WHAT YOU NEED TO KNOW ABOUT THE CBN LICENSE: MYTHS AND FACTS
On October 5, 2018, the CBN wrote a letter to all banks, Telecommunication companies, mobile money operators, banking agents and Nigerian Communication Commission on the guideline and licensing of Payment Service Banks. Several media outlets have since then made publications on the content of the letter most especially on the #5billion capital base required as licensing fee for Payment Service Banks. People have expressed much criticism of such huge amount of base capital and many people have also voiced their opinion on what the CBN should do to protect the customers instead of such huge amount as how can we say they we are campaigning for ease of doing business yet the regulations to start such business es are not friendly.
It is also shocking that many people have interpreted the licensing fee to be specifically out against the FINTECH companies. A particular media outlet even had a headline that ‘FINTECH MUST HAVE A CAPITAL REQUIREMENT OF 5 BILLION BEFORE THEY CAN GET THEIR LICENCES’.
The headline is largely misleading and doesn't capture the content of the exposure draft sent by CBN. The content of the article also generalized throughout by mentioning fintechs without even a mention of PSB(Payment Service Bank). This has misled a lot of people and many curious people didn't even bother to read the content of the letter to know what it's about. While the 5 billion licensing fees might have its cause and effect on the ease of doing business, it is not targeted specifically at FINTECHS and startups as claimed.
WHAT IS A PSB (Payment Service Banks)
According to section 3, page 3 of the letter, CBN states that a Payment Service Banks shall:
- Operate mostly in the rural centers and unbanked locations, with not less than 50% physical access points in rural areas' as defined by the CBN from time to time:
- Establish ATMs in some of these areas;
- Be at liberty to operate through banking agents (in line with the CBN's Guidelines for the Regulation of Agent Banking and Agent Banking Relationships in Nigeria):
- Use other channels including electronic platforms to reach out to its customers;
- Establish coordinating centers in clusters of outlets to superintend and control the activities of the various access points and banking agents;
- Be technology-driven and shall conform to best practices on data storage; security and integrity;
- Set up consumer help desks at its main office and coordinating centers to attend to consumer-related issues.
From the above, it is clear that PSBs are not strictly fintechs and there is no PSBs doing all of the 7 points listed above in Nigeria. But according to point 6 that a PSB shall be technology-driven, it makes a PSB a potential FINTECH company. This doesn't necessarily make a fintech company a PSB. Fintechs like Appzone, Flutterwave, Paystack, Kudi and a host of others are not PSBs and they are not doing anything close to the required roles of a PSBs. Fintechs can, however, scale to a bank over time such as the way Piggybank scaled to a microfinance bank and acquired a license. Meanwhile, some digital products are existing already as a bank eg ALAT
It is, however, possible that a fintech company scale to a PSB of which only a few of them can in Nigeria based on the solution they are providing. Thus, the licensing regulation doesn't apply to them. Platforms like Paystack, Flutterwave etc are Payment Service Providers and the licensing required for them is 100 million capital base.
Fintechs are more of financial institutions than technology companies. We call them fintechs because they leverage basically on technology to provide their solutions. However, they are simply providing financial services. It won't be wrong to call most banks fintech companies. All of them have leveraged on technology and digital payment gateways in recent times. Yes, the technology they leveraged on is provided by some other companies which are made possible by simply using API provided by another. For example, Appzone and Interswitch powered many commercial bank payment services. Like Iyin Aboyeji, a former Co-founder at Andela and Flutterwave, rightly said, fintechs should not exist as competitors but as collaborators in the financial industry. An example is the use of Flutterwave payment processor by kudi.ai and the use of Interswitch by First Money.
Back to our discussion, I see the regulation more targeted at telcos as they are the ones that presently have the structure and capabilities to provide the service listed that PSBs can perform. The agents that exist that work to register SIM cards and other services on behalf of banks will simply turn to mobile money agents by the time MTN and Airtel launch their mobile money services as announced.
In an exposure draft sent to banks titled ‘Circular on the exposure draft of new CBN licensing regime (Licence tiering) for payment system providers’, CBN gave a more detailed licensing structure as contained below.
From the above, we can see that most fintechs operate in the basic license of a PSP (Payment Service Provider) dictated by their existing Functions. The capital base ranges from 100 million($250 000) to 5 billion($13 million) depending on the operation and services being performed. None of the FINTECHS I currently know of is operating in the super license category of a PSP. Paga, a non-bank mobile money operator, which boosts of 11000 agents across Nigeria is well placed to secure the super license regulation allowing it operate as a full PSB coupled with the fact that it has been able to raise a total of $35 million till date.
PSBs are the PSPs in the super license category. Telcos most especially when they launch into the mobile money space will rather prefer to employ services of existing payments processing gateways and portals like Interswitch, Paystack, Flutterwave among others rather than building their own solution. However, with time they might not have a choice than to come up with their solution. Reason being the extra cost they bear on each payment that passes through the gateway might not be favourable in the long run. You don't know how deep a water body is until you deep your legs into it. One reason commercial banks like First bank and GTBANK are building an in-house solution like Paystack and interswitch.
For example, on all withdrawal on a third party bank atm after three times, a #65 charge is born by the user and #35 by the bank. Interswitch charges #65 per transaction and #35 is the interbank processing fee which means the bank bears a total cost of #100 for the first 3 transactions for all 3rd party atm withdrawal. Now let's take a hypothetical example, assume there are 500 000 atm transactions on three different times by GTBANK users on WEMA bank ATM in a month; a total fee of #50 000 000 (50 million, which will be more in empirical cases) is thus borne by GTBANK in a month. This is a huge loss to banks especially the ones that operate as retail banks because banks are out to make money as profit-making entities. So it seems better for the bank to have their own product doing what interswitch is doing than employing the service of interswitch.
Although, while there are advantages and challenges the licenses posed to financial service providers, this doesn't say that the CBN should not play its regulatory role. Innovation drives regulation and not otherwise. 10 years ago, the licenses will be meaningless because it doesn't affect any financial service provider and the digitization and financial gospel being preached are alien. Quartz captured in an interview with Dozie Chigozie, the CEO of OneFi that: But even though much of the tech industry has railed against the central bank’s pricey license regime, Dozie suggests increased regulation is not necessarily a bad thing as fintech companies become more significant in the financial sector. “CBN improving regulation doesn’t mean you can’t innovate,” he said. “Yes, it might stifle innovation but we also have to watch out for the protection of the customers.”
Hafeez Jimoh writes from Air Force Institute of Technology, Kaduna. Enthusiastic about African technology. Connect with him on twitter or Email. Thanks.