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M-PESA: Tool For Financial Inclusion — Analysis

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Is The Payment Service Bank A Hybrid For M-Pesa?

As an attorney dealing with FinTech companies who are interested in bridging the financial gap in Nigeria, I was very intrigued when I learnt that on the 5th of October 2018, the Central Bank of Nigeria (CBN) released a proposed guideline for a new Bank to be called a “Payment Service Bank” (PSB). In the course of my work, I have supported clients in their applications for CBN licences such as Microfinance Bank Licence, Payment Solution Service Provider Licence, Mobile Money Operator Licence and Banking Agent Licence. My first impression on hearing about this new Bank was……Yes!!! this seems like a new stream of revenue for me.

It may seem too early to write an article on a proposed draft, but I beg to differ as the final guideline on Value Added Services Framework released by the Nigerian Communication Commission in 2018, after several stakeholder’s consultation is very similar to its original draft. My initial review of the proposed document called “Guidelines for Licencing and Regulation of Payment Service Banks” left me rather confused on where the PSB sits in the hierarchy of Banks, and if a PSB is the best option to breach the ongoing financial inclusion discourse between the telecommunication companies and Banks, as Nigeria strives to keep away from the M-Pesa model of financial inclusion.

M-PESA AS A TOOL FOR FINANCIAL INCLUSION

Several articles have been written on M-Pesa, and it is currently regarded as a global model for financial inclusion. M-Pesa, which is a mobile money transfer service was launched in Kenya by a company called Safaricom in 2007, and its software application allows people without bank accounts to send money via mobile messaging to contacts on their phone, or even to pay for goods and services such as groceries or a taxi fare. Uptake for the service grew rapidly in the first year to 2 million users, and by 2014 MPesa processed transactions amounting to almost 7% of the total national payments (NPS) throughput value and two-thirds of total NPS throughput volume in Kenya . In 2017, during the 10 -year anniversary of M-Pesa, CNN reported that that the company now has about 30 million users in 10 countries and the system processed around 6 billion transactions in 2016 at a peak rate of 529 per second .

What is worthy of note, is that M-Pesa facilitates the remittance of cash between users via a combination of its software and a GSM provider, thereby bypassing the banks software. It also relies on an agent network structure which currently comprises of about 287,400 agents for deposit and collection of cash without the hassle of waiting in a banking hall queue. It has been argued that M-Pesa cannot work effectively in a country where there is an existing Government central switch such as the Nigeria Inter Bank Settlement System (NIBSS) in Nigeria, or where the banks have largely captured both urban and rural areas. This may be the reason the technology was never introduced to Nigeria, and may have also resulted in its failure in South Africa where the banks have captured the rural areas and Vodaphone had to work with Nedbank to launch the product .

PAYMENT SERVICE BANK AS A TOOL FOR FINANCIAL INCLUSION

The Central Bank of Nigeria has never hidden its displeasure on the issue of virtual currencies, however, when it comes to the issue of the telecommunication companies providing financial services to the public, there is only a perceived reluctance to allow such services. This may be seen as a legitimate concern for CBN as the Nigerian Communication Commission (NCC) and the CBN have different levels of Know Your Customer (KYC), Consumer Protection Framework, Regulatory Framework and risk mitigation strategies, and surely creates a conflict of interest where the NCC is allowed to take on the financial monitoring role of CBN.

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CBN in its National Financial Inclusion Strategy defines financial inclusion as “…when adult Nigerians have easy access to a broad range of formal financial services that meet their needs at an affordable cost.” These services may include payments, savings, loans, insurance, and pension products. CBN stated that in 2010, 46.3% of adults were unbanked, hence CBN outlined a strategy under its National Financial Inclusion Strategy to bring the figure of unbanked adults down to 20% in 2020.

The PSB is largely a Digital Bank capable of receiving and transferring cash between individuals and small businesses and also maintains savings accounts. It will be largely technology driven as it will be based in rural areas with a main office, but with various coordinating centres to coordinate the activities of its banking agents. The PSB will have the ability to issue electronic wallets, debit and pre-funded cards, and electronically make payments/remit cash between banks for services rendered, as it will be connected or utilize a corresponding bank which is connected to NIBBS.

The draft guidelines provide that the founders of a PSB shall be Banking Agents,

Telecommunication Companies (Telcos) through a subsidiary, Retail Chains (Supermarkets), and Mobile Money Operators (MMO).

It also stipulates that the paid-up share capital of the PSB shall be N5,000,000,000 (Five Billion Naira), but the bank will not be allowed to grant loans, advances, guarantees or underwrite insurances. It does seem as though there are several similarities between M-Pesa and PSB, however, one cannot miss out the fact that while M-Pesa sits outside the banking network, the PSB sits within the banking network and will be directly regulated by the Central Bank of Nigeria. So, can we say the PSB is a hybrid of M-Pesa which removes any worries regarding customer’s money sitting outside the purview of CBN and not insured by the NDIC?

ANALYSIS

Could it be that in an attempt to pacify the perceived tension between the Telcos and the banks on the introduction of the Telcos as players in the financial space, the CBN came up with a structure that allows the Telcos to play in the financial space as a bank and under the similar rules as the other banks? Can we also say that in trying to achieve this, CBN unknowingly or maybe knowingly, created an exclusivity for Telcos to play in the Financial Sector to the detriment of FinTech companies?

