This article was first published in The Paypers.

A walk across a street in Lagos, Nigeria, would give you a pretty interesting picture. You would likely come across more than two mom-and-pop shops with “POS here” written out in front. The busier the street, the more likely that interspersed between them are a few other kinds of businesses - a fruit seller, a cybercafe, or a suya stand, all accepting digital payments in one form or another.

As early as 3 years ago, it was rather different.

To understand how much transformation the financial experience for people and businesses has undergone in the last few years, it’s important to get a sense of the payments landscape in Nigeria.

Payment in Nigeria, like much of Africa, was previously primarily cash first. Even with the introduction of ATMs and more banking services, it was typical to find taking their cash out of the banks and spending it at the places they needed to.

The biggest change to this happened with the introduction of transfers and Nigeria’s cashless policy drive, enabled by the previous establishment of the Nigeria Interbank Settlement System (NIBSS). All of Nigeria’s commercial banks coown NIBSS, and it began operations in June 1994. 

NIBSS was set up to enable easy settlement of funds between banks. With the cashless policy drive, transfers were introduced, done primarily via bank applications. To drive inclusion, these transfers were extended to USSD, which meant that people using feature phones could make transfers too, and the smartphone-technology barrier was less of a problem.

Empowering financial inclusion in Nigeria through transfers and agency banking

With time, transfers became the most common means of digital payments, and still largely are till today. Apart from sheer familiarity with the method, there’s also a higher sense of security. When making transfers, customers have a sense of control and, with that, higher confidence in the security of their payments. 

Subsequent efforts by the Central Bank of Nigeria to further drive inclusion caused agency banking to become a core part of the financial experience in Nigeria. This enabled banking in areas where it wasn’t fiscally feasible or likely that traditional banks would set up branches or ATMs.

With agency banking, people become the banks. They receive cash and credit from customers' bank accounts, or disburse cash in exchange for digital payment. In this way, these cash-in-cash-out merchants performed primary banking functions like deposit and withdrawals, for people in areas that didn’t have banking services available to them.

These cash merchants, or agents, represent another significant leap in financial inclusion in Nigeria. For people and businesses who initially did not have bank accounts, they also made it possible for them to make payments digitally. This opened these areas and businesses to more intranational transactions that were not limited by location.

When people had to move across distances to sell or purchase products, having these agents to turn in their cash to, made it safer for them. They no longer had to carry large amounts of cash across unsafe places or at unsafe times.

In Nigeria, this business safety brought on by access to digital financial services forms one of the cornerstones of the importance of financial inclusion. With access to digital payment and collection services, business is safer, and there is better interconnection between merchants and customers from different places across the country.

Agency banking has come a long way

The earliest version of agency banking depended on terminals that could only accept card payments, and settlement was T-1. This meant that the agents received the money from their transactions the next day.

Apart from affecting the system's efficiency, it also was problematic as tracking transactions was difficult. Agents had to go to the bank in order to track the transactions, armed with only the receipts of the day. There was no digital record accessible to them. 

The consequence was that the agency banking sphere became a low-trust one. It was not uncommon to hear stories of agents being arrested or harassed in cases of suspected fraud, and tracking these transactions was hard. Getting refunds for failed transactions was also a complicated process, leading to losses for both the agents and customers.

In 2019, the service evolved with the introduction of better technology for point-of-sale terminals. Moniepoint, for example, introduced terminals that were reliable and allowed agents to receive their money instantly. Agents could track transactions, get settled instantly and request refunds on behalf of their customers. The service became smoother, setting the stage for the rapid growth of agency banking.

How POS terminals and business adoption transformed Nigeria's financial landscape

By 2022, digital payments through POS terminals had seen a shift from being primarily agency banking based, to business owners adopting it as well. As businesses saw that they could rely on these terminals, they began to seek ways to accept payments themselves, as opposed to through the middlemen agents. They got their own terminals.

Businesses of all sizes could now directly receive payments from their customers. With the business they regularly patronised now accepting digital payments, people also became more inclined to try a digital payment method for varying kinds of transactions.

Further innovation helped this transition. For a pro-transfer society, introducing features like “POS transfer” unlocked new kinds of versatility for these businesses. This feature allowed customers to make transfers directly to the terminals instead of using their cards. Where transfers to businesses were out of their control, they could now accept or reject them from their terminals.

In March 2023, Nigeria saw a decrease in the availability of cash in circulation. With this, it became more important than ever for businesses to be able to receive payments from their customers. This pressure caused a sharp increase in businesses using terminals, and people opting to pay digitally as cash was scarce.

While cash has seen a return into circulation, this policy change further helped accelerate the drive towards digital payments, especially for businesses.

Being part of this evolution since 2015, we’ve witnessed firsthand how much adapting technology, and innovation can change the experience for people every day. Financial technology forms the basis on which much more can be created and explored. If people can pay digitally, commerce can thrive, and the ripple effect improves the economy.

This shift towards digital payments is also important, and as it can open the door to a wider range of digital financial service solutions. These businesses, which are supported by access to payment - the mom-and-pop shops, the fruit seller and co - can benefit from access to credit, business management and full banking services.

Where traditional systems may not be primed to take on these risks, financial technology solutions are willing to do the work, and by helping these businesses grow, take the Nigerian economy to the next level.