Payment is fundamental to how sellers interact with their customers, it forms the basis of many business propositions and they are key considerations in the creation of channels and customer touch points. As a business owner, you must have asked or been asked – “How do you get paid for this service?”. The convenience of payment through a given channel can be a game changer for any business. Capturing payments between buyers and sellers means different things to different entities – to the customers, businesses, banks and the Central Bank of Nigeria (CBN) and Financial Institutions. In an effort to promote financial inclusion and enhance access to financial services to the unbanked or under-banked segment in the society, the CBN has proposed the establishment of Payment Service Banking (PSB).
Having gone through the draft guideline for licensing and regulation of PSB in Nigeria, we have come to reach the conclusion that PSB is dead on arrival. This is a strong statement and in my opinion sensationalized just to attract attention to the article. Dead in the sense that it may not achieve its objective of driving incremental financial inclusion of bankable adult by 2020. Success of PSB would mean additional adults are added to the financially included customer base.
These are 6 reasons why PSB will not drive significant incremental financial inclusion:
1. Lack of Motivation for Investment in Rural Communities
PSB is envisaged to follow the structure of traditional banking with establishment of branches and deployment of POS and ATMs and they are expected to operate mostly in the rural areas. The primary motivation for investors in PSB is profit and not necessarily financial inclusion. The requirement for establishments of capital intensive resources such as deployment ATM, branches and operations in rural communities where purchasing power is lower, payment transactions are mainly through physical contacts and cash exchange and basic infrastructure to facilitate technology-driven commercial activities are lacking would significantly extend the time licensees attain profitability and hence, hamper roll-out. Where PSBs find it relatively easier to attract customers, they may still need to identify a profitable pool of customers and monetize these relationships.
2. SIM Registration as KYC
For CBN to realize its National Financial Inclusion goals through the establishment of Payment Service Banks, it must as a matter of necessity adopt the telecom SIM-Registration database as the equivalence of BVN for Payment service Banking. Perhaps, the telcos might have to charge the payment service providers a one-time-fee for the access through a regulated data monetization API. Requiring PSB customers to sign-up through the traditional KYC or BVN registration process will stifle the ability of PSB to scale at the proportion that will deliver the expected result. BVN and KYC requirements for PSB does not differentiate a PSB from the existing process of onboarding new customers by commercial banks in Nigeria and which has largely (in my opinion) slowed down financial inclusion
3. Regulation is bottleneck to FINTECH
Digital Inclusion is a prerequisite for financial inclusion in Nigeria. This is why bank customers are required to register for BVN using their mobile numbers before operating a bank account (except for tier 1 account). PSBs should adopt the mobile number as account number with relevant appendices or prefixes that indicate the specific bank and the number of accounts owned by the customer. The mobile number alone is sufficient to identify a PSB customer. On the other hand, it will be very difficult to achieve success in PSB roll-out without recourse to Telco SIM-Reg database on the customer. It is frustrating to duplicate this information again that is already with the Telcom Operator as SIM Reg, with the Banks as BVN and then customers are expected to register all over again their 5 fingerprints before that can enroll with a PSB. Automatically, the SIM registration should translate to PSB registration. And a registered SIM subscribers is automatically a potential PSB customers with no other registration required. This implies that a SIM subscriber can receive electronic payment, cash in and cash out without intentionally activating PSB service. With this, we can achieve 90% financial inclusion by December, 2019
4. PSB Data Privacy and Data Protection
We do not believe that the PSB license should be issued to telecom subsidiary and a non-telecom subsidiary company at the same time; both as a matter of necessity must be mutually exclusive. This is because PSBs are expected to leverage on mobile and digital channels to enhance financial inclusion and stimulate economic activities at the grassroots through the provision of financial services. This is because most PSB transactions to be generated through the mobile telecom (especially USSD) infrastructure is visible to the telecom operators.
The Mobile Network Operators (MNO) know when a new customer is acquired, when the last transaction was generated by the customers, the last time a customer generated transaction even when the customer is its PSB subsidiary’s competition. All these data gives the telco and its PSB subsidiary undue advantage over other PSB that are not owned by telcos. We recommend that MNO act only as a customer registration and mobile switching company to PSB and must not own a subsidiary.
The last paragraph of section 5 of the Guideline for licensing and regulation of PSB excludes “Switching companies which already have record/data of the financial system operators shall not be allowed to own PSB to avert conflict of interest “.
CBN should note that telecom companies are also technology switching companies by default and allowing them to own PSB will result into a serious conflict of interest.
5. Absence of Micro-Credit lending with PSB
Micro-lending which would have been a compelling value proposition for Payment Service Banking is not allowed. PSBs are not allowed to grant any form of loan, advances and credit. So you cannot borrow ₦150 credit (less than 50 cents) to pay for your t-fare hoping to reimburse the PSB whenever you receive “alert” despite the fact that you have been banking with the PSB for 12 months and been using the mobile number for 5 years for example. The customer is not likely to discard the SIM-card in order to avoid the repayment of ₦150 debt.
6. Duplicate of what Currently Exist
One of the critical financial inclusion objectives is to increase the number of financial access points. This is very important to facilitate Cash-in and Cash-out (CICO) for customers especially at rural and semi-rural areas of Nigeria. Therefore, achieving a reasonable customer to access point ratio is a critical determinant of customer enrolment and transaction acquisition. Due to cultural sentiments, agent-banking has had limited success in Nigeria and has suffered challenges around viability. Rural dwellers don’t want village people to know how much they have received from their children living in the cities. Therefore, PSB will rely heavily on the mobile-based service delivery which similar to what is currently being offered by commercial banks today. The commercial banks have already made the first move and have gained the first mover advantage which will take PSB a while to break.
In conclusion, by our own assessment, based on the evaluation of the Payment Service Banking framework, there is nothing new a PSB is bringing to the table that is not currently done by the existing commercial banks in the country. The current regulatory requirements for PSB’s establishment will stifle PSBs ability to scale up the financial inclusion process. However, depending of business use case, PSB may take some of the market share of digital banking transactions away from the traditional financial service providers, but relying on it to drive a significant shift in the financial inclusion index is a tall order.
Consequently, existing commercial banks have nothing to worry about competition from PSB. Only that banks may cut down interbank transaction charges to remain competitive. Also, CBN regulation has ring-fenced the commercial banks from undue competition from PSB.
We recommend that mobile network operators minimize their investment in PSB as we believe that the returns will not be commensurate to the value of investment in technology and infrastructure. Non-telcos should not delve into this business unless they have access to data that gives them competitive advantage.
Non-telecom subsidiaries should negotiate good rate for the cost of sale to be incurred for generating transactions over the telecom network infrastructure such as SMS termination in order to remain profitable. PSB operators must incorporate advanced analytics in their strategy and operations to guarantee returns on investment and to scale through the market pressure.
When all is said and done, the customers will win.