3 reasons why direct debit hasn’t become a hit in Nigeria

Over the last five years, countless lenders have echoed one sentiment: getting their loans repaid by borrowers is their top priority. In response, we’ve championed direct debit as a better solution for loan repayments and recovery. It’s been lauded for its efficiency, reliability, and the simplicity it offers in automating repayments. 

But if direct debit is so promising, why hasn’t it taken off in Nigeria?

To understand this, we first must grasp what direct debit truly is. Imagine it as a recurring, automated cheque — a tool that allows lenders to pull money from a borrower’s account with prior authorization. Unlike a one-time cheque, direct debit can be drawn upon repeatedly, making it a powerful instrument for ensuring consistent repayments. The Central Bank of Nigeria even treats direct debit failures with the same seriousness as bounced cheques, highlighting their potential importance in the financial system. Learn more about direct debit.

So, why hasn’t this seemingly perfect solution become a hit in Nigeria? The reasons are multifaceted, rooted in history, perception, and practical challenges. Let’s delve into the three key factors holding direct debit back from widespread adoption.

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Reasons why direct debit hasn’t caught on for loan repayments

Despite its potential, direct debit has struggled to gain widespread acceptance in Nigeria due to several key challenges. 

Cumbersome mandate authorization process

Initially, setting up a direct debit mandate was a tedious, paper-based, often unsuccessful process. This complexity discouraged many Nigerians from embracing it, much like the declining use of cheque books. Companies like NIBSS and Remita have since championed direct debit, but their processes were flawed. NIBSS, for instance, began with a paper mandate that had to be manually uploaded by the merchant’s bank before authorization. Remita started electronically but required a paper-based step for final approval. Both processes were slow and often futile — customers disliked the hassle of visiting banks, and banks were reluctant to approve mandates. Even after NIBSS transitioned to a fully electronic API-based system, the core issue persisted: banks were and are still not approving mandates swiftly.

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The all-or-nothing approach

The initial design of direct debit required the exact amount owed to be in the borrower’s account. If a customer owed ₦50,000 but only had ₦49,000 available, the debit wouldn’t go through. While this mirrors how a cheque would bounce if underfunded, it created a significant barrier for borrowers with fluctuating balances. In response, innovators pushed for a more flexible solution, leading to the development of the e-Mandate, which allows for partial debits and activation via transfer. However, its adoption remains limited, especially as many popular digital banks like Opay, PalmPay, Moniepoint, Kuda, and KrediBank (a Lendsqr customer) don’t support direct debit. This means millions of customers still have to rely on their old banks, reducing the appeal and effectiveness of direct debit.

Limited awareness and trust

One of the less discussed but equally impactful reasons for direct debit’s slow adoption in Nigeria is the lack of awareness and trust among consumers. Many Nigerians are unfamiliar with how direct debit works or are wary of giving lenders ongoing access to their bank accounts. Historical issues with financial fraud and unauthorized debits have made people cautious. Even though direct debit is secure, the perception lingers that it’s risky, especially without widespread education on its benefits and safety measures. 

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The future is bright for direct debit

Imagine a time in the near future when the frustrations of today’s direct debit system in Nigeria are just a distant memory. Thanks to the innovative efforts of tech companies like OnePipe, Paystack, Mono, Lidya, Lendsqr, and others, we’re on the brink of transformation. Soon, the challenges we face now will seem like relics of the past, and people will ask, “Did direct debit really used to be that complicated?” 

The day is coming when direct debit will be as smooth, reliable, and indispensable in Nigeria as in countries like the UK and the US. The groundwork is being laid, and it’s only a matter of time before it becomes the backbone of financial transactions nationwide. As always, if you have more questions, contact us at [email protected].