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THE EFFECTOF CASHLESS POLICY AND DIGITAL PAYMENTS ON TRANSACTION COSTS AND BANKING EFFICIENCY IN NIGERIA
CHAPTER ONE
INTRODUCTION
Abstract
This chapter introduces the study on the effect of cashless policy and digital payments on transaction costs and banking efficiency in Nigeria. It examines how the Central Bank of Nigeria’s (CBN) cashless policy, introduced in 2012 and evolved through subsequent reforms, has promoted digital payment channels such as mobile banking, POS terminals, ATMs, and web payments. Recent scholarly evidence indicates that these shifts have generally reduced operational costs for banks by minimizing cash handling expenses, enhanced transaction speed and efficiency, and supported broader financial inclusion. However, challenges persist, including higher perceived costs for some users, cybersecurity risks, and uneven adoption across segments. The study highlights the policy’s role in lowering long-term transaction costs while improving banking operational efficiency, drawing on empirical insights from 2020–2026 to assess impacts in Nigeria’s evolving digital financial landscape.
1.1 Background of the Study
Nigeria’s banking sector has undergone significant transformation since the introduction of the cashless policy by the Central Bank of Nigeria (CBN) in 2012. The policy aimed to reduce the high costs associated with cash management, estimated at over ₦50 billion annually for the financial system, while promoting electronic payments to enhance efficiency, curb inflation, and improve monetary policy effectiveness. Key objectives included minimizing cash handling risks, reducing operational burdens on banks, and fostering a more transparent and inclusive financial ecosystem.
Over the years, the policy has evolved with accelerated digital adoption, particularly post-COVID-19, leading to exponential growth in digital transactions. Channels such as mobile money, Point-of-Sale (POS) terminals, Automated Teller Machines (ATMs), internet banking, and the eNaira (launched in 2021) have become central to this shift. Recent analyses show that cashless transactions, including mobile and online payments, exert a significant long-term positive influence on economic performance by lowering transaction costs and boosting efficiency. For instance, mobile payment systems have been optimized to reduce costs through greater awareness, expanded network coverage, and technological investments that enhance security and accessibility.
Empirical studies confirm that the cashless policy has contributed to substantial reductions in banks’ cash handling and maintenance expenses potentially up to 90% in a fully cashless environment translating to lower service costs for customers and improved profitability through operational streamlining. Digital payments have also driven efficiency by reducing queues, enabling real-time transactions, and facilitating financial intermediation. However, mixed outcomes exist: while ATMs and certain electronic channels positively correlate with sector development and performance, some segments like POS and mobile banking have shown inverse short-term effects in certain contexts due to infrastructure and adoption barriers.
As of 2025–2026, digital payments continue to rise, with policies reinforcing lower merchant service charges and agent banking to deepen inclusion. These developments align with global trends toward cashless economies, positioning Nigeria’s banking sector for greater resilience and efficiency amid ongoing challenges like infrastructure limitations and security concerns.
1.2 Statement of the Problem
Despite the intended benefits of the cashless policy, its implementation has generated mixed results regarding transaction costs and banking efficiency in Nigeria. While the policy has successfully reduced cash management costs for banks and promoted faster, more transparent transactions, evidence suggests persistent issues. Some studies indicate that the shift has increased perceived or direct costs for users, including charges for e-cards, POS transactions, and technologies required for digital adoption, alongside normal banking fees. This has led to concerns that electronic payments may not consistently lower transaction costs for all stakeholders, particularly in rural or low-income segments where infrastructure gaps and digital literacy remain barriers.
Furthermore, banking efficiency gains such as reduced operational queues, improved intermediation, and profitability have been uneven. Certain digital channels exhibit positive impacts on returns and sector development, but others show insignificant or negative short-term effects, potentially due to cybersecurity vulnerabilities, regulatory arbitrage, and slow infrastructure upgrades. These inconsistencies risk undermining consumer trust, slowing adoption, and limiting the policy’s potential to achieve broad efficiency improvements. With cash remaining indispensable for inclusion and operational needs in diverse economic segments, the gap between policy aspirations and practical outcomes necessitates empirical investigation into how cashless measures truly affect transaction costs and overall banking efficiency in Nigeria.
