E-commerce has made tremendous growth in Nigeria since the massive penetration of internet services in Nigeria and with it came lots of gaps in the Nigerian payments system. The Central Bank of Nigeria (“CBN”) which is responsible for the overall management of Nigeria’s financial system has the specific power to regulate, promote and facilitate payments. Section 47 (2) and (3) of the Central Bank of Nigeria (Establishment) Act (the “Act”) empowers the CBN to promote and facilitate the development of efficient and effective systems for settlement of transactions (including development of electronic payment systems).
The CBN is also empowered to prescribe rules and regulations for the effective operations of all clearing and settlement systems. In line with this mandate, the CBN has continued to develop regulations, guidelines and circulars that define, regulate and control payment activities within and beyond the traditional banking system. Some of these regulations and guidelines have been discussed in my previous articles.
On January 30th 2017, the CBN published an exposure draft of the ''Guidelines for the Direct Debit Scheme (Revised),” and ''Guidelines Bills Payments in Nigeria”. The CBN explains that the revised version of the guidelines on direct debit “recognizes the existing and emerging multi-channel options (Online platforms, Instant Payments etc.) applied for Direct Debit instructions in Nigeria. In addition, the provisions of these guidelines are harmonized with developments in the payments system since the release of the last version.”
According to Wikipedia, “[a] direct debit or direct withdrawal is a financial transaction in which one person withdraws funds from another person's bank account. Formally, the person who directly draws the funds ("the payee") instructs his or her bank to collect (i.e., debit) an amount directly from another's ("the payer's") bank account designated by the payer and pay those funds into a bank account designated by the payee. Before the payer's banker will allow the transaction to take place, the payer must have advised the bank that he or she has authorized the payee to directly draw the funds. It is also called pre-authorized debit (PAD) or pre-authorized payment (PAP).” As such, once the payer has given an initial authorisation to the payee to collect funds from an account he holds with a financial institution (a commercial bank), that authorisation is continuous and the right of the payee to keep collecting that sum (or an expected variation of the sum) becomes running except the payer stops or revokes the authorisation.
When you think of a direct debit, subscription fees for your LinkedIn account, Netflix etc. quickly comes to mind. Some important features of a direct debit are that 1), the amount to be debited is does not have to be fixed, it may vary from one payment to another, 2) the date that the debit is to occur is known and fixed, 3) the bank is not an integral part of the contract and 4) the payment is usually initiated by the payee and not the payer/account owner. Please note that a direct debit is not direct deposit or a standing order, which are instructions by the account owner or payer to his bank to credit a certain amount of money to a payee at a pre-determined date.
This initiative by the CBN is ripe and commendable, considering the volume of online transactions in Nigeria and our participation in international e-commerce transactions on a daily basis. It is important to note that the CBN already had an existing guideline for direct deposit and Nigerians have been able to utilize their bank cards, (both MasterCards and Visa Cards) to make direct debit payments to both foreign and local merchants. However, this revision is aimed at bringing the said guidelines up to date with trends in the payments industry and to ensure that all parties to such transactions are protected, regulated and monitored.
The provisions of the two guidelines are standard and comparable to those of other developed countries. However, some of them are noteworthy:
1. Biller’s bank must be a member of the clearing system or integrated with Payment Service providers that accept Direct Debit for processing.
2. The Biller’s bank shall hold an account for the Biller to receive proceeds of Direct Debit.
3. Payer’s bank must be a member of the clearing system or integrated with Payment Service providers that accept Direct Debit for processing.
4. Payment Service Providers must be duly licensed by the Central Bank of Nigeria and subject to electronic payment guidelines.
5. Direct Debit transactions are of 2 types: a. Fixed Direct Debit: allows fixed amounts to be debited from a payer's account. b. Variable Direct Debit: allows variable amounts to be debited from a Payer's account. Typically used for payments where amounts cannot be predetermined in advance. In this instance, there is need for the service provider to intimate the subscriber (payer) of the invoice amount before the debit is sent to his/her bank.
6. A penalty should be applied to the payer for Direct Debit instructions not honored due to insufficient funds. The penalty prescribed for dud cheques shall apply.
Point 1 through 4 above suggests that the merchant’s (biller’s) bank must be a Nigerian bank or the merchant must employ the services of a local payment service provider. As such, one would imagine that international merchant that intend to continue to use this medium must comply with these requirements, if that have not been the case.
The CBN has called for comments from stakeholders before the final version of the two guidelines are issued. The draft guidelines can be downloaded athttps://www.cbn.gov.ng/Out/2017/BPSD/GUIDELINES%20FOR%20THE%20DIRECT%20DEBIT%20SCHEME%20AND%20BILL%20PAYMENTS%20IN%20NIGERIA.pdf
 Section 47 (3) of the Central Bank of Nigeria (Establishment) Act.
 Debit Guidelines for Direct Debit Scheme in Nigeria, 2017 (revised)
Corporate, Energy and Environmental Law Practitioner.
Ed’s Note – This article was first posted here.