ELECTRONIC COMMERCE AND TELECOMMUNICATIONS IN NIGERIA: BANK REGULATOR PERSPECTIVE

BEING A PAPER PRESENTED

BY

MR. O.I IMALA

DIRECTOR OF BANKING SUPERVISION, CENTRAL BANK OF NIGERIA

AT THE INTERNATIONAL CONFERENCE

ON "ELECTRONIC COMMERCE AND TELECOMMUNICATIONS IN NIGERIA"

ON 23^RD SEPTEMBER 2002,

AT THE GOLDEN GATE RESTAURANT, IKOYI, LAGOS

1. INTRODUCTION

I am delighted to be at this "International Conference on Electronic Commerce and Telecommunications in Nigeria" to speak on the "Banker Regulator Perspective." I, therefore, wish to start by thanking the chambers of Chief G. 0. Sodipo & Co and the firm of Strategic Core Consultants, which in collaboration with the University of London, have taken the initiative to organize this conference.

It is my view that, the primary objective of this conference which is the maximization of the benefits of e-commerce (the digital economy, if you like) in Nigeria, is not only apt, but could also not have come at a better time in view of the fact that virtually every sector of the Nigerian economy particularly the banking industry has, though late, embraced the application of information technology in its operations. I am, further delighted to note that a lot of salient and relevant sub themes will be examined in detail during this conference by other notable individuals drawn from both within and outside the country.

With this brief introductory remark, I wish to structure the rest of this presentation into four (4) pan(s. Part 2 deals with Electronic Commerce and Electronic Payment Systems. In part 3, the Nigerian experience is examined, while part 4 highlights the salient supervisory/regulatory issues. The conclusion is in part 5.

2. ELECTRONIC COMMERCE AND ELECTRONIC PAYMENT SYSTEMS

Individuals and businesses are, in general, increasing the use of advanced telecommunications information services to effect a wide variety of commercial transactions. Any information that can be digitised can be sent over a telecommunications system. Automated, electronic information systems provide faster, less expensive and more reliable information transmission in what has been termed "electronic commerce." Electronic commerce (e-commerce for short) differs from traditional commerce especially in the way information is exchanged and processed. Historically transactional information was exchanged through direct personal contact or by using the telephone or postal services. With electronic commerce, some form of electronic processing is used for the exchange of value - information is conveyed through a digital -communications network, computer system or some other electronic media.

In a broad sense, payment systems enable payment mechanisms to be used as media of exchange in transferring value between a buyer and a seller. The payment system's enabling mechanism is of particular importance because of its wide use as a means of payment, its availability, and its universal acceptance. The distinction between a payment" system and a payment mechanism must be made to underscore the fact that money, notwithstanding the form, serves only as a payment mechanism in the payment system. Other payment system mechanism in which value is exchanged in transaction for goods, securities and services include cheques, fund transfers, credit cards and debit cards. Therefore, the successful conduct of e-commerce as an internet-enabled activity, which seeks to create value and exploit market opportunities, requires an effective and efficient electronic payments system and electronic money (e-payments system and e-money).

An electronic payment system involves the provision of payment services over electronic devices such as telephones, personal computers and the Internet. As a paperless method of making payments, it offers an alternative to the traditional systems, which involve the use of instruments such as cheques, travelers' cheques, postal orders, wire transfer etc. Just like e-commerce, e-payment systems have the advantage of enabling transactions to be processed quickly, more cheaply and offer a much more convenient method of effecting settlement of transactions. Electronic payment systems as one of the two major products of e-banking (which itself is a subset of e-commerce), involve the creation of e-purses': protocol for storing value for transactions through software/network-based products that have some characteristics akin to "stored -value cards", the second major e-banking product.

It is usual to categories e-payments into either wholesale or retail payment systems, and into closed or open systems, A detailed discussion of this categorization cannot be accommodated within the scope of this presentation. Before concluding this section of my presentation, it is perhaps necessary to advert our attention to the fact that the rapid introduction and underlying complexity of e-commerce and the activities of its e-banking subset have modified and indeed heightened many of the traditional risks associated with the conduct of business and banking in particular. Some of these risks, which I realise fhat other speakers would discuss in detail include;

•  Strategic risk

• Operational risk

• Security risk

• Reputational risk

• Legal risk

• Cross border risk and

• Other risks

3. THE NIGERIAN EXPERIENCE

In the past few years, Nigerian banks and the financial services industry in general, have embraced e-banking/e-money made possible by advancements in information-based technology. I do not think they have a choice, anyway. In the competitive environment of this twenty-first century, technology is "how to beat the other guys." Indeed, technological innovation presents banks with an opportunity to gain a competitive advantage through cost-effective delivery system and to use these systems to generate fee income.

Currently, the concept of e-payment/e-money in Nigeria is card-based and involves in the main, only prepaid cards. The CBN welcomes, and has indeed been very supportive of the introduction and usage of such e-money products in the country, as this could, in principle, improve efficiency in payment operations. The introduction of such e-payment products in Nigeria commenced in 1996 when the CBN granted Allstates Trust Bank approval to introduce a closed system electronic purse called ESCA. This was followed in February 1997, with the introduction of a similar product called "Paycard", by Diamond Bank. The card based e-money products assumed an open platform with the authorisation in February 1998, of Smartcard Nigeria Pie, a company floated by a consortium of

19 banks to produce and' manage cards issued by the member banks. Another consortium of more than 20 banks under the auspices of Gemcard Nigeria Limited obtained CBN approval in November 1999 to introduce the "Smartpay" scheme. The number of participating banks in each of the two schemes had since risen to over 35 as at July 2002.

