Review of regulatory framework of CBN’s payment service banks and its prospects for Nigeria’s economy

The Central Bank of Nigeria (CBN) has since launched the National Financial Inclusion Strategy (NFIS), the objective of which is to ensure that over 80 percent of the bankable adults in Nigeria have access to financial services by 2020. In pursuit of this objective the NFIS birthed several initiatives, including the introduction of Microfinance Banking, Agent Banking, Tiered Know-Your-Customer Requirements and Mobile Money Operation (MMO). Nevertheless, the financial inclusion rate remains below expectation as a large percentage of the Nigerian populace remains unbanked, with little or no access to financial services. Consequently, the CBN consulted with critical stakeholders in the digital financial ecosystem, such as the Nigerian Communications Commission, commercial banks, mobile money operators and teleco mmunication companies and created payment service banks in Nigeria.

The CBN through its Financial Policy and Regulation Department on October 5, 2018 released draft Guidelines for the Licensing and Regulation of Payment Service Banks (Guidelines) in Nigeria. Sequel to that, on October 28, 2018 the CBN issued a final version of the Guidelines. This article sets out to review the provisions of the Guidelines to enable a better understanding of its aims and desired reforms, which are designed to increase the country’s level of financial inclusion and achieve global standards for financial inclusion. We have also attempted to assess the prospects, advantages and challenges associated with execution of the Guidelines and offered recommendations towards addressing some of the issues envisaged.

0bjective and structure of Payment System Banks (PSB)
As earlier mentioned, the objective of setting up PSBs is to promote financial inclusion and enhance access to financial services to people in rural areas, low income earners who make up a significant percentage of financially excluded people in the society by leveraging on available technology. The phrase “available technology” refers to all mobile and digital channels that facilitate the provision of financial services, stimulate economic activities at the grassroots level and ultimately enhance financial inclusion

From the foregoing, PSBs are to focus on the facilitation of financial services in the rural areas and unbanked locations. They are to enter into direct partnership with card scheme operators for the purpose of issuing out debit and pre-paid cards to their customers although such cards shall not be eligible for foreign currency transactions. They shall also deploy ATMs and Point of Sale devices in some of their areas of operation.

In addition, PSBs may operate through banking agents (in line with the CBN’s Guidelines for the Regulation of Agent Banking and Agent Banking Relationships in Nigeria), roll out agent networks with the prior approval of the CBN and also use other channels including electronic platforms to reach-out to their customers. They are required to establish coordinating centres in clusters of outlets to superintend and control the activities of the various financial services touch points and banking agents they deploy. They have to be technology-driven and shall conform to best practices on data storage, security and integrity. As a matter of importance, they shall set up consumer help desks (physical and online) at their main office and coordinating centres.

Eligible Promoters and Licensing Requirements
While the CBN is desirous of driving its NFIS, it does not appear to be the case that anyone can just promote a PSB. This is because the Guidelines provide that only Banking Agents, Telecommunications companies (through subsidiaries), Retail chains (supermarkets, downstream petroleum marketing companies), Postal services providers and courier companies, Mobile Money Operators, Financial technology companies (Fintech), Financial Holding Companies and any other entity on the merit of its application subject to the approval of the CBN can promote a PSB. Anyone from the above-mentioned categories Promoters of a PSB shall be required to submit a formal application for the grant of a Payment Service Bank licence addressed to the Governor of the CBN. They shall also present a proposal to that effect to the Director, Financial Policy and Regulation Department (FPRD), CBN. The proposal shall cover the items listed in the regulations, which includes business case, vision and strategy, governance arrangements, risk management, compliance and financial viability. The financial requirements for the registration and operation of PSBs are: i. A non-refundable application fee of N500, 000 only. ii. Non-refundable licensing fee of N2, 000,000 only. iii. The minimum capital of PSBs shall be ₦5,000,000,000 only. iv. Change of name fee of ₦1,000,000,000.

