Payment Services Bank; the challenger banks

April 2019
Payment
ServicesBank:
thechallenger
banks
Lagos Fintech Week

© 2019 KPMG Advisory Services, a partnership registered in Nigeria and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in Nigeria. 2
“Payment Service Banks
(PSBs) could revolutionise
financial services in Nigeria
as they usher in a new era of
change in delivering
innovative payment solutions
to customers …these new
entities could become
‘challenger banks’ as they
take on traditional banks in
Nigeria.”
- KPMG (Payment Services Bank: The
“Challenger” Bank Nigeria”)

Key questions to be answered
How will the emergence of PSBs impact financial inclusion in
Nigeria?
What is it’s market potential and how will this disrupt banking in
Nigeria?
What kind of Bank will the PSB be? How can PSB leverage Fintech
partnership to achieve their objectives?
What are the levers for success in this business?

PSBswereestablishedwiththeobjectivetodrivefinancialinclusionleveragingtechnology…
Impact on Financial Services
Drive Financial Inclusion
• The PSB offers simple
financial services to the
under-banked and un-
banked segment.
Compliment Existing
Financial Services
Structure
• The PSB will leverage
existing financial
services structures to
deepen service delivery
among the rural
unbanked and under-
banked.
Facilitate the
Implementation of Social
Inclusion Policies
• The PSB will provide a
suitable platform for
the distribution of
funds, bettering the
implementation of the
government’s social
inclusion policies.
Job Creation through
PSB Value Chain
Promote Adoption of
Digital Financial Services
• The PSB will leverage
agile technology with
best in class operations
to bring ease,
convenience and security
of financial services to
the grassroots level.
86 92 64
• The PSB through it’s
value chain and
partnerships will create
jobs within the financial
services industry.
Minimum Capital Requirement : ₦5 billion
Source: CBN PSB Circular (2018)
CBN’s Mandate for PSBs

….withguidelinesforoperationstoensuresuccesswithreducedrisks
A payments service bank
is like any other bank, but
operating on a smaller
scale without involving
any credit risk
N
Permissible Activities
• Accept deposits from individuals and small
businesses;
• Carry out payments and remittances
services through various channels;
• Issue debit and pre-paid cards;
• Operate electronic wallet;
• Sell foreign currencies realized from
inbound cross-border personal remittances
to authorized foreign exchange dealers;
• Render financial advisory services;
• Invest in FGN and CBN securities; and
• Carry out such other activities as may be
prescribed by the CBN from time to time
Non-Permissible Activities
• Grant any form of loans, advances and
guarantees (directly or indirectly);
• Accept foreign currency deposits;
• Deal in the foreign exchange market except
as prescribed;
• Insurance underwriting;
• Undertake any other transaction which is
not prescribed by this Guidelines;
• Accept any closed scheme electronic value
(e.g. airtime) as a form deposit or payment;
• Establish any subsidiary except as
prescribed in the CBN Regulation on the
Scope of Banking and Ancillary Matters, No
3, 2010

Thefinanciallyunderservedandunserveddemographypresentsignificantmarketopportunities
107m
Adults
~2m
Well-served
~65m
Financially
Underserved
~40m
Financially
Unserved
North
West
39%
North
Central
12%
South
West
11%
South
10%
South
East
10%
North
East
18%
M: 49% F: 51%
Sources: EFInA Financial Inclusion Survey, 2018, CBN
PROFILE OF THE FINANCIALLY UNSERVED
• Over 65% of the
financially unserved
population are in rural
areas concentrated in
the North

Thereisalsocontinuedgrowthindigitaladoption,particularlymobile,whichsetsastageforPSBstothrive…
70 million
Nigerians are estimated
to have at least one
mobile phone and use it
at least once a month.
This is estimated to
reach 96 million by 2020.
expected to rise to 26
million people by 2020
174 million
mobile subscribers
Smartphone
owners/users
23m
NIGERIANS
Sources: NCC, Statista, eMarketer.com
82%
Adult internet
users in Nigeria
also access
social networks
114 million
mobile internet
subscribers

12%
14%
20%
35%
53%
80%
2011 2014 2017
Population of Financial Services Users in
India
Population who save in commercial banks
Population who save in other financial
institutions
KeylearningsfromotherclimessuchasIndiaportraythepotentialtoimprovefinancialactivityanddisrupt
financialsystem
Source: World Bank Findex 2017, Indiatimes
Reserve Bank of India granted 11 eleven applicants in-principle
approval to set up payments banks in 2015 – 3 were the largest
telecoms operators in the country
As at 2017, about 9.5 million Indians had a payments bank account
with 9.5 million people admitting to saving with PSBs.
The three payments banks to first begin operations recorded a
combined 2.15 million debit card transactions – one bank
outperforming HSBC in terms of debit card transactions
Partnered with retail outlets and small merchants -- Airtel
Payments Bank, backed by the largest telecom service provider in
India, has established over 250,000 access points commensurate
to the network of some of the large traditional banks.
Due to their growth, some of the large traditional banks – ICICI
and Kotak Bank– have become strategic investors in payments
banks.
Key Learnings

