Nigerian Cashless Efforts Have Shortfalls

If you are contemplating what it might be like living in a cashless society in the future, you might want to look first to Nigeria as the poster child for reasons to continue to use physical cash instead.

A recent Financial Institutions Training Centre report titled “Frauds and Forgeries in Nigerian Banks” indicated there were 78,584 cases of banking fraud within the past year. The report also identified 34,772 computer-based fraud cases valued at 18.97 billion naira (due to inflation, it took 1,040 naira to equal one U.S. dollar at the time this article was being written) and 33,714 mobile-based fraud cases amounting to ₦6.48 billion during the same time period.

There were more than 10,098 fraud cases valued at ₦1.95 billion in PoS (Point of Sales) transactions between the second quarter of 2022 and the second quarter of 2023. In addition, there were 34,772 computer-based fraud cases valued at ₦18.97 billion and 33,714 mobile-based fraud cases valued at ₦6.48 billion.

Cashless transactions are at the root of all this. The Financial Institutions Training Centre reported an increase of 44.84 percent in electronic transactions in Nigeria during the first quarter of 2023. This is exponentially within the Central Bank of Nigeria’s projections of reducing cash transactions by 2025 in favor of using a variety of cashless terminals instead.

Nigeria has changed its physical currency ten times since the nation gained its independence in 1960. The African nation began production and distribution of new 200-, 500-, and 1,000-naira bank notes in late October 2022. Nigeria also issues banknotes in denominations of 5, 10, 20, 50, and 100 nairas. Coins circulate in denominations of 50 kobo, 1, and 2 naira. The new higher denomination notes have all the latest security devices to combat counterfeiting efforts.

CBN Governor Godwin Emefiele said the changes were made to mitigate counterfeiting, preserve the collective national heritage, control the number of banknotes in circulation, and reduce the overall cost of currency management.

Chairperson of the Committee of e-Banking Industry Heads Celestina Appeal recently acknowledged online fraud could become the most prominent form of bogus payment by 2030. According to Appeal, “Today more purchases are done through online payments. E-banking is now globalized. But as things become seamless, there will be risks. The fraudsters are also trying to expand their strategies. Every year, the finance sector records losses in billions. According to NIBSS’ reports, the volume of fraud successfully carried out has increased about four times between 2019 and 2021.”

CBN Director of Payment Systems Musa Jimoh said, “The rate and incidence of fraud have actually expanded. More frauds are being committed. Once you open a new channel, people study it and they begin to penetrate. Once the CBN issues a regulation around the payments system, the next thing they do is to see where the compromises are.”

OnePipe Engineering Director Victor Irechukwu noted negative experiences resulting from fraud incidents can deter individuals and the country as a whole from embracing the cashless economy concept.

The benefits of going cashless include increased transparency, reduction in the handling of physical cash, and improved efficiency in financial transactions. It also provides opportunities for businesses to thrive in an interconnected digital ecosystem.

A major argument often cited against going entirely cashless is the lack of privacy. Through the Nigerian experience, an additional problem is surfacing: fraudsters are adapting to exploit the channels designed to make cashless transactions easier than using coins and banknotes. As transactions continue to shift from cash (and checks), online criminals are finding new vulnerabilities to exploit. It’s much easier and significantly more profitable to rob a bank electronically than to go into a bank’s lobby with a gun.

As the website technext24.com put it, “The [Nigerian] statistics are alarming, with thousands of fraud cases recorded, amounting to billions of naira in losses. This raises a pressing question: Is the convenience of a cashless society worth the risks it poses?”

Nigeria’s physical money supply (coins and bank notes) has doubled since the September 2020 lockdown due to the COVID-19 pandemic. More recently, Nigeria’s quasi-money financial tools easily converted into cash expanded from N40.8 trillion to N41 trillion during August. More cash and less electronic transfers are not necessarily a good mix. These become challenges to domestic inflation.