Investment Banking firm Cardinal Stone Partners in its latest weekly report revealed why it thought commercial banks in Nigeria were charging customers parallel market rates when they use their debit card for online forex transactions.
In a research report sent to its clients, the firm opined that banks made a lot of money from Card/E-banking Revenue by charging customers parallel market rates after it agreed “informally” with the CBN to do so as a means of discouraging arbitrage.
Card revenue for the banks in our coverage universe grew by an average of 88% between FY’15 and H1’16 (annualized) respectively. The significant jump between FY’15 and H1’16 as we gathered was partly as a result of an informal agreement between the CBN and banks to set card rate close to parallel market rate so as to discourage FX round tripping and speculations. Card transactions are typically settled by Nigerian banks at a rate that is substantially higher than the interbank rate (spread to interbank rate is about 55% on average). With this many banks saw a substantial improvement in non-interest income despite the lack of liquidity in the interbank FX market.
Nairametrics readers will recall clearly that forex transactions on Naira debit cards were typically charged rates closer to the parallel market rates instead of the interbank of (fixed rate as it were before floating) that many had expected. This confused a lot of people who did not understand why the rates were that high.
This also explains why a lot of Nigerian banks posted significant rise in revenue from Card/E-Business. According to the report, Cards/E-banking Revenue on average accounted for 7% of total revenue representing a growth of about 88% year on year. However, they also opine that this revenue boom might dissipate in the final quarter of 2016, following then decision of most banks to suspend the usage of cards for online forex transactions.
We expect a significant reduction in the contribution of card revenues to non-interest income in Q4 if the suspension of card transactions persist. However, the impact on FY revenue would be minimal since only Q4 card revenues will be affected. On our previous FY’16 e-banking revenue estimate of N157.8 billion for the banks in our coverage, we estimate a 12% reduction across board. Access bank and UBA will likely be the most affected as e-banking revenues account for 10.8% and 10.9% of gross earnings for the two banks – the highest in the industry.
E-banking Revenue Growth
| Coverage Banks | FY’15 | H1’16 |
| Access | 69.0% | 659.4% |
| Diamond | 77.4% | 11.4% |
| FBNH | 34.1% | 37.5% |
| FCMB | 32.8% | 30.3% |
| Fidelity | 323.3% | 343.0% |
| Guaranty | 220.9% | 219.7% |
| UBA | 46.1% | 183.4% |
| Zenith | 21.4% | 40.5% |
