An Overview of the CBN’s Supervisory Framework for Payment Service Banks

CONTRIBUTOR: LILIAN EKU

INTRODUCTION

A Payment Service Bank is a type of bank licensed by the Central Bank of Nigeria to provide limited banking services aimed at enhancing financial inclusion, particularly for the unbanked and underserved populations.^[1] Unlike traditional banks, PSBs focus on offering essential services such as accepting deposits, facilitating payments and remittances, issuing debit cards, and operating electronic wallets, but they are restricted from granting loans or engaging in foreign exchange trading.^[2] PSBs play a crucial role in financial inclusion by extending banking services to rural and remote areas, helping to bridge the gap between formal financial institutions and millions of Nigerians who lack access to basic banking.^[3] By leveraging technology and agent networks, PSBs provide affordable, accessible financial solutions that promote economic participation, reduce poverty, and strengthen the overall financial system by increasing the number of people involved in formal financial activities.^[4]

The CBN in 2021 issued the Supervisory Framework for Payment Service Banks^[5] representing a critical step toward enhancing financial inclusion in Nigeria. This framework was developed to provide clear guidelines for the operations of PSBs, ensuring that they can effectively serve the unbanked and underserved segments of the population. By leveraging technology, PSBs are expected to operate in rural and remote areas, offering essential financial services that were previously unavailable to many Nigerians. This article will explore the key provisions of the framework, focusing on the structure and permissible activities of PSBs, the corporate governance and the regulatory requirements while also delving into how the framework aligns with Nigeria’s broader financial goals, particularly in promoting financial inclusion and security.

AN OVERVIEW OF THE SUPERVISORY FRAMEWORK FOR PAYMENT SERVICE BANKS IN NIGERIA

The framework makes elaborate provisions relating o the structure of the banks, permissible and non-permissible activities, ownership and licensing requirements, corporate governance, KYC and AML requirements, etc. Some of these are examined below:

Structure of PSBs

The structure of Payment Service Banks is designed to differentiate them from traditional banks while focusing on delivering accessible financial services. PSBs are mandated to primarily operate in rural and underserved areas, with a minimum of 25% of their financial service touchpoints situated in these regions.^[6] Unlike commercial banks, PSBs have limitations on their scope of operations; they are permitted to accept deposits from individuals and small businesses, provide payment and remittance services, and issue debit and prepaid cards. PSBs are also required to utilize technology by employing electronic platforms, Point of Sale (POS) devices, and ATMs to reach remote locations.^[7] This framework ensures that PSBs maintain their focus on expanding access to financial services rather than competing with traditional banks in urban markets.

The targeting of the unbanked population is central to PSBs’ role in financial inclusion. In Nigeria, millions of individuals, especially in rural areas, lack access to formal banking services, which limits their ability to save, invest, or transfer funds securely.^[8] PSBs bridge this gap by providing easy-to-access, low-cost banking options. By operating through agents, digital platforms, and simplified banking processes, PSBs reduce the barriers to entry for those excluded from traditional financial institutions. This not only serves to boost economic involvement but also aids in alleviating poverty by empowering those without access to banking services to partake in financial transactions that can enhance their quality of life, including saving for education, establishing small enterprises, or receiving remittances.

Permissible Activities^[9]

PSBs are authorized to offer a range of essential financial services designed to enhance access to banking for underserved populations. PSBs can accept deposits from individuals and small businesses, ensuring that these funds are covered by the national deposit insurance scheme, which provides a safety net for depositors. They also offer payment and remittance services, facilitating both domestic and inbound cross-border personal remittances, issue debit and prepaid cards under their own name, enabling customers to conduct electronic transactions, operate electronic wallets, financial advisory services, and the investment in government and Central Bank of Nigeria (CBN) securities, all of which aim to provide affordable financial solutions to the unbanked and underserved.^[10]

However, PSBs are restricted from engaging in certain activities that are traditionally reserved for commercial banks. For instance, PSBs cannot grant loans, advances, or guarantees, which prevents them from becoming directly involved in credit creation or high-risk lending practices. They are also prohibited from accepting foreign currency deposits or participating in foreign exchange trading, except when selling foreign currencies derived from inbound remittances to authorized dealers. In addition, PSBs cannot underwrite insurance or engage in any other activities not explicitly prescribed by the CBN.^[11] These restrictions are put in place to keep PSBs focused on their primary goal of financial inclusion while minimizing the risks typically associated with broader banking services like credit provision and speculative trading.

