The Central Bank of Nigeria issued an approval in principle to two of the nation’s largest telecommunication firms, MTN Nigeria and Airtel Africa to operate as Payment Service Banks (PSB).
The news was positively accepted by stakeholders in the FinTech space who believe this will deepen financial inclusion in the country and improve payment transfers. There are also beliefs in some quarters that this could provide a source of competition for commercial banks who rely on customer deposits to drive their business.
However, this is not really the case. Banks and PSB’s have very clear distinctions on how they are to operate. We will explain in this article.
For starters, a PSB is a company allowed to leverage on technology and agency banking to mobilize deposits and facilitate transfers from unbanked customers in rural areas and any location where they exist in Nigeria.
A DMB on the other hand is a commercial bank or any bank that is allowed to also accept deposits from customers from any part of the country and also engage in giving out loans and advances, investing in fixed income securities and conducting other banking services as prescribed by the CBN.
Why is the CBN issuing a PSB
According to the Apex Bank, the key objective of issuing PSB licenses is to boost financial inclusion especially in rural areas and facilitate transactions.
“To enhance financial inclusion in rural areas by increasing access to deposit products and payment/remittance services to small businesses, low-income households and other entities through high-volume low-value transactions in a secured technology-driven environment.”
How PSB’s operate
According to the CBN, there are 7 detailed structures PSBs are expected to perform in carrying out their activities.
“Operate mostly in the rural centres and unbanked locations, with not less than 50% physical access points in ‘rural areas,’ as defined by the CBN from time to time.
This suggests PSBs are expected to operate in rural areas and locations where you have Nigerians without bank accounts. They are also expected to have at least 50% physical access points (which also means kiosk) in the rural areas.
PSBs can also have ATMs in some of the locations that it operates. This allows its customers to make cash withdrawals
What they can do (Permissible)
PSBs can accept deposits and allow their customers to also operate savings accounts. Their customers include individuals and small businesses.
They can also facilitate cross border remittances using all the channels available within Nigeria.
They can also issue debit and prepaid cards and also operate electronic purses.
They can also invest some of the deposits they collect in FBN and CBN Securities.
What they cannot do (Non-Permissible)
They are not to issue loans, advances and guarantees.
They are also not allowed to trade in foreign exchanges except for remittances
They are also not allowed to issue insurance products.
Paid-up Capital – The minimum share capital of a PSB in Nigeria is N5 billion and they are also required to maintain a Statutory Reserve just like Deposit Money Banks. The CBN can also require that the PSBs maintain additional capital just like they do when they feel banks are at risk.
The CBN also set a minimum capital adequacy ratio of 10% for PSBs.
Dividend Payment – PSBs are also allowed to pay dividends provided they have written off all the expenses incurred before setting up the business (preliminary and pre-operational expenses).
They should have also met their minimum capital adequacy ratios and also met all matured obligations.
Finally, they should also obtain CBN approvals before making payments.
What can they invest deposits in?
Just like banks, PSBs also have an opportunity to make use of customer deposits. Because customers may not always come to withdraw their money at all times, the deposits can be invested in short term securities giving the PSBs an opportunity to make a quick profit.
However, the CBN stipulates that not less than 75% of the deposit they collect must be kept in treasury bills and other short term Federal Government debt instruments at any point in time.
The CBN also stipulates that all the funds in excess of a PSBs operational float (the amount it needs daily to operate) should be deposited with deposit money banks (commercial banks).
This means, whilst many consider them a competition to banks, they actually are meant to complement the efforts of banks, since their deposits should also be placed with any bank of their choice.
Difference between PSBs and DMBs
As detailed above, the major similarity between a regular commercial bank and a PSB is that they are both allowed to accept deposits from customers and allowed to invest some of the deposits in short-term CBN or FG instruments.
The major difference however is that while deposit money banks (e.g. commercial banks) are allowed to give out loans and advances, PSBs are not. Also, PSBs can also move some of their excess funds to any deposit money bank of their choice.