Before the COVID-19 pandemic, Nigerian fintech companies discovered an easy way to attract customers: offering foreign debit cards. These cards were often given out for free or at very low costs, allowing customers to withdraw money from ATMs or make payments at supermarkets. This led to increased spending and higher transaction fees for the fintech companies.

Financial Technology Law in Nigeria (Fintech) – former banker explained to Thepaan News that no Nigerian was willing to spend money from a bank if they did not have the bank’s card.

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However, the situation changed with the COVID-19 pandemic, a cash crunch in Nigeria in 2023, and cash shortages at bank ATMs. These factors reduced the reliance on card payments and increased the popularity of bank transfers.

Fintech startups and banks are now reconsidering their card strategies. All Nigerian commercial banks, except for Guaranty Trust Holding Company (GTCO), have started issuing Verve cards, a local card scheme operated by Nigerian payments company Interswitch.

First Bank, Nigeria’s oldest bank, has issued Verve cards to more than half of its card customers. Fintech company OPay has issued 13 million Verve cards, while Moniepoint has issued about 4 million. Since the end of the COVID-19 pandemic in 2021, Verve has captured 54% of the Nigerian card market. The shift away from international card schemes, which charge fees in US dollars, has been driven by the devaluation of the naira, making foreign currency-denominated bills more expensive.

Visa and Mastercard fees vary depending on the size and region of the financial institution. Their pricing strategies are complex, with Mastercard’s pricing guide being a 300-page document. Financial institutions must also meet requirements like a $2,000 monthly implementation charge, opening an offshore account, renewing contracts annually, and providing collateral worth millions of dollars. Additionally, international card schemes charge Nigerian banks for logging disputes on their resolution channels and prevent non-banks from directly connecting to their schemes, forcing fintechs to partner with commercial banks.

These complexities have increased the popularity of local alternatives like Verve and Afrigo. Despite heavy investments from Mastercard and Visa in Africa’s fintech industry, local schemes are gaining traction. Both companies have invested at least $700 million to remain relevant on the continent. However, Visa and Mastercard did not respond to requests for comments.

Switching to local card schemes also aligns with customers’ spending habits. Most fintech customers use their cards for point-of-sale transactions rather than international online shopping. An employee at a Nigerian card scheme mentioned that customers are more concerned about local payments due to inflation and reduced spending power.

Nigeria is facing its worst cost of living crisis in three decades, leading to a drop in customer spending and interchange fees (the fees merchants pay for card processing). This is problematic for fintechs that need high transaction volumes to break even with cards. The Central Bank of Nigeria, under Godwin Emefiele, launched Afrigo, a local card scheme, to help banks save costs. Fintechs, now under closer regulatory scrutiny after a six-week ban on onboarding new customers, see adopting local schemes as a way to stay in regulators’ good books.

The rise of online transfer payments has also driven fintechs to develop products that facilitate bank transfers. Paystack, owned by Stripe, has launched two pay-by-transfer products, with bank transfers accounting for 58% of its transactions in Nigeria in 2023, up from 28% in 2022. Bank transfers offer better margins than card payments since they eliminate the multiple processors involved in card transactions.

Besides changing customer behavior, card operations require significant scale to be profitable due to logistics, manufacturing, technology, regulatory costs, and fraud risks. Although international card schemes have considered collecting fees in naira, years of foreign exchange restrictions and $20 limits on global payments have made alternatives like virtual cards popular. As long as the cards work for everyday transactions, customers are indifferent to the switch.