Payment Service Banks in Nigeria, lessons from the past.

 By Emmanuel Okoegwale

Principal Associate, MobileMoneyAfrica

Ten years ago, there was great optimism that the licensing of mobile money providers will usher in, a new era in the drive for greater financial inclusion and fill the vacuum that the banks failed to fill, for many years. Ten Years after, the country has recorded some decent incremental improvements in the financial services sector through the mobile money operators but not the expected transformational leap, we had hoped for.

On the march again, the country has created a new category of financial services providers to be called, Payment service Banks.

The CBN in furtherance of its mandate to deepen financial inclusion in Nigeria is actively seeking to license Payment Service Banks which had been similarly deployed in other jurisdictions such as India. Both countries are similar in  some areas of regulation that excludes mobile networks operators from mobile financial services and Banks that cannot fill the gaps, in serving the hard to reach places.

What’s difference between PSB and mobilemoney?

Permissible services for both in Nigeria are similar with few advantages for the PSB such as, ability to mobilize deposits from individuals and small businesses, issue debit and pre-paid cards, invest in FGN bonds while both cannot give out loans, provide insurance underwriting and trade on foreign exchange market. No cap was mentioned in the framework on deposits mobilization allowed for PSBs.

Many reasons had been raised for the slow uptake of mobile money in Nigeria from low capitalized operations, fragmented agency network, exclusion of mobile network operators and some underlying bottlenecks like extensive delays in granting mass access channels like USSD and Sim tool kit channels to mobile money operators, were major hindrances to early take off and adoption.

The operational levers to drive a successful deployment are network effects, lack of financial access points in many rural areas, available mass market access channels, heavy marketing, channel leverage and incentives to drive last mile operations. These are domain areas of mobile networks and these are some of the levers that mobile money operators lacked in India and Nigeria however some of them, still managed to keep their heads, above the waters.

The Indian story so far

In 2015, 11 organizations were approved to commence payment service Bank services in India however three dropped out even before launch, with one of them citing, increased competition and time to recover profit on investments.

Some of the operators had been clamped by the regulator, due to inappropriate Know-your-customer implementation and some of the providers struggle to convert their huge subscriber base as envisaged to bank customers, the license also excluded the providers, from lending.Due to its limited offering, the commercial viability was no longer appealing to providers hence they struggle to stay afloat.

Shape of things to come in Nigeria

As Africa’s most populous nation, prepares to soften the ground for mobile network operators to participate in the financial services sector which had predominantly been the turf of the banks, it will be interesting to see how they will successfully convert their network assets to serve the large unbanked population in the country.

With MTN Nigeria woes seeming to be coming to an end, over tax dispute with the Central bank of Nigeria and a planned listing on the Nigerian Stock Exchange later this year and armed with an approval -in-principle to launch payment service Bank, it will be the honey on the cookie pie, for local and international stock investors.

The challenge non-telco operators of PSB will face, will be similar and may even be more than what the mobile money operators faced, in the early days and even till date.

Why will the mobile network operator give equal-footing access to a competitor? What will the regulator do to enforce fair competition? What are the risk of granting non-telcos PSB licenses only for them to face similar challenges faced by licensed mobile money operators for ten years?

Some recommendations

The regulator may consider to upgrade some of the mobile money operator’s license to PSB ( maybe on a regional basis) if they have proven ability, so that they don’t spread themselves thin, to compete with what will be a very formidable competition (mobile networks) and considered for lower paid-up capital, to compensate for their investment as frontier providers.

Addition of retail lending approval to their license while the customers deposit pool is isolated or if possible, allow for a small percentage of the deposit pool for retail lending.

A proper assessment of non-telco and non-mobile money applicants for the PSB license to ensure they have compelling business cases, well capitalized and ability to overcome the challenges that almost crippled some mobile money operators, in the last ten years.

In view of many initiatives in the market place that are driven largely by industry associations and regulations, innovations should be allowed to drive these initiatives.

Fair competition should be enforced by the regulator to ensure fair access to telco’s mass market channels and government standard setting agencies for BVN, National ID for robust KYC, available to all participating entities.