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Examining the Relevance of Payment Service Banks to Nigeria's Financial Services Sector

Nov 23, 2021   •   by   •   Source: Proshare   •   eye-icon 2195 views

Tuesday, November 23, 2021 /08:30 AM / byDavidson, Frances and Ifeoluwa of AELEX / Header Image Credit: AELEX



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Introduction

PaymentService Banks ("PSBs") have, since their introduction into the financial space,remained a veritable vehicle for financial inclusion across countries. In ,the Central Bank of Nigeria ("CBN") issued a Supervisory Framework for PaymentService Banks 1 ("the Framework"), to supplement the existingGuidelines for the Licensing and Regulation of Payment Service Banks 2 ("the Guidelines"), (issued in 2018 and revised in 2020).

 

Subsequently,in November 2021, it was announced that two mobile telecommunicationscompanies, Airtel and MTN, had obtained PSB licences from the CBN and are setto soon roll out operations.

 

In thisarticle, we discuss PSBs and explore their relevance to the Nigerian financialservices sector.

 

What arePayment Service Banks?

PSBs areregarded as a hybrid of conventional banks and fintech companies, as theyprovide banking solutions with the flexibility, accessibility and technologytools employed by fintech companies in driving the financial inclusionambitions of the CBN.

 

According tothe Framework, PSBs "are expected to leverage on technology to provideservices that would be easily accessed by the unbanked population and those whoare in hard-to-reach areas of the country". PSBs provide theirbanking services through physical access points or digital interfaces, includingmobile or internet-enabled platforms.3

 

TheGuidelines contain, amongst others, extensive provisions on licensingrequirements/documentation (pre and post-commencement), the financialrequirements, charging rates, revocation of licence, business conduct inrelation to fair competition for PSBs. On the other hand, the Framework containsa set of regulations that are targeted at streamlining the operations of PSBs,ensuring transparency in their operations as well as ensuring adequate customerprotection.

 

Highlightsof the Framework

Structure of Payment Service Banks

The Framework retains thestructure of PSBs as prescribed by the Guidelines 4 and reiterates that the words "Payment Service Bank" are to be included in thename of a PSB to differentiate it from other banks. The name of a PSB must,however, not include any word that links it to its parent company or promoter.


Also, in line with theobjective for setting up PSBs, they are to operate mostly in the rural areasand unbanked locations targeting financially excluded persons with not lessthan 25% financial service touch points in such rural areas as defined by theCBN from time to time.


Permissible Activities

PSBs are permitted to:

  • Accept deposits from individuals and small businesses, which shall be covered by the deposit insurance scheme;
  • Carry out payments and remittances (including inbound cross-border personal remittances) services through various channels within Nigeria;
  • Sell foreign currencies realized from inbound cross-border personal remittances to authorized foreign exchange dealers;
  • Issue debit and pre-paid cards on its name;
  • Operate electronic wallets;
  • Render financial advisory services; and
  • Invest in FGN and CBN securities.


Non-Permissible Activities

PSBs are prohibitedfrom:

  • Granting any form of loans, advances and guarantees (directly or indirectly) 5;
  • Accepting foreign currency deposits;
  • Dealing in the foreign exchange market except as permitted;
  • Insurance underwriting;
  • Undertaking any other transaction not prescribed by the Framework;
  • Accepting any closed scheme electronic value (e.g. airtime) as a form deposit or payment; and
  • Establishing any subsidiary.6

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Corporate Governance / Regime and CompetencyFramework for Principal Officers

PSBs are required to adoptsound corporate governance culture which inculcates structures and practicesthat will protect the interest of all stakeholders.


The Framework containsextensive corporate governance provisions in relation to board structure,composition, method of appointment, committee meetings, appraisal ofperformance of board members. It also makes contains provisions on the roles,responsibilities and minimum qualifications for principal officers of PSBs.


In relation to boardcomposition, PSBs are required to have a minimum of five (5) and a maximum ofthirteen (13) directors including at least one (1) non-executive director asindependent director and at least two (2) non-executive directors with bankingor related financial industry experience.


PSBs are also mandated tocomply with the provisions of the Assessment Criteria for Approved Persons' Regime for Payment Service Banks which stipulates the roles, responsibilities,minimum qualifications and/or experience for principal officers of PSBs.



