REGULATION OF PAYMENT SERVICE BANKS IN NIGERIA: TOO MUCH OF A ‘GOOD THING’?

The picture above best captures my early thoughts when I heard the news that the Nigeria now has a regulation for payment service banks in Nigeria.

Given my understanding of how regulations work in Nigeria, having been privy and privileged to have worked closely with different regulators and sundry industry stakeholders, I knew, to some extent, what to expect from the "Town's New Sheriff".

Now to The Business

On 26 October 2018, the Central Bank of Nigeria (CBN), in a bid to create a new regulatory and licensing regime for Payment System Banks (PSBs) in Nigeria issued the Guidelines for Licensing and Regulation of PSBs in Nigeria (the ‘Regulation’).

The Regulation was issued barely seven (7) days just after the fourteen-day ultimatum issued by the CBN for stakeholders in the financial technology (FinTech) industry to submit their comments on the proposed Regulations.

While it could be argued that the time allowed for comments from stakeholders on the draft was quite short, this publication seeks to review the Regulation and critically examines whether the Regulation has succeeded in achieving a balance between the protection of ‘public interests’ on the one hand and on the other hand, promoting innovation, growth and financial inclusion in Nigeria.

This publication does not attempt to exhaust the issues thrown up by the Regulation as such a voyage is too ambitious for this platform. Hence, why there is an ongoing effort to publish a more detailed analysis of the Regulation in a peer reviewed Journal later on. Details of this will be shared much later.

For the avoidance of doubt, this publication does not seek to pass a 'full judgement' on the age-long debate of preference for performance-based or goal-setting regulation or even self-regulation over prescriptive regulation. Nonetheless, a quick comment on whether the Regulation is overly prescriptive or not will surface later on in this publication, for the purpose of enriching the literature in this regard.

The foregoing said, it is apt to mention that the Regulation attempts to accord with the National Financial Inclusion Strategy (NFIS) which seeks to reduce the percentage of adult Nigerians that are excluded from financial services from 46.3% in 2010 to 20% by 2020. The NFIS is also focused on increasing the number of Nigerians included in the formal sector from 36.3% in 2010 to 70% by 2020.

While the intention behind the NFIS is quite laudable, it remains to be seen whether the seemly lofty goals of the NFIS will be achieved by 2020.

Of course, one does not need a soothsayer to see where things are likely headed.

The understanding of what the NFIS is all about is very crucial and could help in seeing things from the regulator (and specifically in this case, the CBN)'s perspective as this will come in handy when placed alongside the quest for fair treatment of current industry players and prospective new entrants to the financial services industry.

It is perhaps worth noting, for the purpose of analysis to be later done, that the Regulation was issued in collaboration with different stakeholders in the digital financial ecosystem, including but not limited to the Nigerian Communications Commission, Telecommunication Companies (Telcos), Mobile Money Operators (MMO), and commercial banks, with a view to implementing the NFIS.

Why was the Regulation made?

The Regulation came just after the CBN had reiterated the need to secure payment systems and curb fraudulent activities in the financial sector, while having in place, regulations that protect online, mobile and payment services in Nigeria.

Another justification for the Regulation can arguably be attributed to the efforts of selected stakeholders in the industry, to develop efficient and reliable electronic payment systems in Nigeria.

It may also be asserted, albeit not unchallenged, that the Regulation stems from the CBN’s understanding of how crucial it is to harness the opportunities that come with emerging trends in banking and payment systems, in addition to addressing the regulatory and security implications of such emerging trends, with a view to achieving financial stability in Nigeria.

It can further be contended that the Regulation aligns with the CBN’s mandate to promote a sound and financial system in Nigeria, while enhancing access to financial services for low income earners and unbanked segments of the society.

The Regulation is also aimed at addressing the challenges associated with effective outreach to rural communities as well the need to complement the services provided by other licensed entities involved in the operations of PSBs in Nigeria.

As gleaned from the Regulation, 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.

Accordingly, PSBs are envisioned to facilitate high-volume low-value transactions in remittance services, micro-savings and withdrawal services in a secured technology-driven environment to further deepen financial inclusion and help in attaining the policy directive of 20 per cent exclusion rate by 2020.

Another key reason for setting up PSBs, as gleaned from the Regulation, is to enhance financial inclusion by increasing access to deposit products and payment/remittance services to small businesses, low-income households and other financially excluded entities, through high-volume low-value transactions in a secured technology-driven environment.

