How to set up a Licensed Payment Service Bank (PSB) in Nigeria

In a previous article of mine (Available Fintech licenses in Nigeria) i briefly spoke about a unique Fintech category known as Payment Service Banks(or PSBs) being one of the most recent entrants into the Nigerian Banking & Finance sector. The concept of PSBs is still relatively very new and there’s still a scarcity of knowledge on this potentially very lucrative Fintech business. 

What this article basically aims to do is to deal with the topics of :- 

– What Payment Service Banks are. 

– The Regulatory Framework governing Payment Service Banks in Nigeria. 

– The licensing requirements for Payment Service Banks. 

– A clear understanding of what PSBs are allowed to do and what they are barred from doing. 

What exactly is a Payment Service Bank? 

A Payment Service Bank is basically a company licensed to apply technology and Agency banking (please consult your lawyer further on the Agency Banking concept, another Fintech category on its own) to render Financial services revolving around the mobilization of deposits and the enabling of Monetary transfers from “unbanked” customers in rural regions or other locations in the country where they exist. 

What is the Regulatory Framework governing Payment Service Banks in Nigeria? 

Payment Service Banks in Nigeria are licensed and governed by the Central Bank of Nigeria(CBN) through the Banks and Other Financial Institutions Act (BOFIA) and more specifically the  CBN Guidelines For Payment Service Banks in Nigeria 2020(or ‘The Guidelines’) 

What exactly are the permissible and non-permissible activities for Payment Service Banks as stated in the Guidelines? 

The following activities are permitted for PSBs under the CBN Guidelines:- 

– Rendering Banking services revolving around savings, accepting deposits covered by the deposit insurance scheme and Monetary withdrawals. 

– Deploying ATMs and Point of Sale (POS) devices. 

– Carrying out payments and remittances through various channels within Nigeria including inbound cross-border personal remittances. 

– Selling Foreign Exchange/Forex realized from inbound cross-border personal remittances to authorized foreign exchange dealers. 

– The issuance of Debit & Prepaid cards in its name. 

– The operation of electronic wallets. 

– The rendering of Financial advisory services. 

– Investing in FGN & CBN securities. 

However, the following activities are deemed non-permissible for PSBs by the Central Bank of Nigeria:- 

– The rendering of loan, advance and guarantee services. 

– Accepting Forex deposits. 

– Dealing in the Forex market except as prescribed under the Guidelines. 

– Insurance undertaking. 

– Undertaking in any other transaction not prescribed as permissible under the Guidelines. 

– Accepting any closed scheme electronic value (such as airtime) as payments or deposits. 

– Establishing any subsidiary except as prescribed in the CBN Regulations on the scope of Banking & Ancillary matters. 

Who can promote or apply to set up a Payment Service Bank? 

The following can promote (check my previous article “How to secure Investment funding in Nigeria” for the definition of a promoter) a Payment Service Bank as stated under the CBN Guidelines :- 

– Banking Agents (licensed agents). 

– Telecommunication companies through a subsidiary. 

– Supermarkets. 

– Downstream Petroleum marketing companies. 

– Financial technology companies. 

– Postal service providers and Courier companies (check my previous article “How to set up a licensed Courier/Logistics Company in Nigeria” ). 

– Mobile Money Operators. 

– Switching companies. 

– Financial technology (Fintech) companies. 

– Financial holding companies. 

– Any other entity on the merit of its application subject to the approval of the Central Bank of Nigeria. 

What is the procedure for obtaining a Payment Service Bank license in Nigeria? 

Getting a PSB License in Nigeria is in 2 stages which are:- 

a). The Approval-In-Principle (AIP) stage. 

b). The Final License grant stage. 

The Approval-In-Principle Stage. 

To get an AIP requires submitting through your lawyer a formal application for the grant of a PSB License to the Governor of the Central Bank of Nigeria through the Director, Financial Policy & Regulation Department (FPRD) with a proposal containing the business case, vision, strategy, corporate governance arrangement/policy, risk management and Financial viability statement attached. 

This proposal is to be backed up with –  

a). a non-refundable application fee of 500 Thousand Naira in a Bank draft payable to the Central Bank of Nigeria; 

b). evidence of capital contributions made by each shareholder; 

c). evidence of name reservation with the Corporate Affairs Commission (CAC); 

d). a detailed Feasibility report/business plan; 

e). a draft copy of the company’s MEMART Memorandum & Articles of Association; 

f). a written & duly executed undertaking by the promoters that the bank will be adequately capitalized for the volume & nature of its business at all times & that the CBN shall have powers to supervise and regulate its operations; 

g). a shareholder’s agreement providing for disposal and transfer of shares as well as authorizations, amendments, waivers & reimbursement of expenses; 

h). a Technical Services Agreement; 

i). a Statement of Intent to invest in the Bank by each investor. 