Revocation of a PSB’s license shall be in line with the provision of BOFIA or through voluntary liquidation subject to the approval of the CBN. Having met the requirements stated in the Guidelines1, the PSB shall apply for the grant of an Approval-In-Principle. Where this is granted, not later than six months thereafter, the promoters of a proposed PSB shall submit an application for the grant of a final license to the CBN, along with the required documents.

Permissible And Non-Permissible Activities of PSBs
PSBs are meant to facilitate high-volume low-value transactions in remittance services, micro-savings and withdrawal services in a secured technology-driven environment. They are allowed to carry out the following activities: i. Accept deposits from individuals and small businesses, which shall be covered by the deposit insurance scheme. ii. Carry out payments and remittances (including inbound cross-border personal remittances) services through various channels within Nigeria. iii. Sale of foreign currencies realized from inbound cross-border personal remittances to authorized foreign exchange dealers. iv. Issue debit and pre-paid cards on its name. v. Operate electronic wallet. vi. Render financial advisory services. vii. Invest in FGN and CBN securities; and viii. Carry out such other activities as may be prescribed by the CBN from time to time.

Payment Service Banks are prohibited from carrying out the following activities. i. Grant any form of loans, advances and guarantees (directly or indirectly); ii. Accept foreign currency deposits. iii. Deal in the foreign exchange market except the purpose is to Carry out payments and remittances (including inbound cross-border personal remittances) services through various channels within Nigeria and/or sale of foreign currencies realized from inbound cross-border personal remittances to authorized foreign exchange dealers. iv. Insurance underwriting. v. Undertake any other transaction, which is not prescribed by the Guidelines. vi. Accept any closed scheme electronic value (e.g. airtime) as a form deposit or payment. vii. Establish any subsidiary except as prescribed in the CBN Regulation on the Scope of Banking and Ancillary Matters, No 3, 2010.

Corporate Governance and compliance issues by PSBs
A PSB shall use the words “Payment Service Bank” in its name to differentiate it from other banks. Further, where a PSB is incorporated by a corporate entity, the name of the PSB shall not include any word that links it to its parent company. For example a telecommunication company named Beeline cannot incorporate a PSB named Beeline PSB.

Concerning a PSB incorporated by a parent company, the parent company shall observe the Business Conduct (Fair Competition) provisions in the Guidelines in its dealings with the PSB and other related entities. In other words, where it offers services to the PSB, it shall render the same services to similar entities on the same terms and conditions. Also, it shall not offer any preferential treatments to the PSB in negation of fair competition. A breach of these provisions may result in the revocation of the license of such a PSB.
In the event that an existing infrastructure provider, which provides services to other financial institutions, is related to a PSB, such a PSB shall ensure that its dealings with the infrastructure provider are at arms-length. Arm’s-length is defined in the Glossary of the regulations to mean acting freely and independent of each other (keeping personal relationships aside where this exists); the terms of a transaction between related parties should not differ from the terms that would have applied between unrelated persons in a comparable transaction.

The CBN code of corporate governance for banks shall govern PSBs. Consequently, the total number of directors a PSB is permitted to have is between 5 and 7, with at least 2 independent directors.2 Furthermore, the provisions of the Revised Assessment Criteria for Approved Persons’ Regime for Financial Institutions shall be applicable to a PSB.3 Worthy of note is that where a PSB is to be financed by debt equity, such debt facility must not be taken from a Nigerian bank and it must be a long-term facility, having a tenor of at least seven years.

Risk management and internal control provisions
The CBN’s approach to the management of risk associated with PSBs may be divided into credit risk and other risks. In terms of credit risk management, PSBs are not permitted to grant any form of loans and advances. As such, the provisions for management of credit risk applicable to Deposit Money Banks (DMB) shall not apply to PSBs. However, the capital measurement approach for credit risk for PSBs shall be as applicable to DMB or as may be prescribed by the CBN from time to time. With regards to the management of other risks, such as market, operational, liquidity, strategic, information technology and reputational risks, they shall be as may be prescribed by the CBN from time to time. The provisions regarding internal controls, audit and compliance by the PSBs shall be as applicable to DMBs, with appropriate enhancements to take care of the information system related aspects and operations through agents. PSBs shall also implement appropriate controls to ensure strict confidentiality of customers’ data and information.