While a cursory reading of the reasons canvassed in support of the Regulation is likely to leave one with the impression that the Regulation is well placed and made perhaps made with the good intention of protecting the financial system in Nigeria and in particular, protecting users of online, mobile and payment services, it may not be out of place for one to assert that the Regulation hardly takes care of the interests of both existing and potentials FinTech operating as PSBs.

The Regulation at a Glance

A quick glance at the Regulation will reveal some of the following key provisions, to wit: Eligible Promoters; Licensing Requirements; Corporate Governance; Permissible Activities; Requirements for Prudential Regulation; Risk Management, to mention but a few.

In the succeeding paragraphs, efforts will be made to succinctly examine some key provisions of the Regulation that are quite disruptive and could arguably be said to be game changers for key players in the FinTech industry. While we shall only be touching on a couple of some provisions in this publication, subsequently future series in this regard will do justice to other significant provisions.

Structure of Payment Service Banks

The Regulation mandates PSBs to operate mostly in the rural areas[1] and unbanked locations targeting financially excluded persons, with not less than 25% financial service touch points in such rural areas as defined by the CBN from time to time.

PSBs are required to enter into direct partnership with card scheme operators and such cards are precluded from being eligible for foreign currency transactions. It is very plausible for one to struggle with the rationale for this.

Furthermore, the Regulation PSBs are mandated to use the words “Payment Service Bank” in their names to differentiate them from other banks. However, the Regulation precludes a PSB from including any word that links it to its parent company. This could perhaps be because the CBN intends to ensure that PSBs are separate entities from their parent company, with a view to avoiding conflicts of interests.

Permissible and Non-Permissible Activities

Under the Regulation, there are certain activities which PSBs can engage in include:

Acceptance of deposits from individuals and small businesses – such deposits are to be covered by the deposit insurance scheme;

Carrying out payments and remittances services through various channels within Nigeria;

Sale of foreign currencies realized from inbound cross-border personal remittances to authorized foreign exchange dealers;

Issuance of debit and pre-paid cards on its name;

Operation of electronic wallet;

Rendering financial advisory services;

Making investments in Federal Government of Nigeria (FGN) and CBN securities; and

Carrying out such other activities as may be prescribed by the CBN from time to time.

A reading of the operative words in the last paragraph "...such other activities..." will reveal that the list of activities PSBs can engage in is neither closed nor exhaustive and the CBN has the power to include more activities that PSBs can engage in, from time-to-time.

The foregoing notwithstanding, PSBs are precluded from carrying out the following activities:

Grant any form of loans, advances and guarantees (directly or indirectly);

Accept foreign currency deposits;

Deal in the foreign exchange market;

Insurance Underwriting;

Undertake any other transaction which is not prescribed by these Guidelines;

Accept any closed scheme electronic value (e.g. airtime) as a form deposit or payment;

Establish any subsidiary except as prescribed in the CBN Regulation on the Scope of Banking and Ancillary Matters No. 3 2010.

Eligible Promoters

Under the Regulation, the following can promote PSBs, to wit: Banking Agents; Telecommunications companies (Telcos), through subsidiaries; Retail chains supermarkets, downstream petroleum marketing companies); Postal services providers and courier companies; Mobile Money Operators (MMOs that desire to convert to PSBs are mandated to comply with the requirement of this Guideline); Financial Technology Companies (Fintech); Financial Holding Companies; and any other entity, on the merit of its application, subject to the approval of the CBN

Financial Requirement for Grant of Approval In Principle for the PSB License

One of the requirements for the grant of an approval in principle of a PSB license is the ability to demonstrate or show that the applicant company is able to meet the minimum capital requirement stipulated by the CBN for PSBs as Five Billion Naira (#5,000,000,000.00).

For FinTech enthusiasts, the #5 Billion Minimum Capital Requirement may come off as being on the high side, capable of stifling growth, killing innovation as well as likely to militate against the actualization of the 20% exclusion rate by 2020 as well as the actualization of the "financial inclusion" contemplated under the NFIS. The contention can be further fortified by a careful review of the definition of "financial inclusion" will reveal that financial inclusion refers to the stage or time when Nigerians have easy access to a broad range of formal financial services such as payments, savings, loans, insurance, and pension products, that meet their needs at an affordable cost.

While the Non-refundable Licensing Fee of Five Hundred Thousand Naira and the Non-refundable Licensing Fee of Two Million Naira, could be easily secured, one seriously doubts how the CBN expects prospective applicants for the PSBs licence to secure a whooping sum of Five Billion Naira (a sum some traditional banks struggled to meet up with and virtually had to shut down operations), and particularly, FinTech companies, looking forward to become stakeholders in the achievement of the financial inclusion expected in 2020, which is about than 10-11 months away.

