Payment Service Banks (PSBs) are the latest attempt by financial firms to tap into Nigeria’s large population of “unbanked’ folk. In the very recent past, banks have sought for and closed businesses with Telcos, who on the other hand will eventually evolve to…financial institutions.
Although PSBs cannot engage in Lending, FX-trading and Insurance, they can be Telco-led, Supermarket-led or even Mobile Money Operator-led and there’s a N5 billion required minimum shareholder capital …the folks who will wield the hardest stick in successful PSBs will be Telco-backed PSBs.
Problem Statement: As of the 2019 population estimates of 200 million people (though very debatable) financial inclusion in Nigeria, is somewhere between 20 & 25%- agreeably very low (note that the last scientific & official census was in 1991).
Financial Inclusion- good for all stakeholders or not? The fact that both the Telecoms and Financial Service industries are regulated by different bodies leads to some ambiguity of where each body’s jurisdiction starts and ends.
According to the PSB Guidelines issued by CBN, PSBs are envisioned to facilitate high-volume low-value transactions in remittance services, micro-savings and withdrawal services in a secured technology-driven environment to further deepen financial inclusion and help in attaining the policy of 20% exclusion rate by 2020…hmm.
Question: Who benefits from financial inclusion (in pidgin English, who financial inclusion ‘epp…?)
Answer: The group of stakeholders who charge commissions/ fees per transaction or earn tax income
How about the United Nations? With financial inclusion featuring in a number of SDGs projected for achievement by 2030, the UN has academic evidence that financial inclusion is an enabler for economic growth, fostering more stable financial systems and economies, mobilizing domestic resources through national savings and helping to boost government revenue.
So…? How does financial inclusion help the 80% of Nigeria’s population- who (according to the African Development Bank), supposedly earn less than $2 per day?
Will financial inclusion become successful at the detriment of traditional banks?
Is it payback time for the Banks?
About 18 years post the advent of GSM in Nigeria, the traditional value chain for airtime purchase which sustained a large number of families became completely decimated- as most people purchase airtime from their mobile devices whereupon the banks earn all the commissions and report profit after tax on a yearly basis.
The assured commissions (+ incentives) along the value chain, included:
- Super Dealers: who bought airtime directly from Telcos
- Dealers: who bought from Super Dealers
- Sub Dealers: who bought from Dealers
- ERC Retailers: who bought from sub dealers
- Umbrella stands: who included making of phone calls to selling of airtime
- Street hawkers: who bought from the immediate 2 folk above
- End Users: who actually recharged their phones with airtime
- In some cases, depending on the remoteness of the location, this value chain (made up of up to 7 groups of businesses) was completed by the time the end user recharged
Today, every bank in partnership with the major Telcos make transactions like recharging airtime very easy…decimating the value chain above… via USSD strings… at a “little” transaction fee…each time a transaction is done…sharing the proceeds… with only themselves!
Will PSBs eventually make banks pay for the decimation above?
Similarities between Banks & Telcos:
- Regulated Industry: regulated by a central body
- Value Exchange: customer gives money to a bank or Telco and it gets stored as bank balance or airtime balance
- Identification Mechanism: unique identifier is bank account number and phone number
- Agency Networks: Bank agents permit deposits and withdrawals while Telco agents permit buying of prepaid vouchers and SIMs
- P2P Value Transfers: Banks transfer money while Telcos transfer airtime
- Customer Scale: both have millions of customers, but higher in Telcos
How do banks traditionally make money?
- Interests: Depositors’ monies equal to loans and interest made by banks on the loans is greater than the amount of interest paid to customers with savings accounts: this difference is the banks’ profit… loads of it!
- Application fees: applicable whenever a prospective borrower applies for a loan- in most cases, the bank charges a loan origination or application fee- this fee may be included into the loan principal—in which case interest will be paid also!
- Account Fees from Check, Investment and Credit card accounts supposedly for “account maintenances purposes”… costs to the bank which are not at all significant in the short run and lower in the mid to long run.
- Service fees: payments an account holder incurs for getting their account serviced- they include processing fees, service charges, loan fees e.t.c. which are extremely nominal when considered individually but when accumulated, become a very significantly amount .
- Commissions, ATM fees and Penalty charges…no need to explain these!
- Investing in FBN & CBN securities, capital markets e.t.c.
How do Telcos make money?
In a nutshell, easy…from the air!
- CAPEX- to pay for licenses + erect Base Stations
- OPEX- Sweat the fixed assets: infrastructure, proprietary software and applications, energy costs, operational expenses & human resource
- Customers recharge their mobile phones… become addicted to the need(s) to be stay connected, and continue to recharge…
- CAPEX less OPEX equals profits, loads of it
Why do I think PSBs will eventually kill banks…and possibly increase financial inclusion levels?
Outlined below is the abridged structure of PSBs- and why this sub heading is worth considering:
- PSBs inadvertently have a large captive customer base, an ecosystem for distribution & go-to-market capabilities, mini platforms already integrated with the Telco NOCs and well trained products staff in the retail space. PSBs will challenge and seek to oust traditional banks by replacing tradition with dynamism, corporate bureaucracy with innovation, more capital intensiveness with less and rigidity with nimbleness.