Currently, there are three (3) categories of banks in Nigeria, namely; Commercial, Merchant, and Specialised Banks. The hierarchy of these banks are determined by their paid-up share capital requirements. The requirement for Commercial Banks are N10,000,000,000 (Ten Billion), N25,000,000,000 (Twenty-Five Billion), and N50,000,000,000 (Fifty Billion Naira) depending on the class; Merchant Banks require N15,000,000,000 (Fifteen Billion Naira); and Specialised Banks which includes Microfinance Banks, Mortgage Banks, Non-Interest Banks and Investment and Development Banks, have varying paid- up share capital requirements which begins from N20,000,000 to N100,000,000 (Twenty Million to One Hundred Million Naira).

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It is rather strange that the PSB is the only bank wherein the exact field of the promoters have been stipulated in the guidelines. All other banks can be founded by individuals or companies from any sector. Why then did the CBN feel the need to restrict the founders of a PSB to Bank Agents, MMO, Retail Supermarket and Telcos? Is this because their expertise is necessary for the operation of a PSB? Since the PSB is technology driven and all four proposed founders are involved in promoting the sales of products via technology, I am inclined to agree that they have the requisite experience, however, it will be a struggle for an MMO or a Bank Agent to raise the N5,000,000,000 (Five Billion Naira) paid-up share capital as proposed by the CBN as these are largely start-up companies.

So, in anticipation of additional revenue from bank card charges, card maintenance fees, and transaction charges (which the MMO and Bank Agents already share with Commercial Banks), the MMO and Bank Agents are required to maintain a minimum paid-up capital of N5,000,000,000 (Five Billion Naira). One wonders if this is a viable option for the MMO and the Bank Agents, and I guess only time will tell.

Big Retail Supermarkets such as Shoprite, and the Telcos will likely be able to raise and maintain the required paid-up capital, however, what are the odds of the retail supermarkets moving to rural areas in Nigeria away from their strategic market? It is obvious that this is only a no-brainer for the Telcos, as their business already takes them to rural areas to provide telecommunication services to people in the rural areas. However, one question that remains unanswered is what industry the Telco subsidiary will be involved in, and will the subsidiary be registered as a Banking Agent, an MMO or a Retail Supermarket, since those where the areas specified for promoters?

If it was a dream for an MMO or Bank Agent to one day grow into a bank, does the PSB make this dream any closer? I dare to answer in the negative, as the paid-up share capital requirement is prohibitive and still does not allow the PSB to grant loans or invest in any other product than that of CBN, which reduces the ability for the bank to generate substantial revenue, other than the bank charges/fees mentioned above.

It is obvious that the only promoter who gains from this current arrangement would be the Telcos by using USSD or text messages as part of their payment solution. This will lead to a new revenue stream from airtime purchases as customers in the rural areas will have to top-up in order to transact. This would undermine the other listed promoters as their technology will most likely be centred around the use of USSD and text messages, to the advantage of the Telcos. Therefore, the Telcos are bound to win whether they are a promoter or infrastructure provider, but CBN has an obligation to present a level playing field for all promoters in its pursuit of financial inclusion, as the more the players, the faster CBN can achieve its 20% unbanked target.

I propose that the Telcos should be designated as infrastructure partners and earn revenue off transactions, while CBN licensed companies such as Bank Agents, PSSPs , FinTechs and other existing players in the ecosystem should have the mandate to provide solutions/platforms targeted at rural areas using the Telco’s infrastructure.

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Lastly, one struggles with how to place the PSB within the hierarchy of banks in Nigeria, largely because it has a minimum paid-up share capital requirement which is less than that of a Merchant Bank but more than that of a Specialised Bank. Does this mean a PSB will seat above the Specialised Banks, and if this is the case, why does the PSB not have the ability to carry out basic functions which are available to Specialised Banks?

The paid-up share capital requirement for the PSB and the restrictions on who its promoters can be makes it undesirable as a bank, and is considered as a bottleneck to prevent applications from other relevant players in the industry.

CONCLUSION

As much as one appreciates the efforts of the CBN at arriving at this draft guideline, as it removes any perceived issues relating to the unwillingness of the CBN to include the Telcos as players in the financial sector, the framework must be examined holistically in order to ensure that it is fair to all promoters. In the context of the PSB and taking into consideration that any platform used in rural areas will include the use of USSD or text messages, the Telcos will be better off as infrastructure partners who earn revenue off transactions, while CBN licensed companies such as Bank Agents, PSSP, FinTechs and other existing players in the ecosystem should have the mandate to provide solutions/platforms targeted at rural areas using the Telco’s infrastructure

Mr. Olusola Teniola, President of the Association of Telecommunications Companies of Nigeria in his discussion with CNBC Africa on 9th October 2018, confirmed that the proposed PSB is great news for the Telcos, however, no other promoter has openly shown the same enthusiasm about the current framework as I believe the minimum paid-up share capital requirement has to be reduced significantly for a wider range of promoters to get involved. Also, the use of the word “bank” makes the framework undesirable when compared to other existing bank structures. I believe that if it must remain a bank, then the PSB should be permitted to give out loan facilities in order to justify the proposed minimum paid-up share capital of N5,000,000,000 (Five Billion Naira). Otherwise, what would be the yard stick for such minimum paid-up share capital when the funds saved in the e-wallets and bank accounts can only be transferred on the request of the account holder? One may highlight the issue of liquidation of the PSB as a concern, but is that not what the Nigerian Deposit Insurance Corporation (NDIC) caters for?

Surely, the PSB is unique and not a hybrid of the M-Pesa model, but it must be able to assimilate the current promoters and players in the field, in order to avoid the perceived notion that this structure has just been created to pacify the Telcos, to the exception of the other promoters.

Please note that the “Guidelines for Licencing and Regulation of Payment Service

Banks in Nigeria” is a proposed draft which was released on 5th October 2018 by CBN and I encourage all concerned parties to review the document and contribute to the discussion.