Investment of excess deposits of PSBs
The “how” and the percentage of investment of deposits made by PSBs is a regulated activity on the Guidelines. The Guidelines provide that not less than 75 per cent of a PSB’s deposit liabilities shall be invested in CBN securities. That is to say a minimum of 75 per cent of deposits shall be invested in Treasury Bills and other short-term Federal Government debt instruments at any point in time. All excess funds in a PSBs operational float shall be deposited with Deposit Money Banks. Also, a PSB shall not declare or pay dividend on its shares until it has completely written-off all its preliminary and pre-operational expenses, made adequate provisions to the satisfaction of the CBN for actual and contingent losses, satisfied the minimum Capital Adequacy Ratio (of 10 per cent or as may be prescribed by the CBN from time to time) requirement as provided in the Guidelines, met all matured obligations, complied with all relevant CBN regulations on dividend payments and obtained the approval of the CBN in respect thereof. From the tenor of the guidelines it is understood that these conditions are not exclusive of each other, they must all be satisfied before dividends can be paid to the shareholders.

Supervision of PSBs by CBN
PSBs shall be under the supervision of the Central Bank of Nigeria and shall be governed in line with the provisions of the CBN Code of Corporate Governance for Banks. The provisions of the Revised Assessment Criteria for Approved Persons’ Regime for Financial Institutions shall also be applicable to PSBs. PSBs shall comply with relevant provisions of the Money Laundering (Prohibition) Act, 2011 (as amended), Terrorism Prevention Act, 2011 (as amended), CBN AML/CFT Regulations for Banks and Other Financial Institutions 2013, other extant laws and regulations on Know Your Customer issued by the CBN. PSBs shall adopt risk-based approach in the conduct of KYC and ensure that every customer complies with the KYC requirements. All accounts kept by PSBs shall be subjected to continuous suspicious transactions monitoring and any suspicious transaction shall be reported to the appropriate agency. The CBN Consumer Protection Framework shall also be applicable to PSBs. PSBs are also required to render quarterly returns indicating the number of financially excluded customers on-boarded during the relevant quarter of the returns.

Comparative exposure of PSBs in similar jurisdictions
Similar programmes to PSBs have been and are still in operation in some foreign jurisdictions with varying levels of successes. Some of the jurisdictions with considerable success in PSB-related operations include India and Kenya. India operates the payment bank systems while Kenya has the M-pesa. The Indian payment banks offer major regular banking facilities such as remittance services, cash withdrawal/deposit, net banking, third-party fund transfers and mobile payments/transfers/purchases. Like the PSBs, their objective is financial inclusion and reaching out to the unbanked segments of the Indian populace. Payment banks presently operating in India include the Airtel Payments Bank, Payments Bank, Fino Payments Bank, Aditya Birla Idea Payments Bank, Jio Payments Bank and the India Post Payments Bank.

The Kenyan equivalent of a payment service bank is the M-Pesa, which is currently regarded as a global model for financial inclusion. M-Pesa, a mobile money transfer service was launched in Kenya by a company called Safaricom in 2007, and its software application allows people without bank accounts to send money via mobile messaging to contacts on their phone, or even to pay for goods and services such as groceries or a taxi fare. Uptake for the service grew rapidly in the first year to 2 million users, and by 2014 M-PESA processed transactions amounting to almost 7 per cent of the total Kenyan national payments (NPS) throughput value and two-thirds of total NPS throughput volume in Kenya. As at 2017, it was reported that the company had about 30 million users in 10 countries and the system processed around 6 billion transactions in 2016 at a peak rate of 529 per second.

M-Pesa does not make use of the regular bank software in its transactions, it rather facilitates the remittance of cash between users via a combination of its softwares and a GSM provider, thereby bypassing the banks’ software(s). It also relies on an agent network structure, which currently comprises about 287,400 agents for deposit and collection of cash without the hassle of waiting in a banking hall queue.

