Monday, July 29, 2019 / 11:33AM / By FDC
Financial inclusion implies that the general public has access to useful and affordable financial products and services that fulfill their needs.6 Examples of such products and services include: payments, savings, credit and insurance. The Banking Association of South Africa defines financial inclusion as, “the access and usage of affordable and quality financial products by the unbanked adult population”.
Approximately 33% of adults (1.7 billion) are unbanked globally. Nigeria falls above this trend with over 50% of the adult population remaining unbanked. The majority of these affected individuals would attribute their financial exclusion to the low availability of banks, high transaction costs and challenges associated with accessing funds.
In October 2018, the Central Bank of Nigeria (CBN) introduced regulations and guidelines for the licensing and operations of payment service banks (PSBs) in an effort to leverage technology to promote financial inclusion. PSBs are banks whose operations are limited to transactions involving deposits, withdrawals and money transfers.
They are not allowed to provide credit facilities and participate in forex trading unlike the traditional banks. The PSB license is usually granted to mobile network operators (telcos), mobile money operators, supermarkets and the agents of traditional banks. Despite the introduction of several initiatives by the CBN, such as, microfinance banking, agent banking, know-your customer (KYC) requirements, and mobile money operators, the rate of financial inclusion remains low in Nigeria. The telcos present an opportunity to buck this trend. Leveraging the telcos as PSBs will not only grant the unbanked public increased access to financial services, but will also ease their access to funds. MTN Nigeria has taken the lead to secure a PSB license from the CBN.
As Nigeria’s leading telco, with over 58 million subscribers, MTN is targeting between 40 million and 60 million people in the unbanked adult population.
Levers for Successful Operation of Telco PSBs in Nigeria
Leveraging existing capabilities and increasing in financial access points
The most obvious lever telco PSBs have to decrease the unbanked population is their large customer base, the telcos could use their existing finTech capabilities to increase the number of adults that are granted access to simplified, quality and affordable financial services. When paired with another goal of the CBN – increasing access points to financial services – telcos really shine. A lack of infrastructure has constrained banks from setting up physical branches in rural areas. With mobile devices as the primary access point for PSBs, telcos could ease access for depositors, improving the customer to access point ratio.
Low service costs
PSBs are also likely to have lower charges compared to the deposit money banks, as they compete to gain increased market share. Findings from a KPMG-UBS study indicate that the cost of effecting a transaction on a mobile device is half the cost of internet banking, 13 times cheaper than ATM banking, and 43 times cheaper than branch banking.10 Increasing competition for market share amongst the telcos would drive down service costs. This is similar to what Nigeria has experienced with the cost of mobile phone credit dropping as more players have joined the market.
Narrow range of services
The limited services offered by PSBs would improve their operating efficiency. For instance, the administrative bottlenecks associated with some services including provision of credit facilities and forex trading would be absent. Meanwhile, Telco PSBs could attract a number of account users as they currently loan airtime to their subscribers. This would increase the proportion of unbanked adult population absorbed into the financial system.
The Role of Payment Service Banks in Kenya
In March 2007, Safaricom, Kenya’s leading mobile operator, launched M-Pesa. By 2009, 40% of Kenya’s adult population used M-Pesa services.11 The platform has been able to ensure easier remittance of funds, safe conduct of business transactions and reduction of transaction costs in Kenya.12 Based on the 2016 FinAccess survey, only 17% of Kenyan adults remain financially excluded.13 The M-Pesa started operations with money transfers through SMS texts. It later advanced to electronic money transfers (deposits and withdrawals). The platform also involves agents who take delivery of funds. Today, the population of M-Pesa agents is 40-fold the number of bank ATMs in Kenya. The key drivers of this mobile payment system include the ease of opening an account, simplicity of use, affordability, high literacy rate, and high penetration of mobile phones.
Challenges Ahead for Nigeria
Quality & Reliability of Service Delivery
The members of the public would assess the quality and reliability of services provided by Telcos (call services, most especially) before signing up for the new financial services. This challenge was overcome in Kenya where Safaricom launched the M-Pesa with less than 500 participants to serve as testing ground for the new service before it could be made public. At first, there were logistic issues which later subsided and the new service (M-Pesa) was met with wholesome acceptance by the majority of the people. Safaricom benefitted greatly from strong public confidence in the quality and reliability of its services overtime.
High level of illiteracy among target population
Poor adaptability to modern technology by rural residents, who constitute the bulk of the unbanked public, could limit the success of PSBs, despite the increasing traction of the telcos. By implication, the services of these companies may not be recognized beyond rendering call services by a majority of the uneducated unbanked adult population. Kenya’s Safaricom invested in wide-ranging publicity and outreach to create awareness and educate people on the usefulness of the new service (M-Pesa) and how to carry out financial transactions using their mobile phones.
Next steps on Nigeria’s financial inclusion journey
Financial inclusion does not only involve providing access to financial services but also ensuring the appropriate and regular usage of such products. There is therefore the need to educate and sensitize the general public on the benefits associated with banking services. This would go a long way in encouraging the unbanked public to try PSBs. Nigeria could draw useful lessons from the Kenyan experience, which has achieved a high rate of financial inclusion through the successful operations of its PSBs. The emergence of Telco PSBs would support the commitment of the CBN towards achieving 95% financial inclusion rate by 2024.