A closer look at the Five Billion Naira minimum capital requirement stipulated by the CBN will make one question what exactly the CBN's motivation for issuing the Regulation was.

Capital Adequacy Ratio

The provision of the Regulation in this regard appears to be protective of the consumers. Essentially, the capital adequacy ratio of a PSB is to be measured as the percentage of its shareholders’ funds unimpaired by losses to its total risk weighted assets.

The minimum Capital Adequacy Ratio (Qualifying Capital/Total Weighted Assets) for PSBs is stipulated in the Regulation as 10% or as may be prescribed by the CBN from time to time.

Investment of Deposit Liabilities

PSBs are mandated to maintain a minimum of 75% of their deposit liabilities in CBN securities, Treasury Bills (TBs) and other short-term federal government instruments at any point in time. While, the PSBs have the privilege to make their investments from the CBN window, all funds in excess of the PSB’s operational float are to be placed with DMBs.

A careful review of the foregoing provisions and more is likely to make one come to the conclusion that there the Regulation could pass off as typical example of a prescriptive Regulation, which is driven mostly, from the angle of protecting consumers and ensuring the that the interests of clients, and by extension, Nigerians, are protected, while working towards sustaining confidence in the financial sector through different layers of protection from pitfalls.

The foregoing notwithstanding, it is important to place on record that it is not possible, to by a single regulation, contemplate all issues likely to be thrown up. Hence, why there should be room for some adjustments or creativity in the implementation of regulations.

CONCLUSION

While it is conceded that the emergence of FinTechs in our financial system accentuates some known risks within the financial system, there is no telling that payment systems have important implications for monetary policy implementation and efficiency of the Nigerian economy. With the huge interest by bank customers in alternative payment platform, it is necessary for financial sector regulators and operators to come up with innovative ways of securing electronic transactions. This is coming at the back of the banking industry losing the banking industry losing about N12.30 billion to various frauds in the banking system between 2014 and 2017.

The foregoing notwithstanding and having in mind the need not stifle growth as well as innovation in the FinTech Industry, the CBN will do well to strike a balance between regulating the implementation of regulation to facilitate the growth of initiatives that will harmonise payment operations in the country, the need to adopt dynamic payment systems policies and regulations that are targeted at maintaining a delicate balance between the industry players, FinTech companies and consumers/general public, with a view to not stifling innovation and growth in the payment systems.

No doubt, FinTech companies have facilitated the expansion of electronic payments, and helping in providing financial services to previously unreached groups, cannot be mentioned in a jiffy.

If anything at all, FinTech companies deserve to be commended, not condemned or crucified or inhibited through onerous regulations that discourage innovation and stifles growth in the industry.

If the CBN is really serious and committed to the development of a financial inclusion strategy and cash-less policy with specific targets and timelines, it becomes pertinent for the CBN to ensure that a balance is reached between the need for regulation of payment services and protection of consumers, with a view to ensuring the development of a secure, competitive and innovative environment for electronic payments.

References

R. Baldwin et al, "Understanding Regulation: Theory, Strategy and Practice" (2nd ed., Oxford University Press: Oxford, 2012) 26-31;

P. J. May, "Performance-based regulation" in D. Levi-Faur (eds), Handbook on the Politics of Regulation (Edward Elgar Publishing Limited: United Kingdom, 2013) 373-384;

D. Pesendorfer, "Risk regulation and precaution" in D. Levi-Faur (eds), Handbook on the Politics of Regulation (Edward Elgar Publishing Limited: United Kingdom, 2013) 283-394;

G. Majone, "Strategic issues in risk regulation" in D. Levi-Faur (eds), Handbook on the Politics of Regulation (Edward Elgar Publishing Limited: United Kingdom, 2013) 295- 307;

P. J. May, "Performance-based regulation" in D. Levi-Faur (eds), Handbook on the Politics of Regulation (Edward Elgar Publishing Limited: United Kingdom, 2013) pp. 373-384

This publication (represents only the personal views of the writer) and is provided to highlight issues as well as for general information purposes only; it does not constitute legal advice. Whilst reasonable steps were taken to ensure the accuracy of information contained in this publication, the author does not accept any responsibility for any loss or damage that may arise from reliance on information contained in this publication.

For more discussion on the topic or any other interesting (legal) issue of interest, please feel free to reach out to the author via e-mail – [email protected]

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