’s, where prepayment is prevalent, is considerably large and the float typically lasts for days, weeks and months.
Float does so much damage to the national economy. It denies the consumer the use of his money for other needs thereby reducing aggregate purchases, aggregate sales and the velocity of money with attendant adverse effect on economic growth.
Besides, float is hardly regulated and is therefore subject to abuse. The Central Bank of Nigeria, in an effort to reduce the damaging effect of float, embarked on an aggressive reduction of float created by the cheque clearing system such that a typical cheque that would take 21 working days to clear in 2001 now takes just two working days.
Unfortunately, the float problem is rearing its head again with the prevalence of prepaid bills in Nigeria.
Postpaid billing on the other hand is akin to granting of consumer credit i.e. consume now and pay later. Postpaid billing benefits the economy in no small way.
It grows consumption and purchases by consumers thereby enhancing citizens quality of life, and sales and revenue for service providers with a resultant growth in profit, employment, business expansion, and indeed government tax income.
Postpaid billing also facilitates a cost-effective revenue collection and an efficient liquidity management for service providers. In fact, discerning service providers usually incentivize postpaid consumers with discounts to grow the postpaid business and derive the juicy benefits.
Postpaid Billing Must Be Promoted
The volume of Direct Debit instructions processed in the banking system is often used as a measure of postpaid bills while prepaid billing is generally characterized by Direct Credits.
The NIBSS processed up to one billion direct credit instructions but less than one million direct debit instructions in 2018, while the BACS 2017 Highlights report showed that six billion direct credit and 155 million direct debits processed in the UK.
According to Althos, ‘Prepaid billing allows the service provider to obtain revenue for services without the risk of bad debt and it eliminates the need and cost for billing operations. Prepaid service is often associated with customers that may be credit challenged or who want more control over bills.’ It follows then that the huge gap between prepaid and postpaid bills in Nigeria could be easily attributed to the low level of trust that service providers generally have for consumers over the years i.e. the fear that consumers may accumulate postpaid bills and refuse to pay up.
This fear that is aggravated by the lack of a reliable citizens/consumers identification system – a problem which has bedeviled the Nigeria business climate for years – which makes it near impossible to penalize consumers for unpaid bills.
The good news is that this citizens identity problem, which has been a post-payment disincentive over the years, is largely solved in Nigeria today, with the maturity of identity schemes such as the Bank Verification Number (BVN) and the National Identity Number(NIN) which have captured the data of about 50 million adult Nigerians into a reliable identity database with efficient identity validation and verification services.
So stakeholders now have all it takes to grow postpaid services in Nigeria as the consumer identity and identity theft excuses are no longer tenable. It is imperative to grow post-payments to further drive the growth of the national economy.
The Central Bank of Nigeria released the Regulation for Direct Debit Scheme in Nigeria(revised) in February 2018 to provide the right operating environment for the growth of direct debits and post-payments in modern day Nigeria. However other stakeholders are required to focus on the following action points to take full advantage of the new regulation and the opportunities it presents:
- Service providers (that is providers of services such as telcos, paytv, discos, mortgage, microcredits) need to encourage and promote post-payments among their customers with necessary incentives;
- Financial institutions need to provide necessary support and guidance for their retail customers and service providers alike to ensure the efficient processing of direct debit instructions which are required to effect the payment of postpaid bills in a cost-effective manner;
- Licenced Payment Service Providers need to provide seamless, efficient and user friendly technology systems for paperless direct debit mandate creation, management, and regular execution to the delight of service consumers and service providers;
- Citizens as service consumers must be prepared to imbibe post-payment habits so as to derive its immense benefits i.e. enhanced quality of live occasioned by the consume now pay later feature, effortless payment of postpaid bills with direct debits, and the huge contribution this has on the growth of the national economy as it greatly reduces float in the system.
Some have argued that prepaid billing has become so prevalent and entrenched in Nigeria as a result of citizens identity problem which has bedeviled Nigeria in past years, to the extent that postpaid billing has no prospect in the country. Payments system stakeholders must rise up and change this narrative because the complexity and sophistication of modern day national economies is such that the year-on-year increase in prepaid bills volume will continue to stagnate the national economy while the economy thrives as desired as postpaid bills volume grows.
Ajao is the Acting Managing Director/CEO,
Nigeria Inter-Bank Settlement System (NIBSS) Plc