TraditionalbanksinIndiahaverespondedtoincreasedcompetitionfromthepaymentbanksthrough
investments,partnershipsandbuildingdigitalbanks
Payments banks are
not allowed to
provide the
entire gamut of
banking services. This
provides traditional
banks with significant
headroom for growth
and partnership
opportunities.
Investment in the payment bank – Some of the largest traditional banks, including State Bank of
India (biggest public sector bank), ICICI Bank and Kotak Bank (two of the largest private sector
banks), have become strategic shareholders in payment banks.
Partnerships with payment bank – Payment banks are not allowed to hold deposits in excess of
approximately USD 1,456 per customer or give loans. As such, traditional banks such as IndusInd
have partnered with payment banks (Paytm) to channel balances as fixed deposit in excess of the
above maximum limit.
Building a digital bank – Apart from launching digital products, most of the big banks have
launched a digital wallet that allows customers to make merchant payments, transfer money etc.
Tie-ups with Digital Payment Firms – Banks are entering into partnerships with digital payment
service providers and fintech firms to offer their products. For instance HDFC, a large private
sector bank has tied up with GooglePay to offer loans.

DespitethedigitaladvantagesofPSBs,therearekeyimperativestobemettoachievesuccessinthefinancial
space…
BCAPABILITY
ACUSTOMER
CCAPITAL
D
STRATEGY FOCUS ON
UNDERBANKED
ECHANNELS
FCOLLABORATION
OPPORTUNITY
COMPLIANCE
G
• Can the firm provide insights on customer preferences and enable a more
appealing approach to engage with customers?
• Expertise/technical know-how in serving the financially excluded
adults?
• Can the firm absorb the cost of reaching financially excluded
adults?
• Is the firm’s strategy geared towards expanding customer base to
include financially excluded adults?
• Does the firm have or able to rapidly build scalable distribution
platform?
• To what extent does the firm leverage collaboration with industry
stakeholders to reach financially excluded adults
• Are regulatory stakeholders proactively managed and regulatory
milestones met in a timely manner?

Commercial
Banks
Microfinance
Banks
Fintechs
Multipurpose
Cooperative
society
Mobile Money
Payment Service
Banks
Customer
Capability
Capital
Strategy Focus on
underbanked
Regulatory
Compliance
Channels
Collaboration
Opportunity
PSBsarelikelytochallengetheincumbentsastheyhavethepotentialtodeliveronallmetrics…
Market Potential
Legend
Robust Average Minimal

PSB,ifsuccessful,hasthepotentialtodisruptthebankingmarketfromseveralfronts
Market Potential
Source: Proshare, EFINA, NIBSS
• Total banked population:
39.7m
• Total BVN: 36.2m
Potential
Disruptive
Impact of PSB
• 36.6 million unbanked
Stealing the ‘potential sweet
spots in the unbanked and
underbanked space (payments &
transactions)
Cannibalising the ‘Banked’
customer non-interest income
revenue potential
Increasing bargaining power over
deposits
CAGR
6.45
13.1
24.7
40.6
66.7
0
20
40
60
80
2019 2020 2021 2022 2023
Potential PSB Customers (Million) –
Aggressive Scenario
Unbanked & Underbanked
5.6
13.1
19.1
27.4
39.8
0
10
20
30
40
50
2019 2020 2021 2022 2023
Potential PSB Customers (Million) –
Non-aggressive scenario
Potential PSB Customers (Million)

PSBmaycontrolsignificantportionoffee-basedrevenuesinthesectorover5years
Market Potential
5.8
19.3
36.7
68.1
128.7
0.0
50.0
100.0
150.0
2019 2020 2021 2022 2023
Projected Fee Based Income (N’ Billion) – Non-
aggressive scenario
Projected Fee Based Income(N' Billion)
0.6
1.2
1.9
2.9
4.1
0.0
2.0
4.0
6.0
2019 2020 2021 2022 2023
Projected Total Deposit (Trillion) – Non-aggressive
scenario
Projected Total Deposit (Trillion)
6.8 19.3
47.3
100.6
215.3
0.0
100.0
200.0
300.0
2019 2020 2021 2022 2023
Projected Fee Based Income (N’ Billion) – Aggressive
Scenario
Projected Fee Based Income(N' Billion)
0.6
1.2
2.1
3.2
4.6
0.0
2.0
4.0
6.0
2019 2020 2021 2022 2023
Projected Total Deposit (Trillion) – Aggressive
Scenario
Projected Fee Based Income (Trillion)
Key Assumptions
• Customer class divided into Affluent, Middle & Bottom of pyramid
• Customers are divided along unbanked, underbanked and banked population
• Bottom of Pyramid will be the bulk of customers as directed by the CBN
• Percentage of active customers ranges from 40% to 60% over the next 5 years