Where the Bank is sought to be promoted by corporate investors, the following will be required: 

– a Certificate of Incorporation & Certified True Copies (CTCs) of other incorporation documents of the corporate investors; 

– a copy of the Corporate Investor’s Board Resolution confirming its decision to invest in the equity shares of the proposed bank; 

– the names and addresses (business and residential) of owners and directors of the corporate investors as well as their related companies if any; 

– audited financial statements & reports of the company and Tax clearance certificates of the immediate past 3 years (this may not apply for newly formed companies); 

Upon the receipt and consideration of the above requirements, the CBN will send a notification to the applicant communicating its decision then followed by the grant of the AIP.  

It should be noted that applicants for a PSB license are not allowed to register a PSB with the Corporate Affairs Commission expect upon the presentation of an AIP obtained from the CAC. 

Final License Grant Stage 

An application by your lawyer for a Final license grant should be made within 6 months after the grant of an AIP  to the CBN along with:- 

– a non-refundable license fee of 2 Million Naira in Bank draft payable to the Central Bank of Nigeria; 

– a Certified True Copy (CTC) of the Certificate of Incorporation of the PSB; 

– a Certified True Copy of the PSBs MEMART (Memorandum &  Articles of Association) and its CAC  Form1.1; 

– evidence of the location of the PSB Head Office (including information on whether the building is owned or rented) for its takeoff; 

– a schedule of changes in the board of directors and shareholding structure of the PSB after the AIP grant; 

– evidence of ability to meet technical requirements and modern infrastructural facilities such as office equipment, computers, and Telecommunication capabilities needed to carry out PSB operations and meet all its Regulatory Compliance requirements; 

– copies of letters of employment offer & acceptance regarding its management team ; 

– detailed resumes of its top management staff; 

– completed fitness & propriety questionnaires and sworn declarations of net worth executed by the PSB’s top management staff; 

– information on the BVN and Tax clearance certificates of each top management staff of the PSB; 

– a comprehensive plan on the commencement of the bank’s operations with milestones and timelines for the rollout of crucial payment channels; 

– board and staff training programs; 

– other inspections like capital contribution verifications; 

– physical inspections of the PSB office structure and meeting with its board of directors and management team whose resumes had earlier been submitted to the Central Bank of Nigeria alone with the presentation of original copies of documents submitted for the purpose of the final license grant. 

How long does it take for an AIP/Approval-In-Principle application to be processed? 

Treating an AIP application takes 90 days. 

What is the required minimum share capital for Payment Service Banks? 

The stated minimum share capital for Payment Service Banks is 5 Billion Naira. 

What are some of the most notable operation requirements for Payment Service Banks under the CBN Guidelines? 

Some of the most notable operational requirements of the CBN Guidelines For PSBs include:- 

– The overall requirement that PSBs are to be strictly Tech-driven and are required to comply with best practices and Regulatory requirements on Data storage,security and integrity. 

– The name of a Payment Service Bank shall not include any word that links it to its parent company e.g. MTN Nigeria and its PSB subsidiary,MoMo or Airtel Nigeria and its PSB subsidiary, Smartcash PSB. 

– PSBs are at liberty to operate through Banking agents in line with the CBN Guidelines For the Regulation of Agency Banking & Agent Banking Relationships in Nigeria. 

– PSBs can roll out agent networks with the prior approval of the CBN (this is where smaller Fintech companies can come in). 

– PSBs are to rely on electronic platforms to reach out to its customers. 

– PSBs are required to establish coordinating centers in clusters of outlets to superintend and control the activities of the various financial service touch points & banking agents as well as set up consumer help desks (physical & online) at its main office & coordinating centers. 

Conclusion :- Payment Service Banks have come to stay and remain one of the most innovative disruptions in the Nigerian Fintech space, leading to unprecedented levels of Financial Inclusion, low operating costs, and astonishing profits for some of the early investors in this business. The consequently vast Regulatory requirements governing PSBs, unable to be captured by this article, are a major reason why intending participants in this Fintech subsector need to further consult trained professionals to be properly guided going forward.