The CBN has additionally granted approval to a number of banks to introduce international money transfer products, telephone banking and on-line banking via the Internet, though on a limited scale. Mention must also be made of the deployment of automatic teller machines (ATM) by a few banks to facilitate cards usage and. further enhance their service delivery. We are also quite aware that virtually all Banks in Nigeria now has a website. Indeed, a number of these sites has capability that supports and actually pen-nits the conduct of e-banking, a subset of e-commerce. We anticipate that very soon, many more banks will enhance their website capability to support online transaction processing and electronic bill paying services.

4. SUPERVISORY/ REGULATORY ISSUES

We appreciate the fact that Nigerian banks, and indeed the financial services industry, cannot afford to be indifferent to the wind of technological innovations blowing across the industry worldwide and the stiff competition it has engendered. However, the introduction of e-banking /e-payment products in Nigeria, though still at a relatively early stage, has brought a number of issues of regulatory/supervisory concern to the fore; salient among which are:

- Their impact on the conduct of monetary policy;

- Need for adequate transaction clearing and settlement arrangements;

- Technical security of the products;

- Possible susceptibility to money laundering and other financial crimes;

- Need for adequate consumer protection provisions (deposit insurance),

- Need to ensure financial integrity of the issuers; and,

- Potential risks to the issuers such as operational, legal and Liquidity.

Some of these issues, which arc further discussed in detail below, should engage the attention of all stakeholders in the financial system and I hope that you will be able to address some of them during this conference.

Who should issue card based payment product.

Apart from the multi-purpose stored value cards, there exists in the market today, a number of single purpose stored value cards, such as the prepaid telephone cards being issued by telephone service providers. The view of the CBN, which is in consonance with international norm, is that, multi-purpose stored value cards should only be issued by licensed deposit taking institutions, and would be subject to CBN authorisation and supervision. However, single purpose value cards such as the pre-paid telephone cards should continue to be issued by NITEL and other telecommunications service providers.

Legal Framework

There is need for a legal framework to support the development of e-banking and e-money activities. Such a legal framework will address issues as the legal relationships between, as well as the rights and obligations of the participants in the systems - the issuers, cardholders, merchants and operators. It will also give definition to the scope of c- banking and e- money, including of course, e-payments in the country.

Security

Electronic payments schemes must maintain adequate and reliable safeguards in order to prevent, detect and contain possible threats to the security and integrity of  the scheme, including the threat of counterfeits as well as unauthorised access or

modification. In this regard, it is necessary to employ secure and reliable telecommunication networks that can adequately protect the information systems attached to them. This can be achieved through data encryption, authentication, firewalls and other data access and security controls. Each cardholder should have a unique access identification number just as appropriate key infrastructure and security management policy must be put in place.

Privacy

There is also the need to define privacy rules since transaction trails could pose other risks to consumers. The collection, re-use, and instantaneous transmission of information can, if not managed carefully, diminish personal privacy. It is important therefore, To assure personal privacy.

Need For Standardisation

Differentiation is good for the marketplace, but standardisation, which is the driving force behind the computer industry, holds the key to the long-term benefits of electronic payment systems. The goal is to allow products and services from different vendors to work together, since this will allow for competition and reduce uncertainty in the marketplace. While we do not seek to legislate on standards as it may inhibit/technological innovation, interoperability should be a goal of the marketplace.

Monetary Policy Concern

The issuance of e- money is likely to have significant implications for the conduct of monetary policy in the foreseeable future. In this regard, our supervisory interest is to ensure that price stability and the unit of account function of money are not jeopardised. It might be important for the conduct of monetary policy to examine the need for reserve requirements on e- payment card balances to ensure that the objectives of that policy instrument are not impaired.

Possible Criminal Abuse

A major area of possible criminal abuse associated with e- payment schemes relate to money laundering. If such payment systems allow the possibility of anonymous transfers of large sums of money, they could increasingly become susceptible to

financial criminal activities. The attraction is there for market forces to foster the development of those e- payment schemes whose features are quite attractive to money laundering purposes. Such features include anonymity of transactions, the

impossibility of tracing individual transactions and/ or the possibility of making customer-to-customer transactions that bye-pass the issuer or a clearing system and thereby desecrate transaction audit trail.

5. CONCLUDING REMARKS

The CBN acknowledges that the application of inventions facilitated by advancements in computing and telecommunications technology has opened new possibilities that extend far beyond the duster of services that have traditionally defined banking, and indeed, the financial services industry. 'We, believe that banks have much to contribute to the evolving world of e-banking in the country which services customers and businesses want and are willing to pay for in e-payments areas and the development of new online banking products. The CBN will continue to support and encourage such innovative applications that pass the

value-added and profitability tests.

In conclusion, I wish to assure you that as the new capabilities and technologies are incorporated into our financial services environment the CBN, in the discharge of its very special responsibilities, will not compromise the safety and soundness of the payment and banking systems as we will continue to monitor application and developments in the field of e-banking and e-payments in the country. I thank you for your attention.

BANKING SUPERVISION DEPARTMENT

CENTRAL BANK OF NIGERIA

ABUJA

SEPTEMBER 2002

designed & built by: Henry Nwachukwu

e-mail: henrynwachukwu1@yahoo.com