2ND - 4TH JULY 2002  (Organised By Intermarc Consulting)


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Smartcard Expo 2002

Keynote Address by Dr. J.O. Sanusi, Governor of the Central Bank of Nigeria at the SmartCard Expo 2002   (Posted 4th Jul, 2002)

1. Introduction

Dr. Joseph Sanusi, Governor of Central Bank of NigeriaI feel greatly honoured to be invited as the special guest of honour at this International Conference and Exhibition on Smartcards, tagged “Smartcards Expo 2002.” I also thank you for the privilege of presenting this keynote address, in which I intend to highlight some of the views of the Central Bank of Nigeria on “electronic payments (e-payments)” in general and “smartcards” in particular. In view of the fact that virtually every sector of the Nigerian economy, led by the banking sub sector has, though late, embraced the application of information technology in its operations, and the slow but increasing adoption of smartcards as a means of payment in the country I, feel that the theme of this conference which is “Making Electronic-Payments Work’’ is not only apt, but also timely. I, therefore, wish to thank the Intermarc Consulting Limited, the organisers of the conference/exhibition, for providing this platform to discuss a topic that is of particular interest to the operators and regulators in the industry.

2. Electronic Payment Systems

An electronic payment system involves the provision of payment services and transfers through such devices as telephones, computers, the internet, ATMs, smartcards etc. As a paperless system of making payments, it offers an alternative to the traditional systems, which involve the use of cash and cheques. Electronic payment systems have the advantage of enabling transactions to be processed quickly, more cheaply and they also offer a much more convenient method of effecting settlement of transactions.

Electronic payments system could be broadly divided into two groups, namely wholesale payment system and retail payment. Wholesale payment system exists for non-consumer transactions i.e. transactions initiated among and between banks, Governments, and other financial service firms. Examples include the Society for Worldwide Interbank Financial Telecommunications (SWIFT), Nigerian Interbank Settlement Systems (NIBSS), and so on. However, retail payment system, which could be conducted either in an online or offline basis, encompasses those transactions involving consumers and the use of such payment mechanisms like Smartcards, ATMS, Electronic Money Transfer, E-banking etc. It is also fashionable to categorise e-payments into either card-based or network/ software- based and into closed, or open system.

3. The Nigerian Experience

In the past few years, Nigerian banks and generally the financial services industry, have embraced e-money, which has been made possible by advancements in information technology. Given the competitive financial environment of this twenty-first century, I do not think that Nigerian banks have any choice. Indeed, technological innovation presents banks with the opportunity to gain a competitive advantage over others, through cost-effective delivery systems.

Currently, the concept of e-money in Nigeria is card-based and involves, in the main, prepaid and re loadable cards. The CBN welcomes, and has indeed been very supportive of the introduction and usage of such e-money products in the country, as this could, in principle, improve efficiency in payment operations and help reduce the use of currency. The introduction of such e-payment products in Nigeria commenced in 1996 when the CBN granted Allstates Trust Bank approval to introduce a closed system electronic purse called ESCA. This was followed in February 1997, with the introduction of a similar product called “Paycard”, by Diamond Bank. The card based e-money products assumed an open platform with the authorisation in February 1998, of Smartcard Nigeria Plc, a company floated by a consortium of 19 banks to produce and manage cards called valucard and issued by the member banks. Another consortium of more than 20 banks under the auspices of Gemcard Nigeria Limited obtained CBN approval in November 1999 to introduce the “Smartpay” scheme. The number of participating banks (both active and inactive) in each of the two schemes had since risen to over 35 as at today.

The CBN has additionally granted approval to a number of banks to introduce international money transfer products, telephone banking and on-line banking via the Internet, though on a limited scale. We anticipate that very soon, many other banks will deploy automated teller machines [ATM], (which should further facilitate cards usage) and introduce electronic bill paying services.

4. Supervisory /Regulatory Issues

We appreciate the fact that Nigerian banks, and indeed the financial services industry, cannot afford to be indifferent to the wind of technological innovations blowing across the industry worldwide and the stiff competition it has engendered. However, the introduction of e-payment products in Nigeria, though still at its rudimentary stage, has brought a number of issues of regulatory/supervisory concern to the fore; salient among which are:
- Their impact on the conduct of monetary policy;
- The need for adequate transaction clearing and settlement arrangements;
- Technical security of the products;
- Possible susceptibility to money laundering and other financial crimes;
- The need for adequate consumer protection provisions including deposit insurance,
- The need to ensure financial integrity of the issuers; and,
- The potential risks to the issuers such as operational, reputational, security, legal and liquidity, etc.
Some of these issues, which are further discussed in detail below, should engage the attention of all stakeholders in the financial system and I hope that you will be able to address some of them during this conference.

4.1 Who should issue card based payment product?
Apart from the multi-purpose stored value cards, there exist in the market today, a number of single purpose stored value cards, such as the prepaid telephone cards being issued by telephone service providers. The view of the CBN, which is in consonance with international norm, is that, multi-purpose stored value cards should only be issued by licensed deposit taking institutions, and would be subject to CBN authorisation and supervision. However, single purpose value cards such as the pre-paid telephone cards should continue to be issued by NITEL, MTN, Econet and other telecommunications service providers.

