India’s shortcomings in PSB licensing hold lessons for Nigeria

The era of the Payment Service Banks (PSBs) is about to kick off in Nigeria.

Almost everyone expects it to finally put to rest the challenges with financial inclusion and the new operators to provide access to financial services to the over 60 million bankable Nigerians who are unbaked.

But companies vying for the licenses would like to take a step back to consider the long term viability or risks repeating the mistakes of some companies in India.

The release by the Central Bank of Nigeria (CBN) of the updated and reviewed guidelines for licensees and the announcement it has issued the licence to three institutions last week set the wheel in motion. Two of the companies set to receive the licence are led by telcos (Globacom and 9Mobile) and one by a payment firm (Unified Payments).

The fresh hurdles added in the revised guideline could mean the attractiveness of mobile money services would wane and may even raise questions about the survival of potential licencees.

India vs Nigeria

The PSB model Nigeria is rolling out was borrowed – well, most of it – from India’s guidelines issued in 2014.

A close study of the guidelines from both countries would easily reveal the similarities. In some cases, the difference is in the wording of the provision or the rearrangement of the words. The CBN has also introduced a few provisions that are not in the Indian document.

To start with, aside from sharing the same objective of improving financial inclusion, both guidelines require PSBs to invest 75 percent of customers’ deposit balances in eligible government securities and treasury bills.

Also, the N5 billion ($12.9 million) capital requirement by the CBN is also similar to India’s INR 100 Cr ($14.04 million).

And just like Nigeria, PBs or Payment Banks as they called in India are not permitted to give loans or issue credit cards.

How India’s model has fared

Following its announcement of the guidelines in 2014, the Reserve Bank of India (RBI) said it received 41 applications. After vetting the applications 11 companies were licenced.

Like many firms in Nigeria are bound to do, the applicants in India looked at the innovative model with optimism and tried to build a sustainable PB business with a glass half full mindset.

The PBs saw huge potential to serve the 190 million unbanked adults, as envisioned by the RBI.

As of March, five of the initial licencees are not operational for multiple reasons. RBI’s recent report on trends and progress of Banking 2018-19 indicated that the operational payments banks showed net losses of INR 626.8 Cr ($87.8 million) for FY19.

As Sakshi Chadha, Regulatory Manager, Asia for GSMA put it “initial enthusiasm soon gave way to interpretation, implementation and early compliance-related challenges.”

The sore foot

Top among the list of frustration for Indian PBs was the no-lending provision. Since their focus market is people living in rural India, many of whom lack access to credit, it meant that they could not fulfill this demand despite developing a healthy relationship with them.

Nigerian PSBs are likely to face a similar situation. Informal traders dominate the rural areas and they usually need money to either buy new stock or expand their businesses.

However, the Nigerian banking system provides access to credit to only two percent of the population, according to the CEO of Dun & Bradstreet Credit Bureaus, based in the Dominican Republic, Miguel Llenas. He was speaking at a 2018 credit bureau conference in Lagos,  Nigeria.

The CBN has had to force banks to expand access with a 60 percent lending to deposit ratio target. Notwithstanding, not many banks have opened up their loan services to small businesses. Digital lending firms say they have seen a demand surge but the high rates they offer are a big barrier.

“We believe that the factors cited above contributed towards curtailing PBs from realising their true potential of catering to the unbanked in India,” said Chadha. “PBs seem to have been at the receiving end of a regulatory arbitrage where their offering is no different from a payments aggregator (or the fintechs providing payment solutions) but with comparatively stringent regulatory and compliance requirements.”

For the market to be attractive, PSBs need the potential to tap into the undertaker and unbanked credit market.

PSBs also need more than 25 percent of the customers’ deposit to make their mobile money offerings attractive and still make their operations profitable. Holding back as much as 75 percent of their cash in non-viable assets does not give them the room to be creative in widening the financial inclusion net.