1.3 Objectives of the Study
- Examine the impact of cashless policy on transaction costs in Nigeria’s banking sector.
- Assess the effect of digital payments on banking operational efficiency.
- Evaluate the overall relationship between cashless initiatives and financial sector performance.
1.4 Research Questions
- To what extent has the cashless policy reduced transaction costs in Nigeria’s banking sector?
- How do digital payment channels influence operational efficiency in Nigerian banks?
- What is the relationship between cashless policy implementation and overall financial sector performance in Nigeria?
1.5 Research Hypotheses
H01: There is no significant impact of cashless policy on transaction costs in Nigeria’s banking sector. H02: Digital payments do not significantly affect banking operational efficiency in Nigeria. H03: Cashless initiatives have no significant relationship with financial sector performance in Nigeria.
1.6 Significance of the Study
This study provides valuable insights for policymakers, such as the CBN, by offering evidence-based recommendations to refine cashless policies for balanced cost reduction and efficiency gains (Okafor et al., 2025). For bank managers, it highlights strategies to leverage digital channels for improved profitability and customer satisfaction, addressing challenges like infrastructure deficits (Muritala, 2024). Academics benefit from updated analyses on cashless impacts in emerging markets, filling literature gaps post-2021 eNaira rollout (Akhalumeh, 2025). Overall, it supports enhanced financial inclusion and economic growth through efficient banking practices.
1.7 Scope of the Study
The study focuses on Nigeria’s deposit money banks, examining cashless policy effects from 2012 to 2026, with emphasis on digital channels like mobile banking, POS, ATMs, and web payments. It relies on secondary data from scholarly sources and CBN reports, limited to urban and semi-urban contexts where adoption is prominent, excluding microfinance and international comparisons.
1.8 Limitations of the Study
Access to proprietary bank data on transaction costs may be restricted, limiting empirical depth. Rapid policy evolutions could date findings quickly, and reliance on secondary sources introduces potential biases, though mitigated by multiple cross-references (Okafor et al., 2025).
1.9 Definition of Terms
- Cashless Policy: CBN initiative to reduce cash usage through electronic transactions, aiming for cost efficiency and inclusion.
- Digital Payments: Electronic channels including mobile banking, POS, ATMs, and web transfers for financial transactions.
- Transaction Costs: Expenses related to cash handling, fees, and operational overheads in banking.
- Banking Efficiency: Measures of operational speed, cost-effectiveness, and profitability in financial services delivery.
References
Akhalumeh, P. B. (2025). The nexus between cashless banking policy and returns of license deposit money banks (DMBs) in Nigeria. International Journal of Research and Innovation in Social Science, 9(14), 1727-1748. https://rsisinternational.org/journals/ijriss/Digital-Library/volume-9-issue-14/1727-1748.pdf
Akintunde, T. S., et al. (2020). Cashless policy in Nigeria: Effects, challenges and prospects. Journal of Finance and Accounting, 8(1), 29-37. https://www.sciencepublishinggroup.com/article/10.11648/j.jfa.20200801.13
Muritala, T. A. (2024). The impact of Nigeria’s cashless policy on banking sector transformation and economic development. International Journal of Science, Engineering and Innovation, 1(1). https://journals.aseiacademic.org/index.php/ijsei/article/view/550
Okafor, C. E., et al. (2025). Effect of cashless policy on financial sector development in Nigeria. International Journal of Finance, 10(1). https://carijournals.org/journals/IJF/article/download/2546/2972/7354
Okafor, C. E., et al. (2025). Impact of cashless policy on economic growth in Nigeria. IIARD International Journal of Economics and Financial Management, 10(2). https://www.iiardjournals.org/abstract.php?id=60694&j=IJEFM&pn=Impact+of+Cashless+Policy+on+Economic+Growth+in+Nigeria
Ovat, O. O. (2023). Impact of cashless policy on commercial banks performance in Nigeria. Journal of Economics and Finance, 14(2), 45-60. https://www.academia.edu/112466053/IMPACT_OF_CASHLESS_POLICY_ON_COMMERCIAL_BANKS_PERFORMANCE_IN_NIGERIA