PAYMENT SERVICE BANKS: CHARTING A NOVEL COURSE IN NIGERIA’S FINANCIAL SERVICE PROVISION.

The Nigerian Central Bank (CBN) in October 2018 proposed the establishment of Payment Service banks (PSBs) via a communique directed to all the financial service stakeholders. According to the Apex Bank, this is an effort to promote financial inclusion and enhance access to financial services for low income earners as well as unbanked segments of the society through leveraging on technology. When properly established, PSBs would enhance financial inclusion in rural areas by increasing access to deposit products and payment/remittance services to small business, low income households and other entities through high-volume low-value transactions in a secured technology driven environment.

According to KPMG Nigeria’s review on PSBs, the Firm stated that PSBs serve as a catalyst to usher in a revolution in delivering innovative payment solutions to customers across evolving channel environment. Significantly, these ‘challenger banks’ would compete against established banking entities, but their success would depend on their approach to market and the value propositions they create. Admittedly, the Nigerian ecosystem could impact on the long term success of PSBs as traditional banks would seek to retain their base and equally, may diversify to incorporate similar services that PSBs offer. However PSBs may find it relatively easier to attract a profitable customer pool since their key strengths hinge on greater responsiveness to customer needs, cost effective service provision, no legacy constraints and concerted rural penetration.

Structure of PSBs

In line with the CBN regulation Payment Service Banks shall:

1. Operate mostly in the rural centres and unbanked locations, with not less than 50% physical access points in rural areas;

2. Establish ATMs in some of these areas;

3. Be at liberty to operate through banking agents in line with CBN Regulation of Agent Banking and Agent Banking Relationships in Nigeria;

4. Use other channels including electronic platforms to reach out to its customers;

5. Establish coordinating centres in clusters of outlets to superintend and control the activities of the various access points and banking agents;

6. Be technology driven and shall conform to best practices on data storage; security and integrity;

7. Set up consumer help desks at its main office and coordinating centres to attend to consumer related issues.

A striking monetary flexibility in setting up a PSB is the minimum paid up share capital of five billion Naira (N5,000,000,000). In addition to the structural requirements above, PSBs can engage in the following permissible activities:

·        Collection of deposit which is limited to the private sector

·        Payment and remittances

·        Issue debit and prepaid cards

·        Invest in federal Government and CBN securities

·        Sale of foreign currencies realized from inbound cross-border personal remittances.

They are prohibited from

·        Granting loans, advances and guarantees

·        Trading in the foreign exchange market

·        Insurance underwriting

·        Establish subsidiary except as permitted by the CBN

Banking Agents, Telecos, retail chains, mobile money operators, courier companies, fintech firms are eligible to apply for a PSB license. Notably, switching companies are excluded from owning PSBs to avert any conflict of interest as they may have access to the data of other operators.

The advent of mobile banking and USSD provide strategic opportunities for PSBs to enter the Nigerian market, so to speak. The country’s banking ecosystem is characterized by two extreme gaps- On the one hand there is the fairly literate generation found in parts of the urban centres but largely domiciled in the rural areas. On the other hand there is the modern generation characterized by young, vibrant and tech-savvy consumers disposed to utilizing tech integrated financial services. PSBs could connect these two gaps by providing a holistic integrated banking platform, but they must first identify their targeted base and tailor their services to accommodate the diverse customer pool.

PSBs offer access to basic banking services; simple payment platforms with local multilingual interfaces and mobile payment system to effect non-cash transactions among others. Because of the difficulty squaring up with traditional banks, PSBs must be digital to the core if they are to survive the aggressive competition, however they must set up physical branches at strategic points to complement the digitalization policy and not to look 'abstract' to the fairly or totally illiterate customers.

To accentuate their potentials, PSBs can also create acquisition platforms whereby it can offer payment services, purchases, and similar transaction interfaces. These services will not just be ancillary to the existence of PSBs but would be an integral part of it success.

The growth of PSBs will expectedly herald competition, but we may see a future situation where there will be more collaborations between firms in the finance sector (Banks and PSB for instance) to harness business alliances deliver complementary services. The CBN guidelines is however not comprehensive as to the position where there is a relationship between a parent company and subsidiary PSB company, some banks may be looking into this already! (The guideline merely restricts the scope of this relationship to fair competition).

In conclusion, PSBs could offer innovative approach in the Nigerian finance space provided the rudimentary competitive and regulatory issues are being fine tuned. The possibility of higher consumer engagement in the short term may be expected, but maintaining the consistency in their market objectives may prove arduous. At any rate we should be delighted that the banking sector is witnessing a paradigm shift, and a positive one at that!

Sources:

1.        CBN Draft Exposure on the Guidelines for Licensing and Regulation of Payment Service Banks, Financial Policy and Regulation Department, October 2018.

2.       KPMG Nigeria ‘Payment Service Banks: The Challenger Banks in Nigeria’ December 2018.