Payment Service Banks: Reaching the Unbanked through Innovative Means
In 2012, the Central Bank of Nigeria (CBN) developed the National Financial Inclusion Strategy (NFIS), which sought to reduce the financial exclusion rate in Nigeria to 20% by the year 2020. It was built on 4 strategic areas namely: agency banking, mobile banking/mobile payments, linkage models and client empowerment and took into cognisance the demand-side, supply-side and regulatory barriers to financial inclusion. According to the Global Findex Database 2017, nearly half of about 1.7 billion unbanked people in the world live in seven developing economies namely: Bangladesh, China, India, Indonesia, Mexico, Nigeria and Pakistan. Furthermore, according to the EFINA Access to Financial Services Survey, 36.8% of the adult population in Nigeria are financially excluded with 44.1% being male and 55.9% being female. This, therefore, shows that even though significant progress has been made in financial inclusion there still remains a large population of unbanked citizens who require payment services, especially in the rural areas.
With the digitisation of banking services and the internet penetration rates in Nigeria, payments are fundamental to how banks interact with customers. They underpin most propositions and touch customers more than any other part of a bank. Payments have become the key battleground for the customer’s primary relationship and income streams of banks as seen in the rise of digital income on the bank’s financial statements. Payment Service Banks (PSBs) could revolutionise financial services and improve the financial inclusion rates in rural areas in Nigeria, ushering in a new phase in delivering innovative payment solutions to customers across an evolving channel environment such as what pertains in Nigeria.
The History of Payment Service Banks
The concept of Payment Service Banks was first introduced in 2013 in India. Due to the large population and the high number of unbanked citizens, the Reserve Bank of India (RBI) began exploring different interventions to solve the challenge. A committee on Comprehensive Financial Services for Small Businesses and Low-Income Households was formed, and the committee recommended a new bank category called Payments Banks. In 2014, invitations were sent out for interested parties to apply. In 2015, the RBI granted licenses to 11 applicants, despite receiving a total of 41 applications. Of the 11 licensed PSBs, 3 have surrendered/given up their licenses, while 6 PSBs have commenced operations, albeit only 4 are prominent.
In Nigeria, the CBN came up with guidelines in 2018 for the licensing and regulation of PSBs with a clear objective of enhancing financial inclusion in rural areas by increasing access to payment/remittance services and giving access to deposit products to small businesses, low-income households through high-volume low-value transactions. The structure of the PSBs is planned to consist of the following;
- Operations would mostly be in the rural areas and unbanked locations with not less than 50% physical access points in rural areas;
- Establishment of ATMs in some of these areas;
- Using electronic channels including electronic platforms to reach out to customers;
- Being technologically driven;
- Having the freedom to operate through agent banking networks;
- Establishing coordinating centres in clusters to manage the access points and banking agents and;
- Setting up customer help desks at the main office and coordinating centres.
According to the KPMG report on Payment Service Banks, ‘PSBs are expected to adopt digital strategies to acquire new customers and operate efficiently. However, an incremental approach to digital infrastructure may not yield the expected results, considering the structural constraints that have challenged incumbent banks in Nigeria. Moreover, with only 36 million customers (as at December (2018), from an adult population of over 100 million, there is still a lack of awareness/ use of banking services and limited adoption of technology-enabled banking services in Nigeria’.
Challenges facing Payment Service Banks in Nigeria
The target by the CBN for PSBs in having 50% of their physical access points in rural areas means that the lack of functional infrastructure such as power would hinder the operations of the PSBs. Given CBN’s requirement of minimum access points in rural areas, this must account for significant variation factors at various locations including market conditions (e.g. local population, financial transactions dynamics, nature of economic activities), physical infrastructure (e.g. access to electricity, access to mobile networks), operational risks (e.g. security, theft), proximity to financial infrastructure (e.g. commercial banks, microfinance banks).
Technology penetration (particularly telephone and internet services), which is a major requirement to drive this financial inclusiveness in the rural communities in Nigeria (the target market), still falls below expectation. The broadband penetration rate in Nigeria stands at 33% in 2019; therefore, to provide digital services in rural areas, there is a need to improve on the broadband penetration rates. Another challenge facing the PSBs are an irregular saving pattern among the target segment they are meant to reach. There is limited knowledge of the savings patterns and profiles of the underserved; hence, PSBs will need a deep understanding of their market segments to enhance and deploy product-market fit. It must be said, that in solving the challenges to be faced by the PSBs, Nigeria would be solving its developmental challenges that will lead to sustainable development. The power, broadband and jobs created in the rural and urban centres are directly tied to the Sustainable Development Goals (SDGs). Therefore, an enabling environment must be created for the PSBs to be successful.
PSBs and National Development
Nigeria is plagued with a lot of developmental challenges and to solve these challenges, there is a need to lend both externally and internally given the paucity of revenues generated by government agencies. According to the guidelines by the CBN on PSBs, the banks can invest their funds only in FGN and CBN securities such as FGN Bonds, Treasury Bills, CBN Certificates etc. This would enable the government to generate funds that can be used to improve on infrastructure and human capital development.
Also, the PSBs can assist immensely in enhancing the reach of Social Investment Programmes by State and Federal Governments. The success of welfare programmes such as the conditional cash transfer (CCT) and the likes, which provide a monthly stipend to the poorest of the poor in rural areas of the country has been constrained by cash management (distribution). The existence of PSBs therefore in rural communities will ensure that these payments can reach the designated beneficiaries and encourage a savings and investment culture by enhancing financial education. Due to the digitisation of banking services that the PSBs would bring to the rural areas, other digital products that are beneficial can be offered to the customers using the PSB infrastructure in relation to education, health, skills acquisition and value-added services.
In conclusion, customer transactions are anticipated to be the key area for PSBs and they are expected to rely on technology and existing retail footprints, providing them with the foundational infrastructure to provide financial services to rural and unserved customers at lower costs. This, therefore, means that Nigeria needs to fasten her technology development through broadband services and technical education that will create an operational environment that will foster the growth of the PSBs when companies eventually are given the license by the CBN.