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How Micropayments Can Drive the Way forward for the Nigerian Financial system

How Micropayments Can Drive the Future of the Nigerian Economy

One important aspect of micropayments is the fact that its definition varies from person to person. Generally, micropayments are regarded as financial transactions involving very small sums of money. Globally, micropayments refer to transactions of less than 12 USD. According to, a micropayment is an e-commerce transaction involving a very small sum of money in exchange for something made available online, such as an application download, a service or Web-based content.

Micropayments are too small to be feasible for processing through the traditional credit card/debit card system. Amir Herzberg of IBM recounts “Micropayments are for anything that is too inexpensive to pay by credit card”.

The major challenge facing the feasible application of micropayments is the need to keep costs for processing individual transactions low which is impractical when transacting very small sums of money typical of the nature of the micropayment system. Several attempts have been made to make such systems financially feasible to the providers such as the bill to phone model that companies like Zong and Boku have employed. The bill to phone ensures that consumers are able to charge low value transactions to their mobile phone and are sent a transaction code by SMS to complete the transaction. However, the sharing formula that exists between the providers of the micropayment platform and the Mobile Network Operators (MNOs) is largely not in favour of the providers, this has been the key reason for the slow adoption globally.

Largely, micropayments have been used for online transactions in the social community space on websites like Facebook where users can purchase virtual items in games like mobwars, premier football and Farmville to name a few. It’s foray into the print media for pay per view content has been very discouraging as users would simply navigate to another website where they can get the content for free.

Micropayments has had its share of attempts at standardization notable among these attempts is the micropayments per fee specification of the W3C (World Wide Web Consortium) which includes a Common Markup for Micropayment Pay-Per-Fee Links as well as a description of a wallet handler that serves all requests for the per-fee service. However since vendors implement disparate proprietary micropayment infrastructure this has prevented the adoption of W3C’s specification.

As an emerging area, it has undergone some metamorphosis which was clearly described by Robert Parhonyi of the University of Twente in the Netherlands in his paper “Second Generation micropayment systems: Lessons Learned”. He predicted that the market for low value products such as online music and videos and the role of micropayment systems for selling such products are expected to grow substantially. He classified micropayments into 2 generations in which the first generation appeared around 1994, with systems like Millicent, eCash and cybercoin which were unable to gain market share and disappeared slowly in the late 1990s. The 2nd generation appeared around 1999-2000 and are still operational.

He believes most of the failure causes have been accounted for in the second generation and have a much better chance to be successful largely because of the way the Micropayment System Operators (MPSO’s) have implemented the technical and non-technical characteristics of micropayment systems such as the use of token or account based platforms as the medium of value exchange, Ease of use, Anonymity, scalability, Validation, security, interoperability, trust, coverage, privacy, pre-paid or post-paid and the range of multicurrency support. Some of the 2nd generation micropayment systems include minitix, Bitpass, Wallie, PaySafe Card, WebCent, MicroMoney and SoftPay.

In Nigeria, online payment has been wrought with several cases of fraud especially with the use of debit cards. Consumers are no longer comfortable with such medium of payment and often ask themselves if it is worth it to expose private information to consummate transaction on the web for low value transactions. Some people argue that billing for small portions of a product or service reduces the need for security. In this context, security is defined here to be the ratio of security cost to protected value of the transaction. The security challenges above beg for a new channel to consummate low value transactions that is radical and innovative enough to provide musicians a platform to sell their music, software developers their small applications, photographers their pictures and all other content providers a medium that is fast, convenient and easy to use without the restrictions of the traditional payment systems.

The revenue potential is huge as it covers both the banked and the unbanked populace. The majority of the revenue is expected to originate from the unbanked according to EFINA there are over 64 million Nigerian adults who have never been banked, and the private sector understands that the Nigerian microfinance industry estimated at NGN 900 million is profitable. The unbanked money in circulation is estimated to be NGN 1.2 Trillion as at May 2009, this figure is growing and would serve to strengthen the financial system if platforms such as micropayments are used as a tool to channel such money into the mainstream economy.

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