Payment: Electronic Commerce and Cashless Economy Essay Example

handle. He believes that the government should have been better prepared before introducing the system as innocent people have suffered as a result. The payments system is crucial for any economy as it facilitates the flow of financial resources between different sectors.The Central Bank of Nigeria (CAB, 2011) has played a significant role in monetary policy, financial stability, and overall economic development. In collaboration with the Bankers Committee, they have worked towards modernizing the payments system over the past decade. This began with automating the queue learning system and developing electronic payment channels to replace manual bank processing and settlement computations.

The implementation of magnetic ink character recognition (MICR) technology revolutionized the queue clearing system by introducing new procedures. Through MICRO Reader Sorters, necessary information on cheques is captured and incorporated into clearing files that are electronically transmitted to the clearing house. A centralized automated clearing process was established in the Lagos clearing zone as a result.

During the net settlement session, which involves 140 participating banks, calculations are automatically done and transmitted to the Central Bank for final settlement. The changes led to a reduction in the clearing cycle from 5 days to 3 days, allowing all local and up-country cheques to be cleared within this timeframe (CAB, 2011).

In addition to these advancements, Nigeria's cashless system of payment has been continuously evolving in line with global payment evolution. Cashless systems and instruments play a crucial role in enhancing efficiency and stability within the financial system (CAB, 2011).The effectiveness and security of cashless payment systems are significantly impacted by technological advancements and changes in business models. A cashless system refers to transactions conducted without coins or banknotes,

using credit cards or electronic fund transfers. The introduction of new technologies and non-bank providers supports the goal of financial inclusion. Nigeria is actively transitioning from a cash-based economy to a cashless one.

To become one of the top world economies by 2020, analysts suggest fully embracing electronic payment systems is necessary. To address reliance on cash in banking and enhance electronic payments, the Central Bank of Nigeria (CAB) implemented reform policies. As of August 2011, currency in circulation was IN .42 trillion, with IN .025 trillion outside bank vaults as of February (compared to IN .33 trillion and IN .082 trillion in January 2011 and December 2010 respectively). However, despite improvements intended for banking transactions, customer complaints about time wasted during power failures have arisen due to the adoption of electronic banking.This paper aims to analyze the issues related to electronic payment in a cashless economy in Nigeria and offer recommendations. The review of related literature includes empirical research conducted by various authors on the introduction of electronic banking and its impact on the economy. Taylor and Todd (1995) and Gaffe and Straus (1997) found that gender plays a role in technology adoption, with men and women having different rates of computer technology acceptance. Putrefy (2002) conducted a descriptive survey to determine information processing differences between genders, revealing varying rates of technology acceptance. Gained and Blood (2009) examined the adoption and influence of e-commerce in Kenya using time series data from 90% of retail banks, noting significant changes in the importance given to specific e-banking drivers between 2005 and 2009. Layton and Gabion (2009) used diffusion of innovation theory to study ATM card usage in

Nigeria, finding positive correlations between factors like Relative Advantage, Complexity, Absorbability, Compatibility, Tractability, and attitudes towards ATM card usage.In a study conducted by Lorgnettes (2010), the impact of electronic banking on the Nigerian banking system was examined using cluster sampling. The results showed that an effective electronic banking system can improve customer relationships and satisfaction.

James (2012) utilized the Statistical Package for Social Sciences (SOPS) to investigate the acceptance of e-banking in Nigeria. The findings revealed that various factors including age, educational background, income, perceived benefits, perceived ease of use, perceived risk, and perceived enjoyment significantly influenced the acceptance of e-banking in Nigeria.

Morrow and Tibia (2012) conducted a qualitative survey among bankers in Nigeria to explore their perceptions of electronic banking. The results indicated that bankers view electronic banking as a way to minimize inconvenience, reduce transaction costs, change customers' queuing patterns, and save customers' time.

Alkaloid (2012) employed theories to examine cashless banking in Nigeria and its implications on the economy. The researcher found that cashless banking has the potential to boost the economy in the long run.

Chatham and Giggly (1987) used the technology acceptance theory to analyze factors influencing retailing technologies' acceptance among elderly and non-elderly consumers in developed countries.The text discusses multiple studies examining the adoption of technology in different banking sectors. One study conducted by Kigali (2008) focuses on consumer acceptance theory and investigates how customers perceive security indicators on online banking sites in Benign, Nigeria. It concludes that these indicators are ineffective at protecting users from fraudulent sites. Another study by Hogwash, Collisions, and Gabon (2008) utilizes diffusion innovation theory to explore consumer payment choices between paper, plastics, or electronic methods. The

findings indicate that income and education positively influence the adoption of electronic banking across various technologies. However, the impact of other demographic characteristics on adoption remains uncertain. In a similar vein, Khartoum, Mantilla, and Pent (2002) employ consumer acceptance theory to assess the acceptance of online banking.Research has shown that the attitude towards and usage of online banking is greatly influenced by prior computer experience, technological experience, personal banking experience, and reference group influence (Source: Their research). In contrast, Arithmeticians and Speech (2004) have identified key factors that affect the adoption of e-banking based on web benefits (such as information quality, accessibility, sharing, and transaction benefits) as well as web barriers (such as organization barriers, trust issues, and legal support) (Source: Arithmeticians and Speech). These studies collectively provide insights into the factors influencing technology adoption in the banking industry.