Know Your Customer (KYC) & Anti-MoneyLaundering and Combating The Financing Of Terrorism (AML/CFT)


In line with theprovisions of the Framework, PSBs are to ensure that their systems are not usedfor money laundering and the financing of terrorism. They are to comply withthe provisions of the Central Bank of Nigeria (Anti-Money Laundering andCombating the Financing of Terrorism in Banks and Other Financial Institutionsin Nigeria) Regulation 2019 (as amended) and extant laws aimed at combattingmoney laundering and the financing of terrorism.


The Framework covers thefollowing:

  • Key areas of Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) policy: PSBs are required to adopt policies stating their commitment to comply with Anti-Money Laundering ("AML") and Combating Financing of Terrorism ("CFT") obligations under subsisting laws, regulations and regulatory directives and to actively prevent any transaction that otherwise facilitates criminal activity, money laundering or terrorism.  Each PSB is also expected to formulate and implement internal controls and other procedures to deter criminals from using its facilities for money laundering and terrorist financing and adopt a risk-based approach in the identification and management of their AML/CFT risks in line with the requirements of the Framework.


  • Designation of a Chief Compliance Officer: PSBs are to designate competent chief compliance officers ("CCO") who would be saddled with the responsibility of developing an AML/CFT Compliance Programme; receiving and vetting suspicious transaction reports from staff; filing suspicious transaction reports with the Nigeria Financial Intelligence Unit (NFIU); filing other regulatory returns with the CBN and other relevant regulatory and supervisory authorities, etc. The CCO is to head the compliance unit and be the liaison officer between his institution, the CBN and NFIU and a point-of- contact for all employees on issues relating to money laundering and terrorist financing.

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Reporting Obligations in relation to SuspiciousTransactions

PSBs are requiredto identify and file suspicious transaction reports with the NFIU, where funds,assets or property are suspected to have been derived from criminal activitiesstated in the Framework. These include participation in an organized criminalgroup and racketeering; terrorism, including terrorist financing; traffickingin human beings and migrant smuggling; sexual exploitation, including sexualexploitation of children; illicit trafficking in narcotic drugs andpsychotropic substances, amongst others.


Provisions relating to Customer Due Diligence("CDD")

The Framework mandatesPSBs to put in place CDD measures to ensure that necessary checks are in placebefore signing up a customer. A higher level of due diligence is required forhigher-risk customers, business accounts or transactions.These include non-resident customers; legal persons or legal arrangements,politically exposed personsand any other business, activities or professionals as may be prescribed by theregulatory, supervisory or competent authorities.


For lower risk customers,PSBs are to apply reduced or simplified CDD measures. This is to ensure thatthe measures are not very stringent so as to exclude the very people that thePSBs were set up for. Such instances of lower risk include where: (a) the riskof money laundering or terrorist financing is lower; (b) information on theidentity of the customer and the beneficial owner of a customer is publiclyavailable; or (c) adequate checks and controls exist elsewhere in the nationalsystems.


Also, the Frameworkprovides for the utilisation of a three-tiered KYC standard to ensureapplication of flexible account opening requirements for low value and mediumvalue accounts which shall be subject to caps and restrictions as the amountsof transactions increase.


PSBs are also required to identify and assess the money laundering or terroristfinancing risks that may arise in relation to the development of new productsand new business practices (including new delivery mechanisms) and the use ofnew or developing technologies for both new and pre-existing products.

 

Conclusion

TheFramework is indeed an attempt by the CBN to provide a robust guide and checkon the activities of PSBs, considering the role they play, which is similar tothe role of regular deposit money banks. Also, the need for adequate AML/CFTpolicy/regulations cannot be overemphasised as the non-financial institutionswho are permitted to operate as PSBs may not be familiar with existingAML/CFT/CDD requirements.

 

 

Footnotes

1.     Supervisory Framework for PaymentService Banks available at https://www.cbn.gov.ng/Out/2021/CCD/Supervisory%20Framework%20for%20PSBs.pdf

2.    Guidelinesfor the Licensing and Regulation of Payment Service Banks available

3.     FinancialInclusion ray of hope as CBN Licenses PSBS

4.    See Paragraph 3 of the Guidelines

5.     They may,however, lendto their employees in line with their employee loan policy, subject to theapproval of their Board.

6.    Except as prescribed in the CBNRegulation on the Scope of Banking and Ancillary Matters, No 3, 2010.

 

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