Over the years, we have discussed various constraints limiting financial inclusion whose targets were established in the 2012 National Financial Inclusion Strategy (NFIS). One of the critical inhibitors — access to financial access points through agents — was often pitched against the progress in other markets where telcos operate mobile money services. While the direct participation of telcos in Nigeria’s mobile money licensing regime was restricted, the Central Bank, after years of consultation and engagement is exploring a new mechanism to enhance financial inclusion.
Borrowing a play 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 category of bank 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 basically 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 Payment Banks was first introduced in 2013 when a committee on Comprehensive Financial Services for Small Businesses and Low Income Households was formed, and the committee recommended a new bank category called Payments Banks.
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?
One peculiarity of PSBs is they are not permitted to offer loans or credit facilities to their customers — they can only receive deposits. Thus, Payment Banks cannot entirely replace traditional Deposit Money Banks, but they can serve as intermediate providers of financial services to new customers.
Payment 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 Banks offer interests on customer deposits, though the rate of interest is still unknown/yet to be decided.
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.
The Payment Bank document is still under review, but it appears the ecosystem is going to welcome a new type of financial service provider in the coming months. What impact will this have on financial inclusion? Could this be the magic bullet we have been waiting for? How disruptive will this new entry be and what impact will it have on the entire ecosystem in general?
— 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.
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.
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).