According to Echo's survey conducted in 2006 in Nigeria regarding internet banking regulation and associated problems/challenges, it was found that customers were slowly adopting internet banking due to concerns about cyber fraud. This involves fraudsters using genuine or deceptive banking websites to trick users into providing sensitive information and gaining access to their funds (Source: Echo).

Using the Technology Acceptance Model, Pickering et al. (2004) investigated consumer acceptance of online banking. They discovered that factors such as perceived usefulness and ease of use significantly influenced e-banking adoption. Other factors they identified were perceived enjoyment, availability of information on online banking, security measures implemented by banks for customer protection/privacy concerns,and the quality of internet connection available to users (Source: Pickering et al.).

Laser, Manilas, and Laser (2005) conducted a qualitative survey to investigate the factors influencing the use of

e-banking in European countries. They found that consumer innovativeness and personal characteristics were the main determinants of online banking adoption. Security concerns were identified as the top factor limiting customer acceptance of e-banking services.

Based on the empirical literature, this study's theoretical framework consists of the Technology Acceptance Model (TAM) and the Diffusion of Innovation (DO') Theory. The TAM is an information systems theory that explains how users accept and use technology, considering factors such as perceived usefulness and perceived ease-of-use. Developed by Fred Davis in 1989, it has also been applied by Pickering et al. (2004). On the other hand, the Diffusion of Innovations theory was developed by Gabriel Tarde in 1890 and popularized by Everett Rogers in 1962. It explains how new ideas and technology spread through cultures, defining diffusion as the process by which an innovation is communicated over time among members of a social system. Researchers like Hogwash et al.(2008) have utilized this theory.

Both theories propose that the sooner people in Nigeria embrace a cashless economy, the more it will enhance business activities and stimulate economic growth (CAB, 2011). The concept of a cashless economy has gained popularity worldwide due to the widespread use of the internet, which has greatly impacted banking practices and led to the rise of e-banking services (Dames, 2012). However, developing countries like Nigeria have been slower in adopting these services. In response, the Central Bank of Nigeria introduced a "cashless" policy in 2011. This policy sets limits on cash deposits and withdrawals while urging the country to embrace electronic payment methods. To demonstrate its commitment to this policy, the CAB has implemented it in cities such

as Lagos, Baja, and Port Harcourt (CAB, 2011). There is debate among Nigerians regarding its advantages and disadvantages; however, both the CAB and Governor of the Central Bank of Nigeria support this shift towards electronic payment methods as a global trend. They emphasize that successful implementation would save significant resources by eliminating physical cash transportation across the country (CAB, 2011).The resources could be directed towards other national needs, as the use of cash in Nigeria is often associated with corruption (Sinus, 2011). To demonstrate their commitment to the policy, CAB has licensed six Payment Terminal Service Providers (Potts) to maintain and support Point-of-Sale (POS) terminals. This action shows the determination of the central bank to make this policy effective. The implementation began in Lagos in early 2012, focusing on the downstream sector. CAB assured Lagos residents that there would be no need for separate POS terminals for different card schemes; all terminals would accept payments from any type of card, including Verve, Genesis, Master Card, Visa, etc (CAB, 2012).

For this policy's success, increased adoption of alternative payment systems like e-banking is crucial. E-banking refers to banking services provided through the internet and includes mobile banking (M-banking), video banking, fund transfers,e-payments,and ATM cards(Daniel ,1999). Among all e-banking services offered by banks in Nigeria,the most popular one is ATM. However,newer e-banking services are being developed and introduced due to technological advancements.All deposit money banks in Nigeria currently provide e-banking services.The concept of electronic banking and a cashless economy has been widely discussed in literature.Wicker's (1935) and Bannocks and Trainee (2004) emphasize the significance of monetary policy in regards to a pure credit economy. 144 studies have explored

the relationship between investor demand, measured by movements in demand deposits, and the real sector within a cashless economy. Berg, Hahn, and Strum (2006) argue that money does not play a significant role in determining price movements or inflation. They suggest that an economy can grow without cash as changes in the money base do not affect the price level, contradicting claims made by quantity theorists.

Numerous authors have examined the implications of transitioning to a cashless economy and electronic banking. These studies examine various aspects including transactions, regulations, costs to banking institutions and the general public (Godchild and Krueger, 2000; Palely, 2001; Rogers, 2004). However, these studies primarily focus on more advanced countries with higher living standards and technological advancements. The introduction of sophisticated forms of currency has also resulted in an increase in financial crimes (Wood, 2006; National Drug intelligence center, 2008; financial action task force ,2010).

