N710bn ATM investment deficit troubles Nigeria’s financial inclusion

Omobayo Azeez

•  71,000 ATM vacuum bites
• Issuers, acquirers discouraged by poor economics

Indications are rife that Nigeria may have to tarry more on its path to achieving robust financial inclusion in the country because of failing investment into some of the channels meant to drive the inclusion, OMOBAYO AZEEZ writes:

In the financial inclusion report of the Central Bank of Nigeria (CBN), the deployment of automated teller machines (ATMs) across the country had been identified as imperative to giving people access to cash anywhere for financial transactions.

Even as the country is also firing up to upgrade the economy to cashless one, evidence abounds that the economy, by its current structure, supports cash transactions, given its large informal sector in which the basic needs of the 200 million Nigerians are met.

As an extant fact, the apex bank had stipulated in both its 2012 and 2018 CBN Financial Inclusion Strategy Documents specific targets for ATM deployment in Nigeria in order for the country to boast of at least 80 per cent financial inclusion, which shows how important the ATM channel is.

Investigations have shown that up till 2020, only 22,000 ATMs have been deployed across the country to serve the growing needs of Nigerians even as the population of the country continues to rise.

The achieved number of ATMs represents just 23.66 per cent of the 93,000 specified by the CBN that must be deployed by 2020 in the interest of serving Nigerians with cash and non-cash functions, whereas the chances of meeting up with the number by providing additional 71,000 ATMs this year is far from being realistic.

Meanwhile, analysts who spoke with this paper during an online engagement further explained that the modest cost of installing an ATM in the country stands at N10 million excluding cost of maintenance.

Consequently, working with this conservative amount to bridge the vacuum created by the required additional 71,000 ATMs across the country puts the investment deficit at N710 billion.

Experts have recalled that despite the obvious need, initial ATMs deployment in Nigeria suffered failed adoption or usage during its first 10 years of deployment in Nigeria between 1993 and 2003 due to a number of well-researched factors.

They warned that CBN and all interested stakeholders must tread carefully to avert a reversal of the seeming success recorded in ATM usage in Nigeria since 2003.

In the last 15 years, it was gathered that while ATM deployment had recorded slow albeit steady increase, at an average of 38 per cent year-on-year to hit 22,000 in 2020, bank branches have declined due to mergers and branch rationalizations.

Although financial and fintech analysts have ascribed the success recorded since 2003 to the synergy of three major factors including needs, interoperability, and economics, they identified the need for new modalities to fast track deployment.

Earlier, the banking industry in collaboration with the switch developed an economic model for ATMs built around the N100 End User Fee for Cash Withdrawal, an arrangement that offered value to the two key stakeholders, ATM Acquirer Bank and Card Issuer Bank, assuring cost-reflective participation for all

Customer Preference for ATMs

The ATMs have continued to rank as the consumer’s number one channel of choice based on the modest 22,000 ATMs deployed generating 839 billion in transaction volume, according to data from the Nigerian Inter-Bank Settlement System (NiBBS).

This compares very favourably against 266,039 agents generating just 377 billion and 303,162 PoS terminals generating 438 billion in transaction volume.

This is consistent with surveys which reveal that consumers rank ATM as number one for trust at par with the bank branch. This is far ahead of the trust level accorded to all other channels such as PoS terminal, USSD, and agency banking

Consequently, queues and crowds at ATM locations have become more severe and widespread causing major customer frustrations across the country despite the availability and huge investments being made to promote these alternative channels.

According to experts, the low and mid income account holders that belong to the bottom of the pyramid suffer the most from the extremely poor service arising from the crowding.

This is compounded by the high cost of alternative offering, agent banking, where such vulnerable consumers are compelled to pay as much as N500 for accessing funds in their bank accounts, which is more than 10 times the ATM End User Fee of N35.

Oladipo Alabede, group head of digital banking at Sterling Bank, reiterated that while efforts are being made to find substitutes for ATMs to access cash, the channels are costlier.

