Oludare Senbore Nafisa Adama March 22 2019 Financial inclusion: Central Bank of Nigeria introduces payment service banks Aluko & Oyebode | Banking & Financial Services - Nigeria Oludare Senbore, Nafisa Adama Banking & Financial Services IntroductionHighlights of guidelinesCommentIntroductionOn 26 October 2018 the Central Bank of Nigeria (CBN) – in a bid to promote a sound financial system and enhance access to financial services for low-income earners and the unbanked segments of the Nigerian population – issued the Guidelines for Licensing and Regulation of Payment Service Banks (PSBs) in Nigeria, thereby introducing PSBs to the Nigerian financial sector.The guidelines were issued pursuant to the National Financial Inclusion Strategy launched by the CBN in 2012, which aims to ensure that more than 80% of bankable adults in Nigeria have access to financial services by 2020. The main objective of establishing PSBs is to enable high-volume, low-value transactions in remittance, micro-saving and withdrawal services in a secured technology-driven environment. This is particularly important in rural areas which require greater financial inclusion.Highlights of guidelinesEligibilityThe guidelines provide a non-exhaustive list of entities that are eligible to apply for a PSB licence, including:banking agents;telecoms companies (through subsidiaries);retail chains (eg, supermarkets);mobile money operators;postal services providers and courier companies;fintech companies;financial holding companies; andother entities that the CBN may consider eligible.Where the promoter of a PSB is a regulated entity, it must obtain approval or a no-objection letter from its primary regulator and submit this to the CBN at the licensing application stage. The guidelines also preclude switching companies which already have a record of or data pertaining to a financial system operator from establishing PSBs so as to avoid conflicts of interest.Structure of PSBsPSBs are structured to facilitate banking services through physical access points or other digital interfaces, including mobile or internet-enabled channels. The guidelines provide that PSBs will operate mainly in rural centres and unbanked locations and must have at least 25% of their 'financial services touch points' (to be defined by the CBN) in these areas. Further, they must:establish automated teller machines (ATMs);operate through banking agents in accordance with the CBN Guidelines for the Regulation of Agent Banking and Agent Banking Relationships in Nigeria 2013; anduse other channels, including electronic platforms, to reach out to customers.The Nigerian financial industry has made commendable progress in driving growth through the adoption of e-payment platforms, such as mobile banking. This has become a prominent feature in daily banking operations in Nigeria, with an increasing number of banks adopting this technology to provide fast, reliable and high-quality services to the vast majority of the population. With an increase in the use of smartphones in Nigeria, PSBs have a ready market in mobile banking for the deployment of their services through intuitive and user-friendly mobile applications.Notwithstanding the above, a significant number of communities across Nigeria still lack access to basic telephony services; therefore, a large number of the population will be new users to the digitised service offerings of PSBs. To bridge this gap, PSBs will need to be hands on in attracting and guiding their prospective customers to use their services (hence the requirement for physical access points). To ensure operational efficiency, boost revenue and successfully acquire and retain a substantial customer base, the physical access points of PSBs must complement their digital banking services. PSBs must also digitise the entire chain of their service delivery – from their physical customer service desks to their back-end operations. This will ensure a more synchronised and consistent customer experience. In this regard, PSB applicants with existing infrastructure and customer bases are at an advantage, as they may leverage their existing capabilities to commence business operations immediately.In conducting their business, PSBs – with their parent companies or other counterparts – must be mindful of stifling competition or raising anti-trust concerns. Therefore, such partnerships or business collaborations must be properly managed and fine-tuned to ensure fair competition within the industry. A largely digitised structure will also ensure that PSBs can efficiently manage operational costs incidental to the infrastructure required to set up access points and ATMs (eg, by concentrating physical access points in areas where access to mobile networks and other technology-enabled applications is low). The requirement for physical access points may also be augmented by using bank agents as access points.PSBs must establish coordinating centres in clusters of outlets to control the activities of their various access points and banking agents. They must also establish online and offline consumer help desks at their main offices to manage consumer-related issues. Finally, PSBs must be technology driven and conform to best practices on data storage, security and integrity of their operations. It is critical that PSBs adhere to the various data