A Closer Look at the Card Payment Technology

Step outside your door, and you’ll encounter a multitude of financial transactions happening around you. In this digital age, where every second counts, payment technology has seamlessly woven itself into the fabric of our daily lives, evolving over time to make things simpler and more convenient.

As recently as 2021, cash payments held sway as Nigeria’s primary exchange method. Gone are the days of fumbling with crumpled notes and counting out change because recent reports reveal a shifting pattern, with card payments taking center stage, constituting 37% of the payment method breakdown in Nigeria. Bank transfers follow suit at 29%, while cash lags behind at 16%. But this is far from the end — Payments technology in Nigeria is constantly evolving, pushing boundaries and creating new possibilities.

This article cuts through the complexity of the payments industry, focusing specifically on how card payment technology in Nigeria works. It explains the key players involved and how they interact, making it easy for beginners to understand the basics. So, if you work in the IT space, need a refresher, or are just simply curious about how card payments work this is the article for you!

Who’s Involved? — The Key Players in the Card Payment Industry in Nigeria

You can picture the card payment process like a relay race! In this race, each team plays a specific role and this “race track” is the payment value chain, involving the following parties;

1. Merchants

A merchant is a term used for businesses that sell goods or services and accept card payments from customers. These businesses can receive payments in person, online, or over the phone.

A Merchant Services Provider supports these businesses by offering products and systems to help them operate smoothly. These services often integrate with existing business tools like POS systems. Merchants process payments and manage funds through a special account called a merchant account provided by the acquirer. In this payment value chain, merchants attract and retain customers by providing a quick and efficient buying experience, making them essential customers themselves in the broader payment process. These include payment points for Shopping malls, supermarkets, Fuel stations, etc.

Additionally, merchants may include agents for companies with the necessary licenses, facilitating transactions on their behalf by providing payment terminals to third parties, thereby expanding their role in the payment ecosystem.

2. Acquirer

An acquiring bank, also known as an acquirer, is a financial institution that helps merchants accept card payments. They capture transaction details and send them to the cardholder’s bank for approval. Once approved, the acquirer settles the payment in the merchant’s account, usually within two business days. This settlement includes the total sales minus any fees or refunds. In short, the acquirer makes it possible for merchants to take card payments smoothly. They provide the necessary infrastructure, like Point-of-Sale (POS) terminals, enabling merchants to accept card transactions.

3. Original Equipment Manufacturer (OEM)

In the context of card payments, an Original Equipment Manufacturer (OEM) specializes in manufacturing terminals and providing essential Software Development Kits (SDK) and application development support. These OEMs contribute significantly to the card payment ecosystem by supplying the hardware infrastructure and the necessary tools for software development. There are a couple of indigenous OEMS in Nigeria but the market is largely saturated by foreign providers like Telpo, Nexgo, SZZT, Newland, etc.

4. Issuer

Card issuers or Issuing banks are financial institutions that issue credit and debit cards, manage accounts, and process payments. Beyond issuing cards, they serve as gatekeepers, meticulously authenticating every transaction. They verify details like card number, CVV, and expiry date, ensuring the legitimacy of the cardholder through methods like PINs or biometric authentication. Their crucial role includes checking if customers have sufficient funds or credit, preventing fraud, and safeguarding both consumers and merchants.

Traditionally, commercial banks were the primary issuers, offering cards as part of their suite of services, for example, the Zenith Bank Card of which Zenith Bank is the issuer. However, the landscape is evolving. FinTech companies are increasingly entering the scene, partnering with banks or offering their own card issuance solutions. This diversification brings fresh perspectives and innovation to the industry, but also presents new challenges in terms of regulation and competition.

5. Card Network

In every card transaction, a card network, often referred to as a card brand, is required. The card network serves as the facilitator for card transactions, and in return, acquirers and issuers are required to pay a license fee, commonly known as a card scheme fee. These networks play a crucial role in transmitting information and settling funds between the acquirer and the issuer.

