The financial market offers a variety of opportunities for those who are willing to tap from its wealth. The market not only creates a platform of opportunities but creates an atmosphere of competitiveness; those who play their cards right may win by a royal flush. According to a 2020 report by Mckinsey, the Nigerian banking and financial service industry remains an attractive sector, with over 9 billion dollars in value pools, but in spite of the high level of competition, a great majority of its consumers are underserved. Consumers, especially in the rural areas, have to deal with a lack of access to services, affordability issues, poor user experience, and a host of other issues.
Fintechs have been able to take advantage of the openings which these issues have presented, developing products to address obstacles in affordable payments, quick loans, flexible savings and investments amongst others. These Fintech companies which are mainly startups have been lauded for their contributions to ensuring that financial services are made simple and accessible to the layman. However, in order to further drive the financial inclusion objective of the Central Bank of Nigeria (CBN), there is a need not only for a reliable platform but one that will allow for a wider coverage which would ensure that the Nigerian grassroots can have access to affordable financial services. The CBN, therefore, introduced the Payment Service Banks (PSBs) – a hybrid of conventional banks and fintech companies that provide banking solutions for their consumers, operate on a smaller scale by harnessing technology services through mobile and agency banking to mobilize deposits and facilitate transfers from unbanked customers, especially for those in rural areas. Although the CBN lists a number of companies that can promote payment service banking in Nigeria, including fintech and telecommunications companies (Telcos), it is notable that the license for operating as PSBs has largely been granted to Telcos.
As of June 2021, the list of CBN’s licensed PSBs includes Hope PSB owned by Unified Payment Service Ltd, MoneyMaster PSB by Globacom, 9PSB by 9Mobile. Now, the CBN has added to its list, SmartCash PSB by Airtel Africa and MoMo PSB by MTN. What this means is that of the five PSBs licensed by the CBN, four of them are owned by the four major Telcos in Nigeria, with only one fintech company. It is understandable the Telcos have wide coverage, but the CBN in its effort of ensuring inclusion by handing over the operation of PSBs to Telcos may not have considered how this dynamic may alter the level playing field in the fintech space.
The impact of the operations of PSBS in engendering the financial integration of persons in rural areas of Nigeria cannot be overemphasized. It is one that has been tested in some jurisdictions like India, and by effective management of their operations, the vision for a financially inclusive Nigerian society may be achieved. However, there seems to be an area to be put into consideration- the Nigeria fintech startup ecosystem. What will be the fate of fintech startups that offer platforms for savings, transfers, and withdrawals which are typical of PSB operations?
The rise of PSBs in Nigeria
The launch of the National Financial Inclusion Strategy (NFIS) on 3 October 2012 heralded the CBN’s commitment to ensuring financial inclusion in Nigeria, targeting remote areas in Nigeria. This commitment is also to ensure that greater access to financial services is provided for the underbanked rural areas with poor and low-income earners in Nigeria. It also sought to ensure that over 80% of bankable adults in the country had access to financial services by 2020, decreasing the exclusion rate by 20 per cent by the year 2020.
The CBN, therefore, introduced some mechanisms that it hoped would achieve this feat. Microfinance Banking, Agent Banking, Tiered Know-Your-Customer Requirements and Mobile Money Operation (MMO) were introduced as part of the strategies to ensure financial integration.
However, in an Exposure Draft on the Guidelines for Licensing and regulation of PSBs addressed to stakeholders on 5 October 2018, the CBN stated that these strategies which had been earlier employed have yet to yield enough results. By research later carried out by the CBN and other stakeholders including the Nigerian Communications Commission, commercial banks, mobile money operators and telecommunications companies, it was agreed that PSBs held an attractive chance in the pursuit of the objective to ensure financial inclusion in Nigeria as telecommunication companies have a wider reach and more robust network than all commercial banks put together.
Thus, the PSB operations, the remedy to cure the ill was proposed in 2018.
The need for a veritable mechanism to ensure financial inclusion in Nigeria also brought about the CBN’s Guidelines for the Licensing and Regulation of Payment Service Banks 2018 (The Guidelines).
The Guidelines which were revised in 2020 have been supplemented by a Supervisory Framework for Payment Service Banks in July 2021. According to the Guidelines, the key objective of setting up PSBs is to “enhance financial inclusion in rural areas by increasing access to deposit products and payment/remittance of services to small businesses, low-income households and other financially excluded entities through high volume low-value transactions in a secured technology-driven environment”.
