Payment Service Banks (PSBs) in Nigeria: Landscape Assessment and Key Learnings from India to Implement Optimal Payment Service Banks January 2020 1 Table of Contents Acknowledgements...................................................................................................................... 4 Executive summary ...................................................................................................................... 4 1.0 Introduction ......................................................................................................................... 10 2.0 Overview and analysis of the Nigerian ecosystem for PSBs: A contextual analysis .................. 10 2.1 Macro layer review .............................................................................................................................. 10 2.2 Meso layer review ............................................................................................................................... 21 2.3 Micro layer review ............................................................................................................................... 30 3.0 The Payment Service Banks concept ..................................................................................... 33 3.1 Stakeholders exhibit concerns on the limited scope and clarity around PSB regulations ..................... 34 4.0 Operationalisation of PSBs in Nigeria .................................................................................... 35 4.1 Lessons from implementation of Payments Banks in India .................................................................. 35 Case study 1: Airtel Payments Bank ........................................................................................................... 36 Case Study 2: Paytm Payments Bank ......................................................................................................... 37 Case Study 3: Fino Payments Bank ............................................................................................................ 37 Case Study 4: Jio Payments Bank ............................................................................................................... 38 4.2 Key business challenges for Payment Service Banks ............................................................................ 39 4.3 Key operational challenges for Payment Service Banks ....................................................................... 42 4.4 Defining the business case for Payment Service Banks ........................................................................ 44 4.5 Defining the right strategy and operational framework for an optimal PSB ......................................... 49 4.6 Hypothetical optimal PSB requirements and areas of focus at different stages of growth ................... 59 5.0 Critical stakeholder strategies to facilitate financial sector growth ......................................... 61 5.1 Banks …………. ...................................................................................................................................... 61 5.2 Mobile network operators ................................................................................................................... 62 5.3 Regulators ........................................................................................................................................... 62 6.0 Key action points .................................................................................................................. 63 6.1 Payment service banks ........................................................................................................................ 63 6.2 Regulators ........................................................................................................................................... 64 7.0 Conclusion ........................................................................................................................... 65 Annexes..................................................................................................................................... 66 Annex A: Stakeholder interview questions ................................................................................................ 66 Annex B: Abbreviations ............................................................................................................................. 68 2 List of figures Figure 1: Identity systems in Nigeria .................................................................................................................... 19 Figure 2: Case study of JAM trinity from India ..................................................................................................... 21 Figure 3: Telco market share and subscriber data, August 2019 ......................................................................... 22 Figure 4: Frequency of banking transactions in Nigeria ....................................................................................... 25 Figure 5: The different ways adults save, access credit and make remittances ................................................... 26 Figure 6: Trends in ATM, PoS, and mobile banking (Source: RBI database) ......................................................... 29 Figure 7: Use of financial services by different segments and the progression on the customer journey .......... 31 List of tables Table 1: Comparative operational context country indicators ............................................................................. 11 Table 2: ICT industry statistics .............................................................................................................................. 16 Table 3: Use of financial services .......................................................................................................................... 26 Table 4: Key capital expenditure (CAPEX) cost areas for a hypothetical PSB ……………………………………………………49 Table 5: Key operating expenses for a hypothetical model of a PSB…………………………………………………………………51 Table 6: Key revenue streams for a hypothetical model of a PSB……………………………………………………………………..52 Table 7: Profitability analysis for a hypothetical model of a PSB……………………………………………………………………….52 Table 8: Key resource requirements for the optimal PSB………………………………………………………………………………….54 3 Acknowledgements The MSC research team and authors1 of this study would like to express their sincere gratitude to all the representatives from the financial services sector who provided their valuable data and perspectives. We would like to thank the EFInA team for their crucial support and insights to this work. We also thank the internal and external peer reviewers who took time to review this study to ensure the best quality possible. Finally, we would like to thank the research team for their effort in collecting the data, developing and reviewing the content of this study: Nancy Kiarie, Maansi Sharda, Peter Karah Charagu, Anup Singh, Tomi Eromosele, Norah Igwe, Folasade Agbejule and Ashley Immanuel. This Payment Service Bank study was prepared for educational purposes, providing an assessment of the current financial services landscape in Nigeria and the implications on the implementation of Payment Service Banks. A comparative study of India was conducted to draw key lessons to inform the implementation of Payment Service Banks in Nigeria. MSC does not intend to benefit or create a legal duty to any third-party recipient of its work. In performing any analysis in this study, the research team relied on various sources of publicly available information as well as proprietary information from Nigerian financial sector stakeholders. The data was self-reported by representatives of various financial sector players including the Central Bank of Nigeria, Shared Agent Network Expansion Facility (SANEF), Banks, Mobile Network Operators (MNOs), Switches, Mobile Money Operators (MMO) and FinTechs. If the underlying data, information, or assumptions are inaccurate or incomplete, the results of our analysis may likewise be inaccurate or incomplete. 1 Nancy Kiarie, Maansi Sharda, Peter Karah Charagu, and Anup Singh (MSC). www.microsave.net 4 Executive summary National commitment to advance financial inclusion The Government of Nigeria has made concerted efforts to enhance the economic and social growth of citizens with a special focus on enhancing financial inclusion. Nigeria continues to experience challenges in advancing financial inclusion that stem from various physical, regulatory, and cultural challenges. Stakeholders from the financial services ecosystem have been taking initiatives to enhance financial inclusion. The Central Bank of Nigeria (CBN) wishes to minimise the rate of exclusion down to 20% by 20202. It therefore continues to introduce and implement various strategies to enhance financial inclusion. One of its key strategies is a dedicated focus on national payment systems to drive digital transactions. Payments systems in Nigeria have recently seen some growth with various innovative and timely national payment strategies. The current onus to advance financial inclusion lies with the banks, with other players providing supporting roles. To achieve the targeted 80% rate of financial inclusion, all stakeholders within the financial ecosystem need to cover a lot of ground. The opportunities are vast in driving financial inclusion through digital financial services, predominantly through mobile phones. Women, youth,