In early January, PalmPay, a fintech with over 1.2 million agents and merchants, announced its adoption of blockchain technology to enhance transaction reliability.
PalmPay, one of the beneficiaries of traditional banks’ struggle to transition seamlessly to digital banking, stated, “By leveraging Zone’s blockchain-powered infrastructure, we’re reinforcing the reliability and speed of our transaction success rate of 99.5 percent, allowing us to better serve our customers and set a new standard in digital finance.”
The fintech is not alone in this migration. Several leading financial institutions, including First Bank, United Bank for Africa, and Zenith Bank, have adopted blockchain networks. Most are on Zone’s Blockchain network, which recently partnered with the Nigeria Inter-Bank Settlement System (NIBSS) to improve interoperability across the POS payment value chain.
Why Banks are Migrating
Banks are increasingly adopting blockchain to address surging digital payment demands and infrastructure failures. In 2024, digital payment volumes surpassed N1 quadrillion, according to NIBSS. Yet, this growth has been accompanied by frequent downtimes.
The World Bank attributed Nigeria’s inability to transition fully to a cashless economy in 2023 to inadequate digital and financial infrastructure, exacerbating transaction challenges. For instance, transaction volumes surged by 41.29 percent month-on-month in February 2023 but transfer values declined by 4.83 percent, creating inconsistencies that frustrated users and drove them toward mobile money operators like PalmPay and OPay.
Since 2020, these fintechs have recorded a 2,507.94 percent transaction growth, as users seek faster, more reliable alternatives. “They have made payment methods easier, faster, and better, and people now rely on them for everyday things,” noted Adedeji Olowe, founder of Lendsqr.
Bank insiders have pointed to NIBSS as a pain point. “The infrastructure (NIBSS) is not robust enough to carry out the volume of transactions we intend to do,” said a banking executive.
Read also: Fintechs eat banks’ N80trn transfers lunch
The History and Role of NIBSS
The NIBSS Plc was established in April 1993 under the mandate of the Bankers’ Committee to facilitate interbank transfers. It is owned by all licensed banks and discount houses including the Central Bank of Nigeria (CBN) and commenced operations in June 1994.
It launched the NIBSS Electronic Fund Transfer (NEFT) in 2004 to automate settlements. In 2006, the CBN appointed NIBSS as the National Central Switch with a mandate to connect all CBN-licensed banks, switches, and mobile money operators. By 2011, it launched the NIBSS Instant Payments (NIP) to enable real-time bank transfers.
That year, the CBN directed all banks to adopt a standardised 10-digit account number format known as Nigeria Uniform Bank Account Number (NUBAN) to make the validation and routing of electronic payments easy. Since 2011, NIP has served as the major bridge connecting transfers across different banks.
While NIP has grown into one of the world’s leading instant payment services, the boom in electronic transactions has strained the system and exposed it to fraud risks. Nigeria’s annual fraud count rose by 112 percent from 44,947 cases in 2019 to 95,620 in 2023, with the amount lost to fraud surging 496 percent from N2.9 billion to N17.67 billion within the same period.
To mitigate this risk and address the infrastructure bottlenecks, the Central Bank of Nigeria (CBN) recently issued a second Payment Terminal Service Aggregator (PTSA) license to Unified Payments, breaking NIBSS’s monopoly on transaction aggregation.
“By awarding a second PTSA license, the apex bank has proactively responded to industry operators who had expressed serious concerns about channelling all transactions through a single aggregator, the NIBBS, as has been the case for some years,” an analyst said.
However, Obinna Iwuno, president of Nigeria’s Blockchain Association (SiBAN), argued that the country should be looking to blockchain technology, which is emerging as a transformative force in banking and finance.
Blockchain in Financial Services
Blockchain is a decentralised digital ledger that provides secure, transparent, and efficient transactions without intermediaries. According to Enhancing Financial Innovation & Access (EFInA), it could increase Nigeria’s GDP by $29 billion by 2030.
Globally, 90 percent of banks and financial institutions in the United States and Europe are exploring its potential. For instance, JP Morgan has developed Quorum, a blockchain platform for secure and efficient financial transactions. Central banks in Singapore and Canada are testing blockchain for interbank payments, while the Swiss Financial Market Supervisory Authority (FINMA) has issued guidelines to support blockchain adoption in financial services. In South Africa, Absa participated in the SARB Project Khokha, developing a blockchain-powered cross-border payment solution.
In Nigeria, adoption is still in its infancy, though momentum is building. The government launched its National Blockchain Policy (NBP) in May 2023, acknowledging blockchain’s potential to transform financial services.
The policy states, “Blockchain Technology has the potential to transform financial services by providing secure, transparent, and efficient transactions without the need for intermediaries”
Currently, Zone is the sole provider of blockchain infrastructure for financial institutions in the country. Obi Emetarom, Zone’s chief executive officer, disclosed in 2023 that 16 banks were processing all their ATM transactions via Zone’s blockchain network.
“Blockchain adoption in the financial sector is driven by its ability to enhance security, reduce transaction costs, and enable real-time payments. Its transparent and immutable nature minimises fraud risks, while its decentralized architecture removes intermediaries, cutting operational expenses, assuring high availability and resilience,” explained Sunday Agbi, vice president of Operations at Zone.
Despite its advantages, blockchain adoption in Nigeria faces hurdles, including regulatory uncertainty, interoperability challenges with traditional banking systems, and institutional resistance. In a paper, Interswitch highlighted that poor infrastructure and lack of human resources and capital may hinder the success of blockchain technology in the country and on the continent.
This shortage of blockchain engineers and professionals will continue to slow adoption, although according to Buchi Okoro, CEO of Quidax, there has been an improvement in talent availability compared to 2018.
Iwuno of SiBAN stated that “there is a need to create clear regulations and standards for blockchain technology in banking to ensure compliance and foster innovation.”
To drive adoption, Agbi emphasised the importance of collaboration between banks, fintech startups, and regulators. “Regulatory sandboxes and industry forums can facilitate open discussions and real-world testing, ensuring compliance while fostering innovation,” he said.
In 2023, the CBN launched a regulatory sandbox to provide fintech startups and financial institutions with a controlled environment to test blockchain-based solutions. Agbi believes this initiative will accelerate adoption, ensuring blockchain-powered solutions are both compliant and scalable.
As Nigeria navigates digital transformation in the financial services industry, blockchain innovation is not just an option but a necessity for survival and growth, emphasised Iwuno of SiBAN.
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