New Banking Model At Play In Nigeria

Telecoms and traditional banks are being lured by a new system meant to give all Nigerians access to financial services.

A financial model designed by the Central Bank of Nigeria to open up the country’s financial-services sector is unfolding, set to kick off later this year. Telecoms are among the 30 applicants currently being registered by the central bank to operate as Payment Service Banks (PSBs), and their likely encroachment has already sparked fresh action by traditional banks.

PSBs are a new category of bank, with smaller-scale operations, the absence of credit risk, and foreign exchange operations. According to guidelines released last October by the central bank, PSBs are expected to take advantage of mobile and digital channels to enhance financial inclusion and stimulate economic activities at the grassroots level.

A telecoms-led financial-inclusion model is already operating in some African countries, including Kenya, Ghana and Côte d’Ivoire (Ivory Coast). These countries already have higher levels of financial inclusion than Nigeria.

Nigeria, Africa’s most populous nation, with about 190 million people, wants 80% of its citizens in the banking system by the end of 2020. The central bank reports that 36.8% of the adult population is excluded from the financial system.

The leading telecoms in Nigeria—MTN Nigeria Communications, Globacom and Bharti Airtel Nigeria—are no strangers to financial services. “MTN works behind the scenes providing support to Nigerian banks in their quest to provide digital financial services access to Nigerians,” a spokesperson tells Global Finance. MTN partnered with Diamond Bank in 2014 to launch a unique savings proposition—the Diamond Yello Account. Targeted primarily at the financially excluded, the account lets customers access financial services from their mobile phones, and tap a network of agents.

While telecoms will play a major role, they aren’t likely to dominate the central bank’s new approach. It will be led by banks, says Abiola Rasaq, head of investor relations at United Bank for Africa. The guidelines for licensing and regulation of payment banks limit their offerings compared to full-service banks. PSBs are also constrained by cultural and behavioral attitudes, particularly in rural areas. “I would expect most of the PSBs to partner with banks like UBA for custody of the deposits,” Rasaq says.

Banks also invested in the Unstructured Supplementary Service Data (USSD) code platform, which works on every mobile phone—even if it’s not a “smartphone.” Ordinary phones can carry out a USSD transaction, which lets customers complete all major routine transactions, including interbank transfer and bill payments.

Nigerian banks are investing in the Shared Agent Network Expansion Facility, which rolls out agency networks on behalf of all the banks. This agency network model may revive PSBs and partly defend the banks’ turfs against new players.

As a protective step, all banks lowered the cost of interbank transfers from NGN100 ($.28) per transaction to N50 per transaction in 2018. It creates a pricing war for PSBs, which needs to beat this lower price to attract customers to their platforms, notes Rasaq.

While PSBs, as commercial banks, can be involved in payments, Rasaq believes many banks are already invested in payment services—for example, Nigerian e-commerce platforms such as Jumia, Konga and Jiji and other international payment platforms.

“Banks have made big investments in payment services and some banks like UBA have gone ahead, taking digital banking beyond payments and pioneering the future through lifestyle banking,” says Rasaq. “With partnerships with Facebook and WhatsApp, it’s a revolution in banking and this trend in banking portends exciting times ahead for the Nigerian customers. It is a big bang.”

The PSBs include other operators besides telecoms, although Rasaq admits PSBs are dominated by the telecoms, as they leverage existing infrastructure and customers. One fintech company that made inroads is Paga, a Nigerian mobile-payment company that has been an agent bank in the past decade and has applied for a PSB license.

“What is important is, what will the telecoms bring to the table?” Rasaq says. He admits they will bring new competition to banking. Yet regulation doesn’t aim to create new competition for banks; rather, to encourage payment banks to deepen financial inclusion for Nigerians.

The focus, he says, is the complementary role PSBs can play and their ability to enlarge the pie by deepening banking penetration, particularly in unbanked and underbanked areas. “PSBs are set up to foster financial inclusion,” Rasak says. “Regulation needs to ensure that this overarching objective is not undermined. The banked population should not be the target of the PSBs, otherwise their value proposition will be questioned.”