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By Chinwendu Obienyi
As part of a broad-based consensus by the Federal Government to boost the provision and uptake of digital financial services (DFS) and financial inclusion, the Central Bank of Nigeria (CBN), has targeted tha inclusion of the payment service banks to ensure that banking services get to more Nigerians.
With a relatively well-developed banking sector by regional standards, with a regionally high level of banking penetration (45 per cent vs regional average of 17.8 per cent for West Africa) and robust use of advanced financial instruments in the local economy, Nigeria is also well connected to international financial markets.
Yet, several barriers have continued to hobble efforts at digital payments for scale and Nigeria’s traditional banking sector’s capacity to moderate high volume credit to retail and corporate customers to drive economic growth has consistently remained subdued.
According to S&P Global in its 2021 Global Banking Outlook report, Nigerian banks often struggle on many fronts to render services to its customers.
It was however projected that the country’s banks will grow slower in 2021 on the back of a subdued economy, despite the CBN’s introduction of a minimum ratio of loans to deposits in 2019.
The report said, “We forecast subdued credit growth to the private sector of about 4 to 6 per cent in 2020 and 2021, after a strong 13.9 per cent rebound in 2019, as the foreign exchange market and consumer demand stabilises. Banks will likely focus on blue chips operating across the manufacturing, trade, and telecoms sectors”.
This was as the Financial Access Survey of the International Monetary Fund (IMF) also disclosed that International Monetary Fund (IMF) disclosed that the number of borrowers from commercial banks decreased to 29.61 per cent per 1,000 adults in 2020 from 25.42 percent per 1,000 adults in 2019, despite the outstanding deposits with commercial banks per percentage of gross domestic product (GDP) rising to 20.50 per cent in 2020 against 16.31 per cent in 2019.
For instance, Nigerian banks during this period closed 234 branches and 649 Automated Teller Machines (ATMs) between 2019 and 2020 while there was also a sharp decline in the number of registered mobile money agent outlets in Nigeria to 129,154 in 2020 from 145,800 in 2019.
Also, in light of the 38 million Nigerian adults (36 per cent of the population) who remain completely financially excluded, the CBN opted to set a target of achieving 95 per cent financial inclusion by 2024, to boost financial inclusion, especially in rural areas and facilitate transactions.
Thus, it is fair to say that this move had set the tone for tougher competition in the banking industry as several payment providers as well as Payment Service Banks (PSBs) later came onboard.
On observing the huge potential this could generate for the industry and economy, the CBN issued its first guidelines for PSBs in 2018 before granting licenses to three PSBs to start operation in 2020.
Today, there are four PSB operators in the contry with licenses given to communications companies – MTN (Momo PSB) and Airtel (SmartCash PSB). The broad implication of this new development for traditional banks and other financial institutions is increased competition to win the largest share of the 38 million financially excluded Nigerians.
On the flip side, it opens opportunities for banks and other financial institutions to drive growth through financial inclusion.
What are PSBs?
PSBs are a new category of banks with smaller scale operations and the absence of credit risk and foreign exchange operations. In addition to having savings and current accounts, PSBs can also offer payment and remittance services, issue debit and prepaid cards; deploy Automated Teller Machines (ATMs) and other technology-driven financial services. They, however, do not offer loans and credit facilities to customers but merely receive deposits.
While several barriers exist to leveraging digital payments for scale, telcos’ participation in mobile money payments will likely raise mobile money uptake, increase financial inclusion and simplify payment collection.
Payments are fundamental to how banks interact with customers. They support most propositions and touch customers more than any other part of a bank. It is, says KPMG Nigeria, “the key battleground for the customer’s primary relationship”.
According to Head, Research at FSL Securities, Victor Chiazor, the PSBs are likely to challenge the incumbents primarily on higher customer engagement, coupled with smooth transaction capabilities and volume-driven metrics.
“The PSBs have the potential to be swifter and dexterous, and hence more responsive to changing market trends. With a large captive customer base, few or no legacy constraints and greater responsiveness to customer needs, and with no pressure to offer full-service banking solutions, they are likely to attract a large pool of well-served, underserved as well as unserved customers.
The business of PSBs such as those promoted by MTN and Airtel, centres on providing last mile connectivity and payment facility through either physical points or through other digital interfaces, including mobile or internet-enabled platforms. Besides offering basic deposits and remittance services, the PSBs are likely to introduce smooth, real time, secure, on-the-go approaches for facilitating retail payments”, he said.
For his part, economic and financial analyst, Uche Matthew, said, while PSBs would increase the population of Nigerians with a bank account, this does not necessarily equate to financial inclusion as their limited functions and operational challenges only serve to stifle their operations and limit their potential success.
His words, “Valuable resources are being poured into the CBDC while PSBs continue to face operational challenges with respect to matters such as poor infrastructure. This means that there will be difficulty getting funding for the proper implementation of PSBs.
Thus, while the CBN may be persistent in its search for ways to end financial exclusion, the abandonment of PSBs leaves their future looking bleak.
However, with the grant of license to operate payment service banks (PSBs) across the country by CBN, the entrance of the two telecom companies into the PSB space could help revitalise the sector as they are expected to deploy their huge resources and vast networks to deepen financial inclusion in the country”.
