How Micropayments can drive the future of the Nigerian economy

One important aspect of micropayments is the fact that its definition varies from person to person. Generally, micropayments are regarded as financial transactions involving very small sums of money. Globally, micropayments refer to transactions of less than 12 USD. According to techtarget.com, a micropayment is an e-commerce transaction involving a very small sum of money in exchange for something made available online, such as an application download, a service or Web-based content.

Micropayments are too small to be feasible for processing through the traditional credit card/debit card system. Amir Herzberg of IBM recounts “Micropayments are for anything that is too inexpensive to pay by credit card”.
The major challenge facing the feasible application of micropayments is the need to keep costs for processing individual transactions low which is impractical when transacting very small sums of money typical of the nature of the micropayment system. Several attempts have been made to make such systems financially feasible to the providers such as the bill to phone model that companies like zong and boku have employed. The bill to phone ensures that consumers are able to charge low value transactions to their mobile phone and are sent a transaction code by SMS to complete the transaction. However, the sharing formula that exists between the providers of the micropayment platform and the Mobile Network Operators (MNOs) is largely not in favour of the providers, this has been the key reason for the slow adoption globally.
Largely, micropayments have been used for online transactions in the social community space on websites like www.facebook.com where users can purchase virtual items in games like mobwars, premier football and Farmville to name a few. It’s foray into the print media for pay per view content has been very discouraging as users would simply navigate to another website where they can get the content for free.

Micropayments has had its share of attempts at standardization notable among these attempts is the micropayments per fee specification of the W3C (World Wide Web Consortium) which includes a Common Markup for Micropayment Pay-Per-Fee Links as well as a description of a wallet handler that serves all requests for the per-fee service. However since vendors implement disparate proprietary micropayment infrastructure this has prevented the adoption of W3C’s specification.
As an emerging area, it has undergone some metamorphosis which was clearly described by Robert Parhonyi of the University of Twente in the Netherlands in his paper “Second Generation micropayment systems : Lessons Learned”. He predicted that the market for low value products such as online music and videos and the role of micropayment systems for selling such products are expected to grow substantially. He classified micropayments into 2 generations in which the first generation appeared around 1994, with systems like Millicent, eCash and cybercoin which were unable to gain market share and disappeared slowly in the late 1990s. The 2nd generation appeared around 1999-2000 and are still operational. He believes most of the failure causes have been accounted for in the second generation and have a much better chance to be successful largely because of the way the Micropayment System Operators (MPSO’s) have implemented the technical and non-technical characteristics of micropayment systems such as the use of token or account based platforms as the medium of value exchange, Ease of use, Anonymity, scalability, Validation, security, interoperability, trust, coverage, privacy, pre-paid or post-paid and the range of multicurrency support. Some of the 2nd generation micropayment systems include minitix, Bitpass, Wallie, PaySafe Card, WebCent, MicroMoney and SoftPay.

In Nigeria, online payment has been wrought with several cases of fraud especially with the use of debit cards. Consumers are no longer comfortable with such medium of payment and often ask themselves if it is worth it to expose private information to consummate transaction on the web for low value transactions. Some people argue that billing for small portions of a product or service reduces the need for security. In this context, security is defined here to be the ratio of security cost to protected value of the transaction. The security challenges above beg for a new channel to consummate low value transactions that is radical and innovative enough to provide musicians a platform to sell their music, software developers their small applications, photographers their pictures and all other content providers a medium that is fast, convenient and easy to use without the restrictions of the traditional payment systems.

The revenue potential is huge as it covers both the banked and the unbanked populace. The majority of the revenue is expected to originate from the unbanked according to EFINA there are over 64 million Nigerian adults who have never been banked, and the private sector understands that the Nigerian microfinance industry estimated at NGN 900 million is profitable. The unbanked money in circulation is estimated to be NGN 1.2 Trillion as at May 2009, this figure is growing and would serve to strengthen the financial system if platforms such as micropayments are used as a tool to channel such money into the mainstream economy.

Industry wide impacts of Nigeria deploying EMV to fight fraud

As of 1st quarter 2008, more than 730 million EMV payment cards were in use worldwide, two-thirds of the world’s EMV cards and devices are in Europe with nearly 50% of cards and POS and more than two thirds of ATMs enabled.

In the UK after four years of EMV deployment card fraud loss rate declined 48% from 18 to 12 basis points from 2001 to 2008, while overall card spend nearly doubled, overall card fraud increased 48% from 2001 to 2008, at a global level, the Nilson report estimated card fraud of $5.5 Billion on $11.8 Trillion purchases in goods and services and cash advances in 2007. The true cost of fraud, however exceeds the actual monetary amount of losses, financial services companies incur damage to their reputations, higher overall operating costs for increased vigilance, reduced productivity and higher staff expenditures, and they also bear the cost of re-issuing cards after a fraud incident.

Fraud is a global issue, in its broadest sense, it is a deception carried out for personal gain although it has a more specific legal meaning, the exact details varying between jurisdictions. Fraud in manifested in many forms in the banking system some of which are attributable to bank malpractices, corrupt officials, negligence and disgruntled employees to mention a few. The Nigerian payment systems management bill of 2009 is a step in the right direction for combating the multifaceted nature of fraud in the payments system especially as regards the payment card value chain.

Acquirers and Issuers understand that losses emanating from card fraud affect card usage rates, authorization parameters, operational processes and staffing while also decreasing profit margins. Furthermore, these losses can endanger the most valuable asset acquirers and issuers have –their relationships with business partners and consumers. It follows clearly that the industry should pay close attention to new technology and processes that may prove to be effective in combating fraud. EMV an instance of the chip payment technology is an example of one such methods.

The adoption of EMV has been coupled with the Personal Identification Number (PIN) stored on the chip, the PIN replaces the card holder signature, significantly improving protecting against loss and theft. ATM skimming fraud losses have also decreased by up to 55% with the deployment of EMV compliant ATM machines. While EMV has helped reduce payment card fraud, e-commerce web based fraud is still a cause of concern, the payment industry will need to build on the progress with EMV to combat fraud via this channel; however VISA and master card have recorded some progress with the Dynamic Passcode Authentication and Chip Authentication Program respectively.

It is very difficult to prevent the data on a magnetic stripe from being copied and used for unauthorized transactions as the card security code is static and does not change for every transaction, chip cards provide a new security feature called Dynamic Data Authentication (DDA), DDA generates an encrypted value for every transaction, these encrypted tokens are very difficult to replicate and presents a better security model over static magnetic stripe security tokens.

Initial investment in EMV is future proofing the payment system for security in long term. Benefits to issuers in this case the banks include increased profit from fewer loses due to fraud, merchants will profit from fewer charge backs and consumers or card holders will profit from improved service delivery and security levels. It is important to note that EMV is not the proverbial heaven of smart card payment systems; stakeholders should understand that security measures are to be updated regularly to remain a step ahead of fraudsters. Another added advantage of the chip model is the fact that security can be incrementally increased over time which supports the need to update security mechanisms on an ongoing basis.

References
1. “Top 10 reasons US should consider EMV”; Smart Card Alliance Webinar, January 2010. –Randy Vandehoof, Deborah Baxley, Nick Holland, Simon Hurry, Dave Metcalfe.
2. “Fraud in the US Payments industry: Fraud mitigation and prevention measures in use and chip card technology impact on fraud”; Smart Card Alliance white paper, October 2009 CMPC-09004.
3. The Nilson Report, issue 915; November 2008.
4. The Nigerian Payments System Management Bill, 2009.

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