Impact of Digital Payment System on the Efficiency of the Nigerian Banking Sector

Abstract

In this paper we examine the contribution of digital payment system on the efficiency of the banking sector in Nigeria. Quarterly data covering 2009-2018 were generated from Central Bank of Nigeria (CBN) Statistical Bulletin and World Bank database. We employ the Ordinary Least Square (OLS) regression, after testing for the properties of time series using Augmented Dickey-Fuller (ADF) and Philip-Peron (PP) test of stationarity. Engle and Granger test for co-integration were conducted to determine the existence of long run relationship. The speed of adjustment was determined using the Error Correction Model (ECM). The result of the study shows that digital payments proxied by Automated Teller Machine (ATM) transactions, Point of Sales (POS) transactions, Mobile Payment (MP) transactions and Web Payment (WP) Transactions has negative and significant impact on bank efficiency proxied by bank overhead cost both in the long and short run. The effect of digital payment on total cost as a ratio of income varies according to the variable used to proxy digital payment. Our finding also reveals that digital payment contributes positively to noninterest income, return on equity, and return on assets of banks in Nigeria. The result suggests that a well-developed digital payment system in Nigeria will improve banking sector performance hence the overall performance of the economy. We therefore recommend that Nigerian banks should formulate policies that will enhance accessibility of the available digital payment platforms by all users of financial services in Nigeria so as to increase the volume and the value of their transaction and as well strive to explore other new digital payment systems.