Nigeria’s recent cash shortages exposed the vulnerability of the country’s alternative payment systems and have brought renewed momentum towards a cashless economy, fueling a surge in digital payments.
The cash crunch caused significant hardship for Nigerian citizens, who were unable to access their savings. It also disproportionately affected small- and medium-sized enterprises (SMEs), which account for more than 90 percent of businesses and are responsible for 80 to 90 percent of all customer-to-business (C2B) payments in Nigeria. This, however, also opened the door for merchant acquirers looking to take advantage of these tailwinds and make headway in this challenging market.
According to McKinsey’s new analysis, Acquiring the advantage in a fast-evolving industry, the outlook for merchant acquiring in Nigeria is optimistic, with several trends working in its favor: digital penetration and usage in the country are on the rise; the fintech industry is evolving quickly to cater to the demands of a young and digitally-savvy population; and financial and government institutions are collaborating to create a conducive environment that fosters financial inclusion.
“It is important for digital payment companies to ensure that the move to digital payments that happens, as a result of the recent events, doesn’t go to waste,” says Mayowa Kuyoro a partner in McKinsey’s Nigeria Office, and leader of the firm’s Payments Practice in Africa. “Companies that act now to leverage technology and relationships to offer SMEs hungry for digitalization more reliable and cost-effective payment solutions could attain a position of strength as Nigeria accelerated toward cashless transactions.”
As of 2021, the electronic payments sector generated an estimated $2.1 billion in revenue and $1.1 trillion in value, approximately 60 percent of which is accounted for by domestic payments, which amount to $1.2 billion in revenue. More significant growth in this space is expected over the next few years, with domestic payments revenue projected to grow by around 34 percent per annum by 2026, equating to $5 billion.
The domestic C2B market accounted for around $450 million in revenue from 2021, with merchant acquiring being the most attractive part of this value chain. Of this, C2B merchant payments account for $320 million in revenues. Combined, the acquiring bank, the terminal provider, and the Payment Terminal Service Provider (PTSP) capture around 65 percent of revenues, and total merchant acquiring revenue is estimated at around $200 million. By 2026, this revenue is expected to grow to around $900 million, driven primarily by card transactions.
McKinsey has done significant work with both merchants and merchant acquirers to uncover what may be needed to accelerate the transition to digital. While the culture of cash may be eroding, obstacles still remain on the path to digitalization. For instance, POS (point of sale) penetration in Nigeria is significantly below that of comparable African economies. And since alternative payment acceptance is still in its early days and merchant literacy levels are low, onboarding new merchants can be challenging and costly, requiring multiple touchpoints.
Traditionally, merchant acquiring in Nigeria has been led by banks that issued card-based POS to large corporates and was profitable only to those with scale. But the market is ripe for expansion. Traditional channels catered to only one form of payments—cards—but at just 0.6 per 100 adults, Nigeria has one of the lowest card penetrations in the world. These channels have also largely excluded SMEs.
While SMEs may be harder to acquire, they represent a significant opportunity for merchant acquirers in terms of both volume and value of transactions. Digital innovators that can offer SMEs hungry for digitization more reliable and cost-effective payment solutions are gaining an advantage and changing the face of merchant acquiring.
As digital penetration grows, electronic payment methods are also growing. Nigeria has more than 170 million mobile phones and internet penetration has been increasing. The number of POS terminals in the country grew significantly. Local fintechs are innovating rapidly, forging partnerships, and attracting international investment to enable Nigerian SMEs to participate in the digital global economy. And the hastened adoption of cashless payments and merchant acquiring, generated strong organic demand for digital payment solutions by merchants of varying sizes and scale.
“By leveraging technology and collaborating with stakeholders across the payment ecosystem, merchant acquiring companies could make significant inroads into this potentially valuable segment. At the same time, by providing SMEs with better payment services, merchant acquirers also have a key role play in driving financial inclusion and supporting the Nigerian economy. Most importantly, they can help to ensure that a lack of cash need never again be the reason that Nigerians experience hardship,” says Tola Sunmonu-Balogun, an associate partner in McKinsey’s Lagos office.
