LAFLIF #1: "HELP! I CAN’T PAY FOR STUFF WITH MY NIGERIAN BANK CARD"

Being a Nigerian is a splendid experience, one that I would not trade for anything. But there are days where a lot of things suck! Those days when you have more than enough money in your bank account but your Apple Music subscription just would not go through, even after trying five different bank cards! Those days when there is a promo on Coursera and you try to buy three courses for the price of one! You know those days.

What is happening is actually a mix of law, finance, and policy. In this episode, I am going to give you the bits and pieces needed to have a high-level overview of what is happening here. Then, over the course of the next few episodes, I would explain how card payments work.

The first thing to know is that there is a specific category of payments that are affected by this issue, i.e. international transactions made on a Naira card. An international transaction is any payment whose original value currency (OVC) is a currency other than Naira (Nigeria’s official currency).

I have specifically highlighted the term original value currency (OVC) because sometimes you may see the payment value shown to you in Naira but the original value currency (OVC) is not in Naira. In this case, Naira is the exchanged value currency (EVC).

Let us look at Apple Music to illustrate this. When you pay for Apple Music, the payment is received by Apple which is a company based in America. What this means is that although you pay Naira, Apple must ultimately receive dollars. I mean, this makes sense. If I were a vendor, I would want to receive payment in my currency, especially when my currency is the dollar. In any case, I am definitely not taking Naira in exchange for dollars.

So why is the payment sum shown to you in Naira? It is because, in the international market, all currencies have an official exchange rate. This means that the card scheme provider (Visa, Mastercard, etc.) can take the original value currency and convert it to your local currency (YLC). This process is known as dynamic currency conversion (DCC). Now you don’t have to leave the website to go into your calculator to convert the payment to naira. Isn’t that quite convenient?

I know this is a lot, so I would recap. So far we have highlighted two forms of international transactions:

1. International transactions that are displayed to you in the original value currency e.g $100 when you shop on Amazon.

2. International transactions that are displayed to you in your local currency, but are originally in a foreign currency e.g. Apple Music at ₦900.

The next few paragraphs show where the finance bit comes to play. Note that the description that follows is not necessarily the exact technical flow, but it sufficiently describes what happens.

When you make payments in the first scenario i.e the original value currency transaction, the bank knows exactly how much foreign currency it has to pay on your behalf and can make the conversion by itself and subsequently charge you a naira amount that would sufficiently cover its cost plus a little markup. Here is what the flow would look like:

1. The service provider, let’s say Coursera, lists a course for $10

2. You select the course on Coursera

3. The price is shown to you as $10

4. You click on “purchase”

5. A request is sent to the bank showing that the customer wants to make a purchase for $10 dollars (this is important)

6. The bank checks what conversion rate would be best for it, and then charges you that amount in naira.

7. If the bank got a single dollar at ₦440, then the transaction costs them ₦4,400. The bank can charge you at ₦445 for each dollar, so you are debited ₦4,450. They keep the ₦50 excess as a profit margin.

8. If you have enough money to cover the naira amount, the bank sends a response to approve the transaction.

9. Everyone is more or less happy.

In the second scenario i.e where the amount is shown in your local currency, the conversion is not done by the bank, it is done by a DCC service provider. They basically look up the exchange rate and then display the amount in your local currency. The flow goes something like this:

1. The service provider, say Apple Music, lists the subscription at $2

2. You select the Apple Music subscription

3. The DCC service provider does a look-up and finds that the exchange rate for a dollar is ₦450.

4. The price is shown to you as ₦900

5. You click on “purchase”

6. A request is sent to the bank showing that the customer wants to make a purchase for $2 at a maximum ₦900 (notice the difference?)

7. The bank loses the ability to markup the conversion to account for what it actually cost them to source for the dollars.