Moreover, card networks establish the standards for communication between acquirers and issuers, employing protocols such as the ISO 8583 protocol. They also define dispute resolution rules, standardizing procedures for how issuers and acquirers handle disputes. Visa and MasterCard are some of the most popular international card network schemes while Verve serves as a fast-growing scheme out of Nigeria.

6. The Central Bank of Nigeria (CBN) -The Apex Bank

At the top of Nigeria’s financial system is the Central Bank of Nigeria (CBN), serving as the regulatory authority overseeing the implementation of policies and guidelines related to card payments, and the payment processing industry in general.

Obtaining a license from the Central Bank of Nigeria (CBN) is a mandatory first step for entrepreneurs seeking to establish a payment service business within the country. The specific requirements for this license vary depending on the type of payment service solution the entrepreneur intends to offer, however, the general criteria for aspiring online payment processors in Nigeria are to register with the Corporate Affairs Commission (CAC) and comply with security guidelines set by the CBN to protect customer data and transactions. To learn more about the different payment licenses available with the CBN, check out this article

7. Processor/Switch

Processors act as intermediaries between the acquiring bank (acquirer) and the issuing bank (issuer) during card transactions, overseeing the steps of authorization, clearing, and settlement. They facilitate communication between the acquiring and issuing banks, ensuring the smooth and secure flow of information and funds in the card payment process. Additionally, they often play a key role in enhancing security through advanced fraud detection mechanisms, contributing to card transactions’ overall efficiency and reliability.

Examples include the Nigerian Inter-Bank Settlement System (NIBSS), known for providing clearing and settlement services for interbank transactions, and Interswitch, which recently secured the Payment Service Holding Company (PSHC) license from the Central Bank of Nigeria (CBN).

The Process — What Happens in a Card Payment Transaction?

Here’s what goes on behind the scenes:

Step 1: Initiation

You initiate the payment at the merchant’s store, either by swiping, tapping, or entering your card details. The POS terminal captures the transaction information, including the amount and your card details.

Step 2: Secure Transmission

The information travels securely through the merchant’s acquiring bank and their chosen processor. Encryption ensures data protection throughout the journey.

Step 3: Network Relay

The processor relays the information to the relevant card network (Visa, Mastercard, etc.). This network acts as a highway, routing the information to your card-issuing bank.

Step 4: Authorization Check

Your issuing bank verifies your card details and available balance to ensure sufficient funds. Additionally, fraud prevention systems analyze the transaction for suspicious activity.

Step 5: Approval or Decline

If everything checks out, your issuing bank sends an approval message back through the network. If declined, the merchant receives a notification, and the transaction is not completed.

Step 6: Settlement

Upon approval, your issuing bank sends the funds to the merchant’s acquiring bank. It is important to note that this process, typically takes 1–2 business days, and is distinct from the immediate transaction process.

Step 7: Funds Received

The acquiring bank settles the amount in the merchant’s account, minus fees and deductions for card networks, processors, and the acquiring bank itself.

Step 8: Confirmation

You receive your payment receipt, and the transaction is complete.

A Look Ahead: What’s the Future of Card Payments in Nigeria?

Card payment technology in Nigeria has witnessed significant progress recently, marked by the emergence of various innovative solutions aimed at enhancing convenience for consumers. Among the notable advancements are the adoption of contactless payment technology, the introduction of mobile payment solutions, and the integration of biometric authentication into card transactions.

Contactless payments redefine everyday transactions with speed and ease, transforming consumer lifestyles. Swift, secure, and requiring no swiping or PIN entry, this technology benefits both users and store owners. By enabling quick, streamlined transactions, it enhances efficiency and user experiences, encouraging increased sales.

A standout innovation in Nigeria’s card payment technology landscape is the launch of the Nigeria Central Switch (NCS) by the Nigeria Inter-Bank Settlement System (NIBSS). This platform facilitates seamless interoperability across different payment channels, simplifying the process for consumers to use their cards for payments.

In essence, the card payment technology sphere in Nigeria continues to evolve, with ongoing efforts to enhance security, convenience, and accessibility for a broader consumer base.