“They end up paying more than they would have paid withdrawing from the ATMs. It is clear in our mind that we have to increase the number of ATMs that we have in the country.  What we currently have cannot satisfy bank customers who desire access to cash on a daily basis.

“The ones we are being overused and there is hardly a place you will go without meeting a queue waiting to use the machine,” he said.

From an assessment carried out, the average ATM in Nigeria dispenses thrice the number of notes in Ghana and 10 times the number of notes in U.K.

Poor business case for acquirers, issuers

The relationship between key stakeholders in ATM deployment in Nigeria is not so based on mutual wins because of some regulations by the Central Bank of Nigeria (CBN)

This include low profit or outright losses being recorded by banks deploying ATMs, also known as ATM acquirers, due to regulatory intervention reducing End User Fees, as well as losses recorded by card issuer banks, arising from ‘Remote On Us’ Fees on account of the free transactions per month allowed each cardholder.

The ATM acquirers have lamented that while the average cost of N10 million is required to set up a functional ATM, the process of recouping such investment makes no business sense for the operators because of reduction of end user fee from initial N100 to N35 by the CBN.

“When you put a procurement cost of N10 million against N100 fee per withdrawal, it means that the machine must perform at leans 100,000 withdrawal transactions before you can realise the cost of providing.

“But if you put the N10 million cost against N35 that we charge now, the ATM will have to do close to 300,000 withdrawals for the cost to be recouped. That is not practicable. We run the ATM almost as losses and people are not motivated to put in more investments,” one of the players said.

The operators of ATMs in the country have also bemoaned the increasing cost of providing reliable secondary power supply especially at offsite locations and other soaring expenses on maintenance, mandated upgrades, cash management as well as site rental costs, among other challenges bedeviling their operations.

CBN’s regulatory impact on ATM deployment

According to analyst, the stunted deployment growth rate of ATMs has been directly linked to past CBN policy interventions which have a compounded adverse effect on ATM economics progressively eroding the channel viability to date

Such regulations highlighted include the 2010 IAD Policy requiring banks to exit offsite ATM locations’ the 2012 Cancellation of N100 Cash Withdrawal ATM End User Fee; the 2015 Introduction of N65 Cash Withdrawal ATM End User Fee and the 2019 Introduction of N35 Cash Withdrawal ATM End User Fee.

Stakeholders have also noted the discriminatory regulation of ATM Deployment vis-à-vis PoS and Agent Banking demanding CBN prior approval before each deployment or relocation of individual ATMs with its attendant administrative bottlenecks and delays.

In the meantime

Industry watchers have noted that banks have demonstrated perseverance by maintaining a minimum investment in ATMs to achieve the present network size and service quality.

At the current CBN mandated N35 End User Fee for ATM Cash Withdrawals (equivalent to $0.09 based on current FX rate in Aug 2020), the fee represents a mere 11 per cent of the 2003 fee, a massive erosion in the economics of deployment ATMs which is a  high CAPEX and OPEX channel.

Meanwhile, with corresponding high FX input due to the import dependence of key components of ATMs and related spare parts, the channel has become largely unviable to the banks, analysts noted.

“This has made it increasingly difficult banks to allocate the requisite quantum of investment to the channel for expansion and service quality improvement

“Altogether, the ATM has failed to meet the CBN Financial Inclusion Targets, neither has it met consumer and market demands for service quality and network expansion,” analysts said in their conclusions of discussion on the ATM channel at the recent online brainstorming session.

Last line

Nevertheless, the ATM channel today offers consumers at the bottom of the pyramid the best value such that despite the often having to travel long distances to neighbouring towns and neighbourhoods, Nigerians in large numbers continue to patronise the ATM with all its challenges rather than use some of the more accessible but more expensive alternatives such as Agency Banking. This is a signal to the need for the regulators and operators to improve the channel for the sake of desired financial inclusion in the country.