LICENCING REGIME SERIES: PAYMENT SERVICE BANKS (PSB) IN NIGERIA

In August 2020, Nigeria revised its licencing regime for the Payment Service Banks (PSB) to rejig the PSB to enhance financial inclusion.

Through increased access to deposit products and payment/remittance services to small businesses, low-income households and other financially excluded entities in a secured technology-driven environment.

Background

The Central Bank of Nigeria (“CBN”) issued the Guidelines for Licensing and Regulation of Payment Service Banks in Nigeria 2020 (the PSB Licencing Guidelines”). The Licencing Guidelines replaced the 2018 PSB Guidelines.

Like its predecessor, the Regulatory Framework for Mobile Money Services in Nigeria 2021 (“Mobile Money Regulations”) recognized the importance of Mobile Network Operators (MNOs) in the mobile money system.

The Mobile Money Regulations acknowledged how vital mobile money services infrastructure is to Nigeria’s payment system.

Nigeria does not operate the telco-led model, where the lead initiator is a multinational organization (MNO) or a telco.

So, the PSBs are stand-alone entities from telecommunication companies (“telcos”) in Nigeria. Conceptualized to leverage mobile and digital banking channels to enhance financial inclusion and stimulate economic activities at the grassroots through financial services.

Structurally, Payment Service Banks:

• Operate mainly in the rural areas and unbanked locations targeting financially excluded persons, with not less than twenty-five percent financial service touch points in such rural areas as defined by the CBN from time to time
• Enter into direct partnerships with card scheme operators. Such cards shall not be eligible for foreign currency transactions.
• Deploy ATMs in some of these areas
• Deploy Point of Sale devices
• Issue debit and pre-paid cards in its name
• Operate electronic wallet
• Render financial advisory services
• Invest in FGN and CBN securities and
• Carry out such other activities as may be prescribed by the CBN from time to time.

Financial service touch points are locations where a customer can access essential financial services, including cash-in, cash-out and transfers/remittances.

Rural areas include villages, settlements, hamlets and the hinterlands, as well as other areas without adequate banking facilities as may be prescribed by the CBN from time to time.

Eligible Promoters and Permissible Services

Promoters of Payment Service Banks include subsidiaries of telcos, banking agents, retail chains such as supermarkets and downstream petroleum marketing companies.

The promoters include postal logistics and courier companies, Mobile Money Operators seeking to convert to PSBs, Switching Companies, Financial Technology, and Financial Holding Companies.

Suppose the promoter of a PSB is a regulated entity. In that case, it must obtain approval or a ‘no objection letter’ from its primary regulator and submit the same at the licensing application stage to the CBN.

We submit that non-banking financial technology entities may apply for a PSB licence in Nigeria if the permissible activities squarely fit into their business model.

Permissible activities for PSBs are:

• deposits from individuals and small businesses, which the deposit insurance scheme shall cover;
• payments and remittances (including inbound cross-border personal remittances) services through various channels within Nigeria;
• Sale of foreign currencies realized from inbound cross-border personal remittances to authorized foreign exchange dealers;
• Issue debit and pre-paid cards in its name and operate electronic wallet;
• Render financial advisory services and invest in FGN and CBN securities; and
• Carry out such other activities as may be prescribed by the CBN from time to time.

We are unaware that the CBN had added other services to the permissible activities when we published this commentary.

Payment Service Banks’ Licencing Requirements

You are to address your PSB application to the CBN Governor. After that, the PSB’s promoters may present their proposal to the CBN’s Director, Financial Policy and Regulation Department (FPRD).

The proposal should cover the business case, vision and strategy, governance arrangements, risk management, compliance, and financial viability.

Approval-in-principle

The application for the CBN’s grant of Payment Service Banks’ approval-in-principle includes a non-refundable application fee of five hundred thousand Naira only in bank draft, evidence of minimum capital deposit of five billion Naira, proof of capital contribution made by each shareholder, and name reservation approval at the Corporate Affairs Commission (CAC).

