Things you should know about new CBN payment guidelines

On the 5th of October 2018, the Central Bank of Nigeria (CBN) released for comments an exposure draft of their newly proposed guidelines for the licensing of Payment Service Banks. Almost immediately, news that “fintech” companies, were now required to have a minimum of 5 billion naira in capital hit the public. Major news outlets, carried the misconception that the Payment Service Bank guidelines were a regulation for fintech companies, and as expected, this sparked somewhat panicked conversations across in the industry. In this era of soundbites and headlines decoupled from context and taken as the complete story, it is important to clarify the misconceptions surrounding these guidelines.

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The general definition of a “fintech” company is a technology company that carries out operations in any one, combination or all of financial services which include but are not limited to savings, lending, payments, foreign exchange and wealth management/investment, and any other financial service). With this in mind, it doesn’t appear that his regulation isn’t so much targeted at existing fintechs but is, in essence still a banking license that finally allows telcos lead. So the headline going around the press is a little misleading.

After reading the guidelines, it is understandable that the general sentiment is tense. The regulations suspiciously seem to be designed with an agenda. But on closer investigation, that agenda is revealed to be multilayered. Exponentially increase the rate of financial inclusion by leveraging the desperation of the telecommunications (Telco) companies like MTN, Airtel and others to play in the banking space; and in the process, ensure access to cheap finance for the government.

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Considering the history of the CBN and that its alliances tend to generally favor traditional banks, though this may be a seemingly small step away from that alliance, its significance and potential impact is tremendous. For the very first time, banking services can be led by non traditional banking institutions, including Telcos. Here are the 10 things you should know about the New Guidelines for The Payment Service Bank Guidelines.

1. The Required Minimum Shareholder Capital is N5 Billion Naira Yes. This is correct. The required minimum shareholder capital for a Payment Service Bank (PSB) is N5 billion ($14m, £10m). Clearly, this is a significant amount, one that most “startups” cannot afford. Some Nigerian fintech startups request half that amount for their funding rounds, and this is the amount required for just the shareholder capital.. What this signals is that the CBN is not particularly interested in startups filling this space. They have their eyes on folks who have the financial clout and are desperate enough to venture into financial services — telcos. Other fees involved in participating include an application fee of N500, 000 and a licensing fee of N2, 000,000.

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An important clarification is that the Shareholder Capital Requirement is payable up front during the application process, but will be refunded (with interest, minus administrative expenses and taxes) after the application process is completed.

2. The PSB License Can Be Telco Led, Supermarket Led, and Even Mobile Money Operator Led This PBS guideline is evidence of the CBN opening up to telcos and other “nonbanking” players.. As I stated in the earlier, a critical point to note is that the entire premise of this license is prompted by the fact that bank-led financial inclusion is taking too long. A 2016 Access to Financial Services Survey by Enhancing Financial Innovation and Access (EFINA) showed a decline in the already limited state of Nigeria’s unbanked and under-banked population’s access to financial services. The percentage of the financially excluded increased from ~40% in 2014 to 42% in 2016 which means things got worse for those totally unbanked. However within the same duration, we saw a slight decrease of 2% in informally and “formally-other” banked i.e., the underserved which means things also got better for this segment.
Looking at the downward trend in financial inclusion documented by the survey since 2008, an 11% decrease in financial inclusion between 2014 to 2018, one thing is clear. At this rate, it will take about 30 years to reach CBN’s goal of 80% financial inclusion instead of the current timeline of 2020.

It is encouraging to see the CBN react to the fact that other measures are now necessary to move financial inclusion forward. On the list of potential promoters of this license are telcos, supermarket operators, and mobile money operators, and of course traditional retail Banks. Of this list, the Telcos’ seem to be the most promising. Their historical hunger for this space coupled with their strong distribution networks and a strong incentive to play in the banking space have them primed for action. Therefore, the PSB guidelines definitely come as good news to them irrespective of the hurdles the licensing requirements pose.

3. Lending is an impermissible activity with a PSB license Credit is one of the strongest levers for driving financial inclusion as it serves as a strong incentive for previously unbanked or underserved Nigerians to get plugged into the financial services system. Counterintuitively, this regulation explicitly states that lending is not a permissible activity for companies operating under a PSB license. It also states that FX trading and insurance activities are off the table.
The guidelines, unfortunately, do not provide details as to why these activities are not permitted. One begins to wonder if this stipulation is a protectionist reaction to benefit the traditional banks as they make a move toward retail banking, or if it was made in the same spirit of keeping user deposits as far away from other forms of banking as much as possible. Irrespective of the reasoning behind it, this regulation seems inconsequential for traditional banks and unnecessarily restrictive for the PSBs.

4. Naming Convention must include “Payment Service Bank” in Name There is the requirement that all PSBs have the “Payment Service Bank” added to their name to distinguish them from other banks. So, “MTN PSB”, or “MTN Payment Service Bank” may be a reality in the near future.

5. Compliance with the CBN Corporate Governance Code This was to be expected but it also again signals that CBN did not design this law with startups in mind as CBN Corporate Governance Code is quite intense, for even established organizations. One could argue that with matters of finance and especially deposit-taking, compliance with the governance code is necessary to protect the customers’ interests.