The framework provides that PSBs are expected to leverage on technology to provide services that would be easily accessed by the underbanked population and those who are in hard-to-reach areas of the country”.
Therefore, they are to provide banking services through physical access points or digital interfaces as well as mobile or internet-enabled platforms.
There seems to be a consensus by financial and economic experts that the operations of PSBs in Nigeria could enhance the availability and equality of opportunities to access formal financial services, thereby achieving Nigeria’s goal of ensuring that 95percent of Nigerian adults are financially included by the year 2024.
PSBs are expected to operate largely in rural areas and unbanked locations, targeting financially excluded persons. They are expected to deploy Automated Teller Machines (ATMs) and Point of Sale devices in some of these areas. They are also at liberty to operate through banking agents. In driving the financial inclusion ambition of the CBN, PSBs are to be technology-driven and conform to best practices on data storage, security, and integrity. They are also expected to also set up customer help desks both physically and virtually at their main office and coordinating centres.
PSBs banking services include but are not limited to savings, deposits, transfers, remittances, and investments in bonds. They can also issue debit cards. They are not, however, to grant loans. The simple meaning of this is that just with the dial of a set of codes on a mobile phone, one can carry out some banking transactions without having to visit a bank, download an app, or link a debit or credit card to an app, etc.
Telcos Leverage – A Case against Anti-competition
Telcos are being granted licenses to carry on the same services as several fintech startups. Telcos have a wider coverage. In a statement made by MTN, on the approval of its license to operate a PSB, it stated “we are leveraging on our size when we have subscribers of over 70 million spread across Nigeria with our infrastructural spread, we are well-positioned to cover everywhere”.
The large amount of capital at the disposal of Telcos is one leverage that startups may find hard to stand against.
Many Telcos are multinational public companies, that have been involved in business long enough with a large number of investors. They are well-established companies with capital at their disposal. Also, one of the requirements for operating a PSB is the establishment of a subsidiary with a minimum capital deposit of five billion Naira.
How many startups can afford such a huge capital deposit? Given that startups largely depend on investors who expect to gain returns on new products which are just being introduced to the public, startups may face an uphill task. Also, looking at MTN’s 13% contribution to the total tax revenue generated by the Nigeria Federal Inland Revenue Service (FIRS) in 2021 is a pointer to the fact that these startups are in no way a match for this competition. Domination by Telcos is, therefore, a possible
Technological advancement in the operations of Telcos may not be easily matched by startups. Telcos will be able to take over the platform which fintech companies utilize. The fintech companies that create products that solve payment problems for ambitious consumers and businesses will largely be affected. Business to Consumer (B2C) would bear the brunt of the effects, seeing that the PSB would focus largely on these services.
Telcos have effective marketing and communications strategies. Consumers are likely to jump on any offer which the Telcos are making with the right advertisement. Telcos already have a strong brand and market presence, unlike startups, trying their best to secure the public’s trust, through newly introduced products. It is obvious that startups have to do a lot now, seeing that are coming into the same space. They enjoy the trust of consumers who have been making use of their services for years.
Security and traceability of transactions with the Telcos have increased consumers’ trust in them. Consumers are informed via message about their top-ups, the number of top-ups that were done, data usage, and all other kinds of communications that consumers will typically want to be aware of, thereby building a system of traceability and security in transactions carried out by them. The odds will be stacked against a smaller company, trying to ensure that its product is used first before consumers get to know what level of trust to place in it.
Given all the odds stacked against the small fintech companies and the leverage of the Telcos, Is there a likely case of dominance by telecommunication giants in the long run? The Federal Competition and Consumer Protection Act 2019 (the Act ) prohibits unfair business practices or abuse of dominant market position by any company.
Section 70 (1) of the Act provides that an undertaking is considered to be in a dominant position if it is able to act without taking into account the reaction of its customers, consumers or competitors. Section 70 (2) states that a dominant position in any relevant market exists where an undertaking enjoys a position of economic strength enabling it to prevent effective competition from being maintained in such a market has the power to behave to an appreciable extent independently of its competitors, customers and ultimate consumers.
Seeing that they control telecommunications and would now be involved in the financial banking services, there may just be a case of anti-competitive practices. Competition in the fintech sector will be lessened significantly and the fintech companies may not stand a chance of survival with such big companies.