Corporate Governance Structure

Corporate governance in Payment Service Banks (PSBs) is structured to ensure strong oversight, accountability, and transparency in their operations.^[12] The governance framework mandates that PSBs have a formal board structure, with a board size ranging from a minimum of five to a maximum of thirteen members, including both executive and non-executive directors.^[13] At least one independent non-executive director must be part of the board, ensuring objectivity in decision-making. The board is responsible for key corporate decisions, including setting the strategic direction, approving budgets, and overseeing risk management. Gender diversity is emphasized, requiring adequate representation of both genders on the board. Board committees are also essential components of PSB governance, ensuring specialized oversight in areas like financial reporting, risk mitigation, and executive compensation.^[14]

KYC, AML and Cybersecurity Requirements

PSBs are mandated to implement robust KYC and AML/CFT protocols to prevent financial crimes. PSBs must comply with relevant CBN regulations and ensure that their systems are not used for illicit activities like money laundering or terrorism financing.^[15] This includes developing a compliance program, designating an AML/CFT Compliance Officer, and conducting risk assessments and enhanced due diligence on higher-risk accounts. PSBs are also required to report suspicious transactions to the Nigerian Financial Intelligence Unit and cooperate fully with regulatory authorities. Moreover, continuous employee training on AML/CFT practices is essential to ensure compliance, and PSBs must have policies in place to reflect these requirements in their strategic operations.^[16]

They are also required to must with the Nigerian Financial Services Industry IT Standard Blueprint and the Risk-Based Cyber Security Framework, as well as any additional ICT regulations issued by the Central Bank of Nigeria.^[17] PSBs are required to maintain level 3 IT maturity, where standards are fully defined, documented, integrated into operations, and communicated through training, avoiding fragmented use of automation tools.^[18]

The Supervisory Framework for Payment Service Banks is essential for regulating their operations by promoting financial inclusion, ensuring strong corporate governance, and enforcing compliance with anti-money laundering and combating the financing of terrorism measures. It provides clear guidelines that enhance transparency, accountability, and the security of the financial system while aligning with broader national financial goals.

CONCLUSION

The framework provides a robust regulatory structure that not only ensures the stability and transparency of their operations but also aligns with the Central Bank of Nigeria’s ambitious financial inclusion goals. By outlining the permissible activities, corporate governance expectations, and risk management strategies, the framework positions PSBs as key players in expanding access to financial services in Nigeria. Adherence to these guidelines by PSB is crucial in fostering trust, enhancing financial security, and driving economic growth.

SNIPPET

The Supervisory Framework for Payment Service Banks is essential for regulating their operations by promoting financial inclusion, ensuring strong corporate governance, and enforcing compliance with anti-money laundering, and combating the financing of terrorism measures. It provides clear guidelines that enhance transparency, accountability, and the security of the financial system while aligning with broader national financial goals.

KEYWORDS

Supervisory Framework for Payment Service Banks 2021, Payment Service Banks, Central Bank of Nigeria

1. Bunmi Bailey: Explainer: What are Payment Service Banks? (BUSINESS DAY 2021) available at https://businessday.ng/technology/article/explainer-what-are-payment-service-banks/ accessed October 2024. ↑
2. Ibid ↑
3. Torsten Wezel and Jack Ree, Nigeria- Fostering Financial Inclusion through Digital Financial Services’ IMF Selected Issues Paper, 2023, available at https://www.imf.org/-/media/Files/Publications/Selected-Issues-Papers/2023/English/SIPEA2023020.ashx accessed October, 2024 ↑
4. Ibid. ↑
5. Central Bank of Nigeria, “Supervisory Framework for Payment Service Banks” 2021, available at https://www.cbn.gov.ng/Out/2021/CCD/Supervisory%20Framework%20for%20PSBs.pdf accessed October 2024. ↑
6. See Para 1.0 ↑
7. Ibid. ↑
8. Ikya, F. A. “Banking the unbanked at the bottom of the economic pyramid in Nigeria: Challenges and opportunities for profitable growth.” Journal of Internet Banking and Commerce 24, no. 3 (2019): 1-22 available at https://www.academia.edu/download/76963787/banking-the-unbanked-at-the-bottom-of-the-economic-pyramid-in-nigeria-challenges-and-opportunities-for-profitable-growth.pdf accessed October 2024. ↑
9. See Para 2.0 ↑
10. Para 2.1. ↑
11. Para 2.2 ↑
12. Para 4.0 ↑
13. Para 4.1 ↑
14. See para 4.2. ↑
15. Para 6. ↑
16. Ibid. ↑
17. Para 9. ↑
18. Ibid. ↑