Resolving failed transactions in the digital banking sector

The financial sector, particularly the banking industry, has recently experienced significant changes, including remarkable technological disruptions in delivering financial services. Various FinTech companies have emerged, leveraging budding technologies to provide more efficient banking services. As a result, traditional banks have been compelled to adapt these technological innovations to their banking products and services. Consumers have benefitted immensely from this digital paradigm shift, experiencing greater convenience, efficiency, accessibility, and cost savings. However, these innovations also bring numerous challenges that impact the sector. Regulators face the challenge of understanding and regulating financial products and entities that do not fit into conventional categories, while consumers encounter difficulties in resolving disputes arising from failed transactions.
This article explores the challenges faced in carrying out seamless transactions, the existing dispute resolution mechanisms in the digital banking industry, and finally proffers solutions to resolving these issues.

Dispute resolution mechanisms for failed transactions in digital banking
The digital banking space faces a significant challenge in carrying out seamless transactions without glitches. Over the past few years, the sector has experienced numerous unresolved failed electronic payment transactions, resulting in substantial financial losses. In the first quarter of 2023, failed payment transactions led to a 4.83% decrease in the value of cashless transactions; from N39.58 trillion recorded at the beginning of the first quarter to N37.67 trillion

According to the Guardian newspaper, approximately N 49.4 Trillion Naira worth of failed electronic transactions still await resolution

These transaction failures commonly occur through unstructured supplementary service data (USSD), failed Automated Teller Machine (ATM) or card transactions, and terminal transactions associated with intermittent slow service and a sluggish internet banking system, among other issues. Despite the Central Bank of Nigeria’s (CBN’s) existing provisions for resolving ATM dispense errors and refund complaints within 3-5 working days, as well as manual reversals not exceeding 24 hours, it appears there is currently no effective dispute resolution mechanism in place to promptly resolve customer complaints.

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The Federal Competition and Consumer Protection Council (FCCPC), which was established to protect consumer interests, would typically intervene to address these consumer issues. However, a law passed by the National Assembly has suspended other regulatory agencies from interfering in the protection of banking and financial services consumers. Specifically, Section 65(1) of the Banks and Other Financial Institutions Act, excludes the operations of the Federal Competition and Consumer Protection Act (FCCPA) in matters affecting the banking sector, particularly concerning acts, financial products, or financial services provided by banks or other financial institutions. One would expect that with the suspension of the FCCPA’s provisions, the CBN would provide adequate and speedy mechanisms to assist aggrieved consumers. However, this has not been the case.

Although the CBN has a Consumer Protection Department, it has not been able to deliver immediate resolution for disputes arising from failed card and terminal transactions. In such circumstances, one might expect that the court, typically seen as the hope of the common man, would be the appropriate avenue to seek redress in consumer protection matters. However, in practice, approaching the courts for transactions below a certain amount of money would be a considerable waste of time and resources, without benefitting the party seeking redress. Furthermore, the courts need to possess a deep understanding and extensive knowledge of the financial technology sector in order to deliver sound judgments in this regard.

Despite CBN’s existing provisions for resolving ATM dispense errors and refund complaints within 3-5 working days, as well as manual reversals not exceeding 24 hours, it appears there is currently no effective dispute resolution mechanism in place to promptly resolve customer complaints

To address the constant issues of failed transactions and protect consumers, several measures can be taken.
Firstly, the CBN, as part of its reforms, should establish a designated ombudsman with expertise in the financial technology sector. This ombudsman would be responsible for promptly resolving financial issues arising from the use of technology. By creating this structure, the resolution process can keep up with the fast-paced nature of technology.

Secondly, the exclusion of the FCCPA from protecting consumers of financial products seems misguided, especially considering the CBN’s current capacity to fulfil that role. It is proposed that collaboration between the FCCPC, CBN and other financial service regulators such as the NCC, and NITDA should be established. This collaboration would promote the growth of the entire financial sector while adequately safeguarding consumer interests.

Another effective approach to resolving failed card transactions is the auto-reversal initiative introduced by the NIBSS, a central switch and payment terminal service aggregator. Stakeholders, including traditional banks and fintech payment operators, should consider adopting this initiative. Under this system, the issuer and acquirer banks, as well as other financial payment institutions integrated with the NIBSS platform, would be required to approve the auto-reversal of any failed transaction until the final settlement is completed. To ensure full adoption, the NIBSS has developed a dedicated portal on blockchain technology, accessible only to registered and integrated payment operators. This portal provides real-time access and information about the status of failed digital transactions; resolving the systemic problem of delayed transaction status updates.

The industry operators are expected to fully implement and adopt this initiative within the year. By doing so, the initiative will alleviate the concerns of consumers who are hesitant to embrace the cashless policy due to the high rate of failed digital transactions. With the assurance of immediate fund reversal for any failed transaction, more financially excluded adults will feel confident and be included in the digital financial space.
As digital banking becomes an integral part of the financial sector, regulators must keep pace or closely align with the industry. This will ensure they adequately address emerging issues, particularly in protecting consumer rights. The regulators’ responsiveness is crucial in adapting to the changes brought about by digital banking.

Ugochukwu Obi and Tare Olorogun are both Partners at Perchstone & Graeys and Beulah Lekwauwa is an Associate at the Firm.