Prospects and advantages of PSBs
The prospects of the PSBs and the readiness of the targeted investors in that space may not be easy to predict; there are, however, indications to suggest that PSBs will flourish in Nigeria. To start with, some of the stakeholders in the telecommunication industry are not new to such innovations. Airtel, for example, is not new to the operation of payment banks as Airtel India began its payments bank operations in November 2016 starting with 10,000 outlets in Rajasthan. As at May 2018, Airtel Payments Bank had a network of 250,000 retail stores that also function as banking points in India. MTN on the other hand has deployed Mobile Money across 14 markets. The mobile telecommunications giant sees itself as a new age transactional banking provider and considers it an imperative to roll out financial services in Africa’s largest market. It has been mooted that the two giant Mobile Network Operators (MTN and Airtel) are ready to satisfy all requirements to be come PSBs in Nigeria.

Apart from the two technology giants, some financial technology companies are already gearing up to incorporate and operate PSBs. Prominent among them is One Finance (OneFi), the owner of the money lending app, Paylater. OneFi has secured a $5M debt facility to be used to deploy more loans to its Paylater customers. This move is seen by many as precursory for a transition from a mobile lending platform to a payment service bank. Speaking on the development, OneFi Chief Executive Officer, Chijioke Dozie, said, “Securing this investment from Lendable represents the first internationally-backed commercial debt transaction for us, marking an important stage of our company’s development as we look to serve the next millennium as we transition into a full-service digital bank, this financing will allow us to execute on a number of new products. This includes our partnership with Visa, whereby we’ll be providing credit via QR codes at supermarkets, clinics and on public transport in H1 2019.” PSBs will take banking and financial services to the unbanked populace in Nigeria, given the target locations and individuals. They will be convenient since they are located within their locality and they may also be able to operate beyond regular banking hours. Through PSBs, a synergy of two crucial players in the Nigerian economy (the CBN and telcos) could bring about the much-desired increase in the rate of financial inclusion in Nigeria. The idea of using telecos and other stakeholders to promote PSBs is laudable as they have the capacity to reach more individuals in rural areas than the regular banks. For example, MTN has millions of users, better distribution networks and can easily spread products given mobile phone penetration, not to mention the ease and safety of use in contrast to the paper-laden processes of banks.

The PSBs, like the Payments banks in India, would have access to the latest technology, a large number of customers, and well-established networks that they could easily leverage in their favour. They are well positioned to drive the process of bringing millions of unbanked people into the financial system landscape. As these banks will be operating through their existing business points (for example, MTN phone stores), their operation costs will be negligible and this will help them to sustain and earn profit with minimal charges imposed on customers. This innovative banking system will also be boosted by the digital and cashless economy initiative. The increasing internet and mobile penetration in Nigeria will definitely be an added advantage to this banking format.PSBs may open up the rural areas for government presence and private investment.

PSBs will not only stop at fulfilling the mandate of high volume -low value transactions, they will also produce ancillary benefits. For example, PSBs hold the potential to generate employment opportunities. As at October 2018, M-PESA had about 287,400 agents in its employment. This demonstrates the capacity of PSBs to generate significant employment. A payment service bank account will provide the best of the traditional and electronic banking worlds, mobile wallets and direct bank debit. After all, the focus of these banks is high-volume, seamless transactions in a secure technology-driven environment.

Potential challenges
Every innovation of this nature introduced into an environment such as ours, where significant numbers are unbanked, will experience its own fair share of challenges. We now proceed to discuss some of those envisaged problems.

High Minimum Capital Requirement
Arguably, for every innovative step undertaken by the CBN, such as the creation of PSBs, there would be challenges associated with it. One that readily comes to mind is the minimum capital requirement of N5 billion for operating a PSB. This amount sets a somewhat high entry level bar given that the target customers are somewhere close to, if not at the bottom of the economic scale. That aside, when compared with the entry level of microfinance banks, which is a minimum threshold of N200, 000,000 for a Unit Microfinance Bank and minimum paid-up capital of N1 billion for a newly registered state microfinance bank, an investor may opt to invest in a microfinance bank rather than in PSB. This is not the kind of investor reaction that the Guidelines should generate because it impedes the objectives of the NFIS. It is submitted that the entry level for PSBs should be lower so as to attract more investors into the PSB sector. The overall effect would be to create wider access to financial services for the unbanked while enhancing the level of financial inclusion in the country.