A proposed PSB’s business plan or feasibility report will cover the following:

• Its objectives and a justification for the application
• Proposed ownership structure that fully discloses particulars of shareholders and potential investors,
• Funding source A long-term credit facility – not obtained from the Nigerian banking system – is a good source of income.
• Board and board committee charters, criteria for selecting board members and board composition
• The total number of directors shall be between five and seven, including at least two independent directors.
• Completed Fitness and Propriety Questionnaire; the proposed directors and significant shareholders will supply a sworn declaration of net worth and other sensitive personal data.
• Organizational structure should show functional units, responsibilities, reporting relationships and grades of heads of departments/units.
• Schedule of services to be rendered, sales, distribution and marketing strategy showing geographic coverage, and
• details of information technology requirements and facilities.

Additionally, promoters of sole corporate investors that seek PSB’s AIP will forward incorporation documents and related governance and compliance documents.

The PSB’s draft Memorandum and Articles of Association (MEMART) ensures clear governance structures. The undertakes that the PSB will capitalized on the volume and character of its business at all times. The CBN shall have powers to supervise and regulate its operations.

Regulated foreign institutional investors must submit approval or a ‘no objection letter’ from their regulatory authority in the home country.

Documentary requirements for a PSB’s AIP include technical Services Agreement, detailed Manuals and Policies such as operations, particularly, Asset/Liability Management Policy (ALM Policy), Financial Management Policy, Accounting policies and principles, Anti-Money Laundering and Combating Financing of Terrorism (AML/CFT) Policy, Enterprise-Wide Risk Management Framework, and Code of Ethics and Business Conduct.

On receipt of the forenamed documents and as per the details in the PSB Licencing Guidelines, the CBN will issue an AIP within three months, and the promoters will proceed to incorporate the PSB at the CAC.

When the AIP is issued, the proposed name reserved at the CAC may have expired. The promoter’s solicitors must be agile to successfully re-apply for the expired name at CAC.

Requirements for Granting of Final License

At least six months after obtaining the AIP, the promoters of PSB shall apply for the grant of a final licence to the CBN.

The following documents accompany the application for a PSP’s final licence:

• Bank draft of non-refundable licensing fee of two million Naira
• a validly certified copy of incorporation documents
• proof of the location of the Head Office, whether rented or purchased
• Schedule of changes, if any, in the Board and Shareholding after the grant of AIP.
• Evidence of ability to meet technical requirements and modern infrastructural facilities, such as office equipment, computers, and telecommunications, and to perform the bank’s operations and meet CBN and other regulatory requirements.
• Employee documentation and detailed resumes of top management staff
• Completed Fitness and Propriety Questionnaire and sworn declaration of net worth executed by top management staff
• Bank Verification Number (BVN) and Tax Clearance Certificate of each top management staff
• Comprehensive plan on the commencement of the bank’s operations with milestones and timelines for the roll-out of crucial payment channels, and
• Board and staff training programme.

Before the CBN issues a full PSB licence, it inspects the PSB’s premises and facilities to determine the quality of infrastructure and sight the original copies of the documents submitted to it.

The CBN will meet the PSB’s Board and Management team, verify the promoters’ capital contributions, and integrate its infrastructure with the National Payments System.

Commencement and Post-commencement

Upon the final licence, the PSB informs the CBN of its readiness to commence operations. A PSB’s post-operations compliance with the CBN includes a copy of each shareholder’s register and a certificate issued to each investor.

Other information includes an opening statement of affairs signed by two directors and auditors, enterprise risk management framework (ERMF), Internal control policy, minutes of the pre-commencement board meeting, and proof integration on the National Payments System.

A PSB’s operation must comply with all CBN’s guidelines and regulations and other sector regulators.

Compliance and regulatory requirements include CBN’s code of corporate governance for banks and the Revised Assessment Criteria for Approved Persons’ Regime for Financial Institutions.

A PSB must deal at an arms-length with other related entities who are existing payment infrastructure providers, such as switching and processing or mobile money payment infrastructure.

Conclusion

Nigerians must look to the PSB to help its government harvest the financial inclusion agenda. The CBN as a sole regulator, must tighten its reins of prudential regulations and corporate governance on Payment Service Banks.

An effective board makes an outstanding corporate performance. The PSB Licencing Guidelines commit a PSB to the CBN’s corporate governance code, and business conduct and fair competition principles are enshrined.

The CBN’s consumer protection framework regulates a PSB and all relevant consumer protection principles in the FCCPA (federal competition and consumer protection act) 2018.

PSB as a banking model, is an opportunity for retail businesses in Nigeria.