Payment Service Banks: All You Need to Know about Nigeria’s Newest Banking Category
The direct participation of telcos in Nigeria’s mobile money licensing regime has been restricted since the introduction of mobile money in Nigeria. But after years of consultation and engagement, the Central Bank of Nigeria (CBN) is creating a window of opportunity for telcos to join its efforts to enhance financial inclusion.
Borrowing from the Reserve Bank of India’s playbook, the CBN is exploring the introduction of a new bank model — Payment Service Banks (PSB).
What is a Payment Service Bank?
The Payment Service Banks (or simply Payment Bank as they are called in India), is a new banking category with smaller scale operations and the absence of credit risk and foreign exchange operations. In addition to accounts (current and savings), PSBs can also offer payments and remittance services, issue debit and prepaid cards, deploy ATMs and other technology-enabled banking services.
Think of them as stripped-down versions of our traditional deposit money banks, with limited functionality and a focus on onboarding more of the excluded and marginalised population.
Subsidiaries of mobile network operators (aka telcos), mobile money operators, retail chains (supermarkets) and banking agents are welcome to apply for the PSB license, provided they can meet certain requirements, including a 5 billion naira capital base, and a combined 2.5 million naira application and license fee (which are non-refundable).
A Brief History of Payment Banks
India’s high unbanked population has been the subject of much discourse, locally and internationally. In a bid to reduce the number of Indian citizens without bank accounts, the Reserve Bank of India (RBI) began exploring different interventions.
The concept of Payments Banks was first introduced by the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households headed by Nachiket Mor. Setup by the then RBI governor, Raghuram Rajan, the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households (commonly known as the Nachiket Mor Committee) was tasked to study various aspects of financial inclusion in India.
On 7 January 2014, the committee submitted its final report with a recommendation introducing a paradigm shift towards a vertically differentiated banking system (VDBS) design that unbundles full-service banking into its composite building blocks — payments, deposits and credit. This would involve, among other things, establishing a new banking category with low entry requirements specially designed to tackle India’s high financial exclusion numbers by focusing on payments, hence the moniker ‘Payments Bank’.
These Payments Banks would have a low cost service model and leverage existing touchpoints of telcos and the postal system to enable greater last mile connectivity in rural areas. The model also allows for participation of real sector players without increasing systemic risk in the financial service sector.
In 2014, invitations were sent out for interested parties to apply. The following year, the RBI granted licenses to 11 applicants, despite receiving a total of 41 applications. Of the 11 licensed PSBs, 3 have surrendered/given up their licenses, while 6 PSBs have commenced operations, albeit only 4 are prominent.
What differentiates a Payment Bank from other Financial Service Providers?
Limitations of PSBs
One peculiarity of PSBs is they are not permitted to offer loans or credit facilities to their customers — they can only receive deposits. Thus, PSBs in Nigeria cannot entirely replace traditional Deposit Money Banks, but they can serve as intermediate providers of financial services to new customers.
Payment Service Banks can issue debit cards but not credit cards. Also, unlike traditional banks, you can keep a limited sum in a payment bank account. Payment Service Banks offer interests on customer deposits, though the rate of interest is subject to the CBN’s guidance.
Unlike deposit money banks (DMBs) and microfinance banks (MFBs), from day one, PSBs have a heavy reliance on technology via digital financial services, complemented with a strong agent banking model, which is meant to reduce overhead costs.
Advantages
— Reduced currency circulation: While it’s too early to speculate, the PSB model may be the tool to reduce paper currency circulation (in favour of digital currency), hence promote the Cashless Nigeria initiative.
— Low-risk: With limitations on credit, PSBs will be shielded from notorious credit risks. In addition, the investment of PSB deposits in treasury bills and government-issued instruments also reduces their market risks.
— Deposit safety: all deposits in the PSBs will be insured by the Nigerian Deposit Insurance Corporation (NDIC).
— Lower cost of operations: PSBs are expected to rely on technology and existing retail footprints, providing them with the foundational infrastructure to provide financial services to rural and unserved customers at lower costs.
— KYC: the existing SIM-Reg database and KYC automatically supports the onboarding of all mobile phone owners as PSB customers.
— Enhance the reach of Social Investment Programmes: the success of welfare programmes such as the conditional cash transfer (CCT) that provides a monthly stipend to the poorest of the poor has been constrained by cash management (distribution). The existence of PSBs in rural communities will ensure that these payments can reach designated beneficiaries.
— Financial education: the ubiquity of financial services through PSBs will enhance financial literacy.
Challenges
The existence of PSBs is not without its own set of challenges. These include:
— Revenue model (earning potential): the inability of PSBs to lend/give credit limits their earning potential.
— High competition: even though electronic payment systems are still nascent to underserved customers, the competition with cash would require behavioural change that would enable a truly cashless society.
— Irregular saving pattern among target segment: there’s limited knowledge of the savings patterns and profiles of the underserved; hence, PSBs will need deep understanding of their market segments to enhance and deploy product-market fit.
— Infrastructure: the nationwide availability of power, telecoms and other requisite infrastructure may increase the cost of PSBs and reduce their reach.
— High setup and operational costs.
Profitability concerns
The profitability of the payment bank model is a concern due to high operational expenditure. In India, Payment Banks were permitted to facilitate more activities to increase their revenue and improve profitability.
The operational expenditure ratio (operational expenses/total income) for Indian Payment Banks was in the range of 125%; about 5x higher than that of DMBs (23%). This led to 2 Payment Banks shuttering their operations while three PB licensees surrendered their licenses without launching, citing profitability concerns (leaving only four Payment Banks operational).
Given the permitted activities and corresponding operational costs, Payment Service Banks in Nigeria have limited scope for increasing their profitability.
To enhance long-term viability, Payment Banks in India adopted adjacent revenue generating activities in addition to their primary activities (deposits and payments). Payment Banks often acted as agents to deposit money banks (DMB) and helped them distribute third party financial products like investment and insurance.
Acting as agents to DMBs, PSBs in Nigeria can offer credit to their customers, with the DMB bearing the risk. These referral extra activities will enable them augment their revenue.
Conclusion
The introduction of Payment Service Banks in Nigeria has been met with much fervor. But the jury is still out on the impact of PSBs in Nigeria.
What impact will this have on financial inclusion? Could this be the magic bullet we have been waiting for? How disruptive will this new banking category be and what impact will it have on the entire ecosystem?
Update: On September 18, 2019, the Central Bank of Nigeria issued Approvals -In-Principle (AIPs) to Hope PSB, Money Master PSB and 9PSB to operate as Payment Service Banks (PSBs).
Update: On August 28, 2020, the Central Bank of Nigeria granted full licenses to Hope PSB, Money Master PSB and 9PSB to operate as Payment Service Banks.
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Want more insights on PSB profitability and customer adoption? Read next: 4 Important Takeaways from the Payment Service Bank Webinar
