Nigerian payments giant Interswitch, backed by Visa, has decided to merge with M-Kudi, a provider of mobile money services. This strategic move by Interswitch is a step towards securing a Payment Service Bank (PSB) license from the Central Bank of Nigeria.
Pending regulatory approval, this merger will enable Interswitch to establish accounts and handle customer deposits, marking a significant diversification in its offerings beyond payment services. Interswitch’s decision falls in line with its recent acquisition of a mobile virtual telecommunications license.
According to an industry insider who spoke to TechCabal, the motivation behind these payment companies seeking a PSB license is to retain a portion of their transaction volumes internally and reinforce their already strong positioning. He further added that obtaining a PSB license would be a rational consolidating step for Interswitch, even if it implies they essentially become their own bank.
Though Interswitch has opted not to comment on the situation, it is worth noting that the acquisition of a PSB license will allow the company to receive foreign currencies on behalf of their customers and provide agency banking services directly. After generating $42 million in revenue for its fiscal year ending March 31, 2023, the PSB license could create additional revenue streams for the company.
However, the challenge for Interswitch will be to develop and provides innovative services impressive enough to sway Nigerians—famed for their user inertia—into using its remittance or agency banking services. Given that 94% of Interswitch’s current revenue comes from Nigeria, where the company has a long-standing presence, it is well-positioned to leverage its familiar standing to tackle this challenge.
In 2018, the Central Bank of Nigeria (CBN) introduced regulations for payment service banks with a mandate to boost financial inclusion in rural areas. As per these regulations, license holders are required to undertake 25% of their physical operations in rural regions with a substantial unbanked populace.
Interswitch, which draws the lion’s share of its revenue from providing services to its banking clientele, will need to invest significantly in establishing an expansive, physical network of agents across the nation.
However, restrictions on the operations of mobile money operators do pose some challenges. These operators are barred from engaging in several lucrative aspects of traditional banking, such as directly issuing loans, holding foreign currency deposits, or participating in foreign exchange transactions, with the sole exception of receiving remittances. Such limitations considerably reduce the appeal of PSBs in the Nigerian market, presenting a hurdle for companies like Interswitch despite their ambitions to fortify financial inclusion.