In less developed countries like Nigeria, there is limited literature on e-banking and cashless systems of banking. This may be due to the prevalence of informal sectors and a poor banking culture within these economies.Hence, it is crucial to examine the challenges and possibilities of electronic payment in Nigeria's cashless economy. Currently, there is no specific legislation devoted to payment systems in Nigeria. The primary regulatory body responsible for overseeing the payments system is the CAB Act, specifically Section 41 which mandates the CAB to facilitate check clearing and credit instrument processing for Nigerian banks. This involves establishing clearing houses in necessary locations as determined by the Bank. Moreover, Section 17 grants exclusive authority to the Bank for issuing currency across Nigeria. The Nigeria Deposit Insurance Corporation (NDIS)

also contributes to the payment system by complementing the supervisory role of the CAB through deposit liability insurance aimed at safeguarding depositors' interests and fostering public trust. Furthermore, the Nigerian Stock Exchange participates in payment and settlement activities governed by comprehensive laws and regulations established by the CAB. Within the Nigerian payments system landscape are banks, discount houses, Nigeria Inter-Bank Settlement System (NIBS), Nigeria Stock Exchange card, and 145 switching companies. To ensure efficiency and efficacy of this payments system, oversight responsibilities fall upon both the CAB and Nigerian Deposit Insurance Corporation (NDIS).According to CAB (2012), Nigeria has a total of over 1000 registered institutions offering payments/financial services, including consolidated deposit money banks, discount houses, micro finance banks, bureau-De-change, finance companies, primary mortgage institutions and development finance institutions. However, the current cashless system in Nigeria is not considered feasible due to the large number of participants in the lowest strata of the economy who have limited trading capital. Requiring them to go cashless would be costly for the banking industry and burden the overall economy. Transitioning to a cashless economy is challenging because many people have not yet developed the habit of using banking services. Despite having around 130 million adults eligible for banking, less than 50 million individuals in Nigeria have bank accounts (Nozzle, 2012). Furthermore, issues like ATM-related fraud, excessive charges and unfavorable policies are driving customers away from banks. With so many people lacking access to banking services and an aversion towards ATMs among Nigerians, achieving a cashless economy seems impossible at present.The implementation of a cashless payment system in Nigeria is hindered by various challenges. These difficulties include network reliability, fraud,

security concerns, charges based on distance and amount transferred, system stability affected by the banking crisis, literacy issues among the population, and concerns about the network operator provider and coverage in rural areas for money transfer.Insufficient infrastructural development, particularly in terms of energy (power), poses significant constraints to the operations of e-payment machines. Additionally, Nigeria has experienced social and security problems since 2011, which may jeopardize the success of the e-payment program in the country. Insecurity within banks and other financial institutions can also contribute to these concerns.

Despite these challenges, a cashless economy is expected to benefit various stakeholders in Nigeria. Consumers will experience increased convenience, more service options, reduced risk of cash-related crimes, cheaper access to banking services, and access to credit. Corporations will also benefit from faster access to capital, reduced revenue leakage, and reduced cash handling costs. The government will see increased tax collections, greater financial inclusion, and increased economic development.

However, before implementing the Nigerian cashless policy, it is crucial for authorities to consider the current state of e-banking in the country. The focus should be on raising confidence and stability in the banking industry before transitioning to cashless transactions. It is important for authorities to examine and develop the e-payment system further to ensure people are comfortable with it before enforcing a cashless policy.

It's worth noting that SEEM and petty traders drive a significant portion of Nigeria's economy.The CAB is concerned about what infrastructure will support a cashless economy in rural areas with limited internet access, lack of electronic security, and inconsistent power supply. However, despite these challenges, the use of e-payment will gradually increase and reduce reliance on cash. To

achieve a cashless system in Nigeria, the following recommendations should be considered: 1. Reforms and significant efforts are needed to migrate towards a cashless society, especially for low-income customers who heavily rely on cash. Collaboration among government, financial institutions, and non-bank payment service providers is necessary. 2. While many Nigerians support the idea of a cashless system, there are concerns that could hinder its success which must be addressed by payment service providers. 3. Regulatory authorities should enforce the cashless policy through moral persuasion instead of coercive measures to ensure compliance. This approach will ultimately benefit the economy. 4. Overall, infrastructure development and regulatory enforcement are necessary to establish an effective cashless system in Nigeria. The transition from a cash-based economy to a digital one cannot happen quickly; it requires gradual implementation of structures and regulationsRegulatory authorities need to prioritize the initiation of operations by all licensed service providers, as the current number of Point of Sale (POS) terminals in the country is insufficient. Providers who have not entered the market should be penalized. To ensure widespread acceptance and usage of the cashless payment system, consumers must trust and have confidence in it. This can be achieved through effective communication, strong system security against scams and fraud, and simplified processes designed for low-income customers.