Absence of lending powers for PSBs
Another challenge is the lack of lending powers for PSBs. PSBs are meant to operate in low income and rural areas. These are areas where the inhabitants are not used to saving money per se but rely heavily on traditional cooperative systems of safekeeping of money with a view to collecting same at a future date, with interest (or loan as the case may be) in form of contributions from other participants in the cooperative scheme. With regulatory power to grant loans, the exercise of such powers would directly compete with the traditional cooperative systems thus making PSBs more appealing to target customers.

Limitation on Powers to invest Funds
Also, the restriction on how PSBs can invest deposits is another limitation on PSBs ease of doing business. Under the Guidelines, PSBs are only permitted to invest a minimum of 75 per cent of their funds in FGN and CBN securities. This provision may be viewed as too restrictive by potential investors. It is submitted that it would not have been out of place for PSB’s to have been permitted to invest in collaterized financial or other debt instruments such as the Housing Funds.

Technology
The non-availability of adequate information technology infrastructures may, potentially, be the biggest clog in the wheel of PSBs. The dearth of these infrastructures may render PSBs ineffective and ineffectual given the fact that they are designed to be technology-driven. Academic and computer illiteracy may also limit the capacity of consumers to harness the full benefits derivable from PSBs.
The prohibition of PSBs from accepting any closed scheme electronic value (e.g. airtime) as a form deposit or payment may not necessarily be advantageous to the scheme. This is because people in the rural area are familiar with airtime; it is common and easy to purchase and airtimes are already being used to procure certain goods and services, including call time, data purchase, gaming tickets etc.

The possibility of data hack and theft are additional layers of challenges that PSBs may experience, given that their heavy reliance on technology and data. Data exchange within the PSB space is likely to appeal to cyber criminals because of the financial gains associated with successful breaches. An unlawful breach of a PSB’s network may result in huge financial losses, loss of confidence by stakeholders and systemic risks. The phenomena of hacking into banking systems and stealing customers’ data are no longer strange to Nigerian banks and the banking public. For example, in September 2018, four men were arraigned in court for allegedly hacking into and stealing N1 billion from FCMB’s database.

RECCOMENDATIONS
By way of liberalizing the PSB space, especially in its embryonic stages in Nigeria, it would significantly help to enhance investor participation if the minimum share capital for entry into the industry is reduced. Fixing the minimum capital base at a rate commensurate with the highest threshold available to micro finance banks in the country may be a reasonable start point.

It should be noted that most of the target environments are places where a lot of unregistered mobile money operators are already quasi operational. These operators (mostly using point of sale (POS) devices to render cash deposit, money withdrawal and money transfer services to unbanked and sparsely banked individuals at a fee) have already gained the confidence of their local environments and their affected customers would presumably rather trade with them than trade with unknown or relatively new individuals and organisations.
Consequently, it would help to encourage these unofficial traders to participate in the investment net as they are already familiar with consumers in their environment, and thus armed with huge financial, geographical and human factor knowledge and information. The POS business (as it is popularly called) requires less capital but yields good profits (sometimes N50 out of every N1000 transacted; making it a strong competition for PSBs.

Also, PSBs must operate in such a way that rural dwellers would be able to understand tools of engagement for the business and the many benefits that could accrue to consumers if the technology is maximised. The technology should be simplified enough for non-literates and rural dwellers to understand and use.Finally, the technology should be capable of being deployed on a mobile device/phone without internet access. There should also be government and private investors-led orientation programmes for targeted communities in order to achieve smooth uptake and seamlessness in execution and penetration.
Adu and Adaji are lawyers in Alliance Law Firm, Lagos.