At this point, the bank has two options;

1. The bank approves, debits you ₦900 and hopes the DCC matches the amount it cost it to source the dollars. If the bank gets a single dollar at ₦440, then the transaction costs them ₦880. They keep the ₦20 excess as margin. If the bank gets a single dollar at ₦450, the transaction costs them ₦900 and they make no profit or loss. If the bank gets a single dollar at any price higher than ₦450, the bank runs into a loss.

2. The bank automatically rejects all DCC transactions to protect itself. This is what Guaranty Trust Bank (GTB) has done. You may have noticed that GTB cards never worked for Apple Music and Facebook ads even before all of these transaction limit issues started. This is due to GTB’s policy to reject all DCC transactions. They only accept international transactions if it is displayed in the original value currency.

In all cases, when you make an international transaction of any kind at all, you are debited in Naira, leaving your bank with the task of sourcing for foreign currency to pay the service provider. I mean this is why you have a bank and why you pay fees for a card and all those other charges that randomly pop up.

It is their business to get the payment over to Apple Music in America, in dollars (in subsequent episodes, I would show you exactly how this is done).

This means the bank needs to source for dollars which happens in different ways. However, it is safe to say that the more foreign exchange that comes into the country’s economy, the easier it is for banks to source foreign exchange.

Ordinarily, banks could run to the Central Bank of Nigeria (CBN), get foreign exchange, and make a profit from the buy/sell margin. However, due to the foreign exchange crisis, the CBN has virtually halted sales of foreign exchange to commercial banks, asking them to go “find dollars” by themselves.

When the bank sources for foreign exchange, it divvies it into various endeavours. As a consumer, you have been focused on paying for your $10 course, which is your concern. However, the bank has to provide thousands in foreign exchange to other businesses such as importers seeking to get raw materials in the manufacturing industry. The bank may be involved in some huge project financing requiring hundreds of thousands of foreign exchange to be sourced.

If all were fine in paradise, the bank could source enough foreign exchange by itself to meet all its obligations rather easily. Project financing, online card payments, raw material importing etc. would all operate very smoothly. Sadly, it all ties back to the economy, and there is simply not enough foreign exchange coming into Nigeria. So the bank must decide what proportion of its foreign exchange goes to each category of need.

I do not work in a bank, but it is safe to say that the bank has to make a decision that looks something like this:

1. How much foreign exchange can we source consistently in a month?

2. What banking services do we need to provide foreign exchange for? Project financing, online card payments, raw material importing, students schooling abroad etc.

3. Which of these services yields us the most profit?

Then I imagine that they then make an internal decision to allocate the dwindling foreign exchange they can source to the most profitable endeavors they are engaged in. You can start to see what kind of services would be prioritized over others. So we find banks reducing the value amount for international transactions they are willing to cover on a naira card.

Still on finance, let’s do some quick maths. The majority of the banks that still allow international transactions on a naira card have a $20 limit per card (or its equivalent). This means that for each card, the bank is willing to source $20. On the consumer side, this is an insanely insufficient amount. I have discovered that I can only pay for any two between Netflix, Spotify, Microsoft Office, Amazon Prime, and the New York Times. I have now canceled my subscription to Frontend Masters, which costs $39 a month. I would rather Netflix and Chill than learn frontend web development, sorry not sorry.

Yet the maths on the bank side is insanely huge. For instance, United Bank for Africa (UBA) claims to have 27 million customers, if I take a conservative amount of 200,000 customers to be the Nigerian customers who use up the $20 dollar limit, then UBA has to source for $4 million dollars monthly to meet this obligation. Now that’s fairly huge! This may also explain why banks like Guaranty Trust Bank (GTB) have totally stopped support for international payments on naira cards, asking customers to get a dollar card, then source for dollars themselves and deposit into the dollar card. Which basically means, you become your own bank. Now that’s very inconvenient!

So what can you do? Well, as a consumer, not much. And the available options a.k.a virtual cards, just suck outrightly. They are expensive and unsustainable for the consumer. To understand why this is the case, we need to understand how card payments work.

The next episode would begin the process of unraveling how money moves when you pay with your card. See you next week!