- Structure I: Operate mostly in the rural centers and unbanked locations, with not less than 50% physical access points in rural areas: Each Base Station is… inadvertently, a BANK! Much cheaper to operate than the traditional bank branch + larger number than bank branches! Just imagine the scale… 15,000 PSB base stations to 163 bank branches (being the number of base stations one of the Telcos has when compared with one of the banks!)
- Structure II: Establish ATMs in some of these areas: The main question is “what volume of transactions will be sufficient to assure profitability by situating an ATM in a rural area?” Also, consider associated costs to maintain ATMs (additional overheads of power, with looming security concerns to PSB staff whose tasks are to load the ATMs) in rural areas. PSBs will most likely just ignore this direction- cos if it were profitable, traditional banks would have done so already! If the PSBs stumble on some low cost energy solution to power mini-ATMs or decide to situate each ATM at each Traditional Rulers’ residences…?
- Structure III: Establish coordinating centers in clusters of outlets, be at liberty to operate through banking agents & use other channels including electronic channels to reach out to customers: Telcos have already made sizable investments in infrastructure, it will cost banks more to match, operate & sustain these numbers whilst checking out the profitability bottom line. They also have much more robust distribution mechanisms than banks do and play in the digital space natively. One of the keys to the success for Telcos is the inherent way in which customers are acquired and due to the relative simplicity of communication services and the native digital nature of telephony, it’s just a lot easier for Telcos to reach a lot more people than banks do- in this case, note that these folks spend less than $2 per day
- Structure IV: Be technology-driven and operate electronic purses: whereupon every MSISDN will become…a wallet, so why will customers need traditional bank accounts to purchase airtime, make payments e.t.c.?
- Bottom of Pyramid Context: where (1) Every base station becomes a PSB bank branch (2) According to Raghuram Rajan & Jill Teanor, the gap between the Top of Pyramid & Bottom of Pyramid is widening in such a way that only 1% of the world’s population controls 50% of the wealth today, and the other 99% are well…poor (3) Most of the fees outlined in how do banks make money, will hitherto be earned by PSBs basis the 99%. I see a combination of these 3 factors being a gradually growing dent to the revenues earned by traditional banks
- Basis Telcos’ very elaborate Business Intelligence Systems, over the past 18 years, they actually “know” the customers more than banks do! The demographics and insights currently available easily dwarf the traditional demographics banks operated with
- Reallocation of earnings hitherto earned by traditional banks to PSBs: today, whether in rural or urban areas, customers can purchase airtime from their PSB accounts. Can a customer, physically resident in an urban area open a PSB account (maybe because he has a country home)….? If they can, it pre-supposes that they can buy airtime & make other payments from these PSB accounts… what then becomes of traditional bank accounts & their profits after tax when they now become earned by the PSBs?
- Even if PSBs don’t kill banks, won’t Fintechs complete the job…? Since they are increasingly filling the gaps left by banks who don’t have the patience (or risk appetite) to provide small loans except to salary earners & businesses with proven cash flows?
- Without deeply thinking, one of the ways that easily comes to mind is as follows: A PSB informs all the unbanked/ rural customers on the network as follows (note that the “cost” for the customer is buying a new SIM- if they are not already on the network):
o Open your PSB account by dialing *123456*100# and receive N100 FREE for registering
o Buy airtime from your PSB account and earn 15% bonus airtime (more than 10% that traditional banks currently offer)
o Send money to your loved ones with ease, dial *123456*1000*080xxxxxxx#
o Open your PSB account with ease, dial *123456# now…USSD Menu opens up- Press 1 to enter First Name, Press 2 for Surname, Press 3 for Sex, Press 4 for Address, Press 5 to upload your picture (for 5, note that most Telco websites have data zero-rated for customers’ access & there won’t be any compulsion to incur CAPEX for KYC)
We’re looking at X million customers over a 30-day period…PSBs will easily double the number of customers traditional banks currently have taken years to grow!
Yes, I understand that banks will still earn loads of monies from giving out Loans, FX-transactions, Leasing, Oil & Gas, LPO and other types of Financing, Strategic Partnerships e.t.c. but where one of the banks has celebrated 100 million transactions via USSD airtime purchases alone, it can only be imagined how much of a dent PSBs will cause to those revenues in the short and long run.
Finally, although the success of PSBs in India have not been phenomenal, just the same way Ipods replaced Walk-mans, Wikipedia replaced Encyclopedias and Kodak- who had a long lasting monopoly on photography films were replaced by digital cameras, have also been replaced also by mobile phones…If, in some way you think the notion of traditional banks being killed by PSBs is a farce, who would have thought that:
- Mobile phones will replace desk top computers?
- OEM phone makers- Samsung, Nokia, Huawei, Apple e.t.c. would be worried about device sales before the advent of subdermal implants- that reduce the dependence of a mobile phone in the short run & definitely sometime in the future, will obliterate their existence in the long run?
In the face of all the above the entity that controls the mobile phone is king…should traditional banks strategically position…or ignore?
About Uduak Ekpo-Ufot
With 15 years of strategic and diverse work experience covering Innovation, Technology, Media & Telecommunications in West Africa, Uduak is a multi-skilled, result-oriented individual. He can be reached on his LinkedIn page
