10 things to know about CBN’S new Payment Service Bank 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 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.

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 this 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. It exponentially increases 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.

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 Payment Service Bank Guidelines:

1. The required minimum shareholder capital is N5 Billion naira

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.

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 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 underbanked 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 “formallyother” 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 - 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. Counter-intu- itively, this regulation explicitly states that lending is not a permissible activity for companies operating under a PSB license. It also states that forex 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”

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 the CBN’S 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 (CAR) of 10%

The CAR 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 - 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 these assets.

In simple terms, the CBN 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.

7. 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. It 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 - which 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 underbanked. 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 in excess of PSBS operational float are put in DBMS (Deposit Money Banks).

Maria Rotilu Maria currently serves as the General Manager, Nigeria at Branch.co

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