An introduction to Payment Service banks

In recent years the CBN has switched its financial inclusion strategy to a mobile-led from a bank-led model. Under the previous model, telcos provided the infrastructure or mobile money payments, while banks managed the front-end users' experience and products.

The Central Bank of Nigeria (CBN), in its mandate to promote a sound financial system and enhance access to financial services for low-income earners and unbanked segments in Nigeria, continues to be innovative in deepening the financial services sector. Subsequently, in the last 12 months, the CBN has granted Payment Service banks Licenses to three major players in the industry. As such, Telcos now have mobile money channels; for instance, you can access MTN Momos via its PSB by dialing *671# on any network, and a customer can open a MOMO account and send money to any phone number in the country and pay bills

By our definition, a Payment Service Bank is a financial services provider. A PSB is usually a subsidiary of a telecommunications company, supermarket chain or a similar large B2C firm that acquires a license to provide financial services by leveraging its existing telecommunications or distribution infrastructure. PSBs can offer banking services such as deposit-taking, remittances, payments processing and mobile wallets. These banks aim to increase financial inclusion and depth in Nigeria by providing tailored financial products to unserved and underserved customers.

PSBs are designed to offer banking services to financially excluded entities through high-volume, low-value transactions in a secured, technology-driven environment. These transactions are usually meant to be payments, increasing access to deposit products and payment/remittance services to small businesses and low-income households.

Payment Service license comes with particular idiosyncrasies

One of the primary reasons for the CBN finally allowing Mobile operators to own banking licenses is their ability to operate and extend their reach mainly in the rural and unbanked areas. Due to this reach and ability to target financially excluded persons, PSBs are required to have not less than 25% financial service touch points in such rural areas as defined by the CBN from time to time. PSBs must also enter into direct partnership with card scheme operators and deploy point of Sale devices in these rural areas.

Permissible actions

PSBs are allowed to accept deposits from individuals and small businesses- The deposit insurance scheme shall cover these deposits. PSBs can also carry out payments and remittances (including inbound cross-border personal remittances) through various channels within Nigeria. The CBN also allows PSBs to sell foreign currencies realized from inbound cross-border personal remittances to authorized foreign exchange dealers; Issue debit and pre-paid cards in its name. PSBs can operate electronic wallets. Like regular banks, PSB can render financial advisory services to their clients and invest in FGN and CBN securities. As per usual, PSBs carry out such other activities as may be prescribed by the CBN from time to time.

Non permissible actions

PSBs will not be allowed to grant any form of loans, advances and guarantees (directly or indirectly). However, they may lend to their employees in line with their employee loan policy, subject to the approval of their Board. Direct foreign deposits are not permitted.

Also, dealing in the foreign exchange market and Insurance underwriting; are not permitted. The CBN also frowns upon PSBs accepting any closed scheme electronic value (e.g. airtime) as a form deposit or payment.

Lastly, PSBs cannot establish any subsidiary except as prescribed in the CBN Regulation on the Scope of Banking and Ancillary Matters, No 3, 2010.

CBN regulations for setting up a Payment Service Banks

Payment Service Banks submit to the CBN's supervisory frameworks and prudential guidelines like acquiring other CBN licenses.

The promoters of a PSB shall be required to submit a formal application for the grant of a Payment Service Bank license addressed to the Governor of the CBN. The promoters of a PSB shall formally present the proposal to the Director, Financial Policy and Regulation Department (FPRD), CBN details certain documents and regulations.

Payment Service Banks shall comply with the following specific provisions, in addition to the requirements of Corporate Governance Guidelines for Payment Service Banks. Payment service banks must set up Boards and Investment Committees of Managing Directors, Company Secretaries, and other select senior management.

Finance requirements required to operate a payment service bank

Under CBN prudential guidelines, PSBs require a Minimum Capital Requirement i. The minimum capital of PSBs shall be ₦5 billion or such other amount that the CBN may prescribe from time to time. Maintenance of Statutory Reserves by PSBs shall be in line with Section 16 of BOFIA. As it deems appropriate, the CBN may require a PSB to maintain additional capital for specific risks.

PSBs shall maintain not less than 75% of their deposit liabilities in CBN securities, Treasury Bills (TBs) and other short-term federal government debt instruments at any time. PSBs shall have the privilege to make their investments from the CBN window. All funds in excess of the PSB's operational float should be placed with DMBs.