protection privacy laws applicable in Nigeria.Permissible and non-permissible activitiesThe guidelines set out specific activities that are permissible and non-permissible for PSBs.Permissible activities are:accepting deposits from individuals and small businesses, which will be covered by the deposit insurance scheme;carrying out payment and remittance (including inbound cross-border personal remittances) services through various channels within Nigeria;selling foreign currencies realised from inbound cross-border personal remittances to authorised foreign exchange dealers;issuing debit and pre-paid cards;operating electronic wallets;rendering financial advisory services;investing in federal government and CBN securities; andcarrying out such other activities as may be prescribed by the CBN.Non-permissible activities are:granting any form of loan, advance and guarantee directly or indirectly;trading in foreign exchange markets, except as permitted when carrying out the services in points two and three above;undertaking insurance underwriting or any other transactions which are not prescribed by the guidelines;accepting any closed scheme electronic value (eg, airtime) as a form of deposit or payment; andestablishing a subsidiary, except as prescribed in the CBN Regulation on the Scope of Banking and Ancillary Matters (3/2010).In prescribing permissable activities for PSBs, the CBN has adopted a slightly restrictive approach, perhaps in a bid to streamline their activities and distinguish them from traditional banks and other financial inclusion vehicles, such as microfinance banks. For instance, while PSBs are prohibited from granting any form of loan, advance or guarantee to their customers, microfinance banks have no such restrictions. PSBs are also limited in investment opportunities, such that they must maintain at least 75% of their deposit liabilities in CBN securities, treasury bills and other short-term federal government debt instruments. These are generally considered to be low-risk investments, with generally low to mid-level returns and a higher level of certainty for the securities to be realised into cash as and when they are due.Capital requirementsThe guidelines prescribe a unified capital base requirement of N5 billion for obtaining a licence to operate as a PSB. Further, there is:a non-refundable application fee of N500,000;a non-refundable licensing fee of N2 million; anda name change fee of N1 million.These fees may be varied at the CBN's discretion. The unified capital base requirement is another distinguishing feature between PSBs and traditional or microfinance banks which prescribes capital requirements in accordance with the region of operational coverage (ie, national or state banks).Key considerations for PSBsBelow are the key considerations for prospective PSBs:Parent companies, in leveraging their existing infrastructure, should ensure a smooth transition into the banking industry (with the establishment of a PSB) with minimal disruptions to their primary businesses so as to protect their existing customer base while acquiring new ones.PSBs must also consider tailoring their business structures to the peculiarities of the Nigerian market. Consumers exist within distinctive sections of society with different demographics, challenges and demands. Broadly speaking, they may be categorised as:the banked segment, which has the highest access to the Internet and technology-enabled applications; andthe unbanked segment, which has limited access to the Internet.Therefore, PSBs must adopt strategies that enable them to address the challenges of consumers, develop products that appeal to the demographics of the respective sections and meet their demands.PSBs should carefully identify strategic alliances that will boost their profitability while ensuring a healthy environment that fosters competition.In a largely digitised market, the operations of PSBs will depend heavily on data collection to drive key decision-making processes. Therefore, PSBs are encouraged to invest in data intelligence to enable them to regularly evaluate their business strategies and ensure that the business continually serves customer needs.CommentPSBs can successfully disrupt longstanding traditional banking models in Nigeria by being more responsive to changing market trends and proving themselves to be more attractive to potential customers. Ultimately, the success and longevity of PSBs will largely depend on their business approach to the market and value propositions and the extent to which these satisfy the demands of their prospective customers. The CBN is likely to clarify, in subsequent guidelines or circulars, the key implementation requirements with which PSBs must comply, including how it will measure fulfilment of the requirement for 25% of a PSB's financial touch points to be in rural areas.In addition, the CBN may relax its rules to allow PSBs to provide small consumer credits or loans. This is advisable, as it would cater to the large section of the population that is currently unable to obtain credit facilities.For further information on this topic please contact Oludare Senbore or Nafisa Adama at Aluko & Oyebode by telephone (+234 1 462 8360 71) or email ([email protected] or [email protected]). The Aluko & Oyebode website can be accessed at www.aluko-oyebode.com.