4.2 Legal Framework
There is the need for a legal framework to support the development of not only e- money activities, but e- banking as a whole. Such a legal framework will address issues as the legal relationships between, as well as the rights and obligations of the participants in the systems – the issuers, cardholders, merchants and operators. It will also give definition to the scope of e- money and e- banking, including of course, e- payments in the country.

4.3 Security
Electronic payments schemes must maintain adequate and reliable safeguards in order to prevent, detect and contain possible threats to the security and integrity of the schemes, including the threat of counterfeits as well as unauthorised access or modification. In this regard, it is also necessary to employ secure and reliable telecommunication networks that can adequately protect the information systems attached to them. This can be achieved through data encryption, authentication, firewalls and other data access and security controls. Each cardholder should have a unique access identification number and in the same vein, appropriate key infrastructure and security management policy must be put in place.

4.4 Privacy
There is also the need to define privacy rules since transaction trails could pose other risks to consumers. The collection, re-use, and instantaneous transmission of information can, if not managed carefully, diminish personal privacy. It is important therefore, to assure personal privacy.

4.5 Need For Standardisation
Differentiation is good for the marketplace, but standardisation, which is the driving force behind the computer industry, holds the key to the long-term benefits of electronic payment systems. The goal is to allow products and services from different vendors to work together, since this will allow for competition and reduce uncertainty in the marketplace. While we do not seek to strictly legislate on standards as it may inhibit technological innovation, interoperability should be a goal of the marketplace. The CBN therefore views the recent attempt to introduce the concept of transaction switching by companies such as Cards Technology Ltd as a welcome development, as this should not only promote interoperability among the various smartcard schemes but wider usage of cards in the country.

4.6 Monetary Policy Concern
The issuance of e- money is likely to have significant implications for the conduct of monetary policy in the foreseeable future. In this regard, our supervisory interest is to ensure that price stability and the unit of account function of money are not jeopardised. It might be important for the conduct of monetary policy to examine the need for reserve requirements on unspent card balances to ensure that the objectives of that policy instrument are not compromised.

4.7 Possible Criminal Abuse
A major area of possible criminal abuse associated with e- payment schemes relate to money laundering. If such payment systems allow the anonymous transfers of large sums of money, they could increasingly become susceptible to financial criminal activities. The attraction is there for market forces to foster the development of those e- payment schemes whose features are quite attractive to money laundering purposes. Such features include anonymity of transactions, the difficulty in tracing individual transactions and/or the possibility of making customer-to-customer transactions that bye-pass the issuer or a clearing system and thereby desecrate transaction audit trail. An example of this is the reported practice by some cardholders and merchants of the existing card schemes in the country, whereby the merchants provide the cardholders with cash at a discount and deduct same from the balance on the recipient’s card as if such a recipient purchased goods or service from the merchant. This runs contrary to the intendment of the schemes, whereby cardholders could only offload their card balances at merchant locations through purchase of goods and services. It is however anticipated that with the increase in the number and use of ATMs in the country, this practice will fizzle out.

5. Concluding Remarks

The CBN acknowledges that the application of inventions facilitated by advancements in computing and telecommunications technology has opened new possibilities that extend far beyond the types of services that had traditionally defined banking, and indeed, the financial services industry. We believe that banks have much to contribute to the evolving world of e-banking including e-payments in the country, which services the customers and businesses want and are willing to pay for in e-payments areas and the development of new online banking products. The CBN will continue to support and encourage such innovative applications that are both value adding and profitable.

In concluding this keynote address, I would wish to assure you that as the new capabilities and technologies are incorporated into our financial services environment, the CBN, in the discharge of its very special responsibilities, will not compromise the safety and soundness of the payment and banking systems as it will continue to monitor applications and developments in the field of both
e-payments and e-banking in the country.

I thank you for your kind attention and wish you fruitful deliberations.

Speech Delivered by Dr. Joseph Sanusi, Governor of Nigeria's Central Bank on 2.7.02 at the SmartCard Expo 2002


A Brief Profile of Dr. Joseph Sanusi, who will be Presenting the Keynote Address

CHIEF (DR) JOSEPH OLADELE SANUSI is the Governor of Central bank of
Nigeria, the Apex bank responsible for the control and regulation of the banking industry in Nigeria.

In his role as Governor of CBN, he is charge with creating the necessary Policy environment to promote banking.

Now that banking is about convenience, speed and efficiency in service delivery and Nigeria Banks are now embracing e-banking models, the CBN is challenged to gear up and drive the whole process. The Governor is therefore in the forefront of establishing the framework and standards for the new banking environment.

Joseph Oladele Sanusi was previously the Managing Director of First Bank of
Nigeria 1992-1998) when he created strategy and funding for the automated banking process. His belief in Smartcard Technology was demonstrated when his bank invested as a majority share holder of Valucard Nigeria Plc. As a result of all these FBN Plc. is seen today as a leading technology bank in Nigeria.

He is expected to bring all of these to bear in his role as Governor of Central
bank. He is a regular speaker and commentator on the new economy.

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