6. Have a Minimum Capital Adequacy Ratio of 10% The Capital Adequacy Ratio as a metric essentially tries to protect depositors. It seeks to determine how much of the bank’s capital can cover its risk-weighted assets. The risk-weighted asset is a metric that assigns the potential risk of loss of value on an asset such that when compared to the capital, one can tell if the capital can adequately cover any potential loss of value of on these assets. In simple terms, the Central Bank requires that there be at least 10% of the value of risk-weighted assets available as capital, ready to be deployed to insulate risk and protect depositors from any exposure should assets lose their value. What this means for newly minted PSBs is that this ratio must not drop below 10% at any point in time. If it does, there may be consequences such as fines possibly more severe implications.

7. Must invest 75% of its deposit liabilities in Treasury Bills or Other Government Securities If the sole purpose of the PSB guidelines were to drive financial inclusion, the addition of this requirement seems a little off. Essentially, this requirement mandates PSBs to invest 75% of their deposits in treasury bills (which are considered “risk-free”) or other government securities. A possible reason for this rule that is hard to ignore is that the CBN is using the licensing regulation requirements to guarantee the government easy and cheap access to new sources of finance.

Another angle could be that the CBN tries to proactively discourage “lazy banking”, taking deposits and investing to gain returns that are less risky. This is because if the PSBs provided less risky, and returns higher than retail banking, they may be disincentivized from focusing on the reason they were granted permission to operate —servicing the under-banked. This stipulation could also be a tactic for CBN to ensure that they can control the level of security of most of the investments these banks put deposit floats into. There is another requirement in this section that alludes to this, which requires that funds excess of PSBs operational float is actually put in DBMs (Deposit Money Banks) which are commercial banks.

8. CBN Can Limit PSBs Investments In Fixed Assets (including Branch Expansions) This requirement ensures CBN can pace the growth of these entities. What this appears to do is level the playing field between Deposit Money Banks (DMBs) and Payments Service Banks (PSBs). My first suspicion is that there is a world where telcos aggressively expand – given their already widespread distribution networks, and displace the existing banks in terms of distribution.
The CBN wants to control how aggressively PSBs can expand assets (branches, ATMs, physical payment processing channels etc). I find this position counter-intuitive to its goal of deepening financial inclusion. Instead of this, perhaps a better approach might be to increase the limits of expansion for both parties. Do we want more channels for under-banked and unbanked customers to access financial services, or do we not?

9. PSBs are under strict anti-competition rules. There is an entire section in the guidelines with a focus on “fair competition”. This section anticipates the fact that PSB licenses will be predominantly obtained by telcos, and looks to get ahead potential anti-competition knots that may arise from introducing aggressive telcos into the banking system. Whoever gains enough deep penetration quickly threatens to control a significant section of new users who will now use banking services. Therefore, the risk of Telco affiliated PSBs undercutting the performance of existing banks or vice-versa may be subtle but potent. To combat this, the CBN requires that the PSB (including its parent and other subsidiaries are required to comply with CBN’s governance. Additionally, any preclusion of access to services by a competitor of subsidiary or parent company in any way shape or form can lead to a revocation of license. This, definitely, is going to be even more critical in the coming years as competition gets heated.

10. The licensing decision will be communicated within 90 days after submission The CBN has stated that promoters may expect to receive a response to their PSB application after confirmation of submission, which is 90 days after according to the guidelines. However, it is important to note that receiving an Approval in Principle (AIP) does not mean the entity can start operations. In fact, the guidelines are clear on the fact that you cannot register a business name till an AIP is received. Therefore, there are additional steps required to launch operations as a PSB including payment of licensing fee, pre-licensing inspection among others.

In conclusion, the creation of the Payment Service Bank (PSB) guidelines may come across as onerous and a small step but it is one placed generally in the right direction. Telcos have more penetration in the user demographic that is generally “under-banked” or unbanked, and possess the technologies needed to drive ease and generally lower cost of transactions. They are also incentivized to make this work to their benefit, as it is a low margin high volume business, and the more penetration they get, the more money they are able to make. This also paves the way for an interesting spin on mobile money. The involvement of telcos in the banking space is also good for the end user.

A confirmation of Nigerian telcos’ eagerness to participate in the banking space is the fact that just days after the PSB guidelines were announced, MTN and Airtel have made public statements on their company’s intention to apply for the PSB license and offer banking services in 2019.

While the Payment Service Bank guidelines are still in the exposure draft phase, it is clear this license will change a few things for the ecosystem. It is also not clear if existing payment “fintech” companies are required to comply with this license or just the list of eligible promoters. It also will be interesting to see if this aids or cannibalises the previous work and regulations set for deepening financial inclusion e.g, Mobile Money Operators and efforts on Agent Banking.

It’s clear the ecosystem will respond with creative ways to utilise the license and existing players will adapt, new partnerships will form and morph to utilize the potential benefits of the existence of a Telco led payment service bank. Lastly, it will be interesting to see how effective the PSB strategy is in achieving the goal of 80% financial inclusion by 2020.