Bank’sresponsetoPSBs…
Market Potential
2
4
Collaborating with PSBs
• Banks can collaborate with PSBs
using their existing structure to
assist with:
o Distribution footprint
o Regulation and compliance
skills/‘know how’
o FX servicing
o Government bonds
o ATM operation
o Cash Management
 PSBs has the potential to drive
deeper market penetration
 However, the limitations placed on
the activities of PSBs possesses a
potential for collaboration between
PSBs and banks (e.g. cash
management, lending, etc.). An
opportunity that if well harnessed
can help deepen the services of
the bank to the unbanked and
increase revenue
How banks can respond…
Payment Service Banks
Introduction of PSBs into the
financial services industry will
change the dynamics of financial
inclusion in the country
3
Accelerating scale during PSB
initial phase
• Leverage PSB initiating phase to
drive rapid penetration into
potential PSB sweet spots
(payments, select rural
locations)
Entering PSB space (via Holdco
and Affiliates)
• Direct play in the PSB space.
Requires a strong business
case.
Implications
1
Drive Digital Response
• Leverage digital platform,
ecosystems to scale-up bank’s
reach and distribution
Source: KPMG Analysis, proshare.ng, LBS Breakfast session

Keyconsiderationsforpartnershipswithfintechs
Levers for success
Lower Servicing
Costs
Sustainable
Access Points
Capture
Transactions
Leverage Existing
Capabilities
Partner &
Complement
Push adoption of
lower cost digital
channels right from
the start of their
banking relationships
Increase the number of
financial access points
to facilitate Cash-in and
Cash-out transactions
for customers
Driving transaction
volumes to increase
revenue
Leverage existing
capabilities:
o Distribution footprint
o Large Captive
Customer base
o Existing Ecosystems
for sales – Agents
o Regulation
Working with relevant
external partners to
build internal
capabilities

PSBsareexpectedtooperateonanasset-lightmodel,particularlymobile,to lowercoststoserve
Levers for success
Sources: Javelin Strategy and Research, 2013; KPMG analysis
A comparison of customer servicing costs across various
channels vis-à-vis the mobile channel

Aprofitableaccesspointroll-outstrategymustencompass….
Levers for success
Agent/branch economics Geographic and
infrastructure complexity
Agent churn and
cannibalisation
This will include ensuring that the
agents/branches achieve sufficient
transaction volume across key
products line (CICO, payments etc.)
while minimising transaction costs
(cost of operations, cost of float etc.)
to drive economically sustainable
agents/branches.
This must account for significant
variation factors at various
locations including:
This must factor in the challenge
posed by competitors (PSBs,
incumbent MMOs, etc.) and
industry initiatives such as the
Shared Agent Network Expansion
Facility (SANEF).
• market conditions (e.g. local
population)
• physical infrastructure (e.g.
access to electricity)
• operational risks (e.g. theft) and
• proximity to financial
infrastructure (e.g. commercial
banks)

© 2019 KPMG Advisory Services, a partnership registered in Nigeria and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
18© 2019 KPMG Advisory Services, a partnership registered in Nigeria and a member firm of the KPMG network of independent
Effectivelycapturingtransactionswillrequireanin-depthunderstandingofthecustomer
Less educated with limited
education of technology
High mobile penetration
Low income
Largely unbanked/
underbanked
Cash-reliant; low digital
banking adoption
Mostly resident in rural or
suburban communities
Educated and tech savvy
High mobile penetration
Middle-high income
Largely banked
High digital banking
adoption
Mostly resident in urban
areas
Levers for success

…aswellastheirjourneyintheuseofproducts
Marketplace
Banking
Payments
Remittances
Financial
Planning/PFM
Value added
services
Wealth
WEB EMAIL VIDEO MOBILE APP USSD SOCIAL ATM POS TV GAMING BRANCH
CORE EMERGING OFFLINE
USSD ATM AGENTS POS BRANCH
CORE OFFLINE
Transactional
Accounts
Lending
Levers for success

PSBsmustworkwithrelevantexternalpartnersthathavecapabilitiesinkeyareaswhereitmaytaketimetobuild
internalcapabilities
Levers for success
Partnerships with specific retailers to offer
products, promotions, and gift cards, to
create new market opportunities.
Partners that can create access
points for PSBs including fast moving
consumer goods (FMCG) companies and
their distributors, downstream petroleum
players, etc.
Partners that can assist in cash and
liquidity management.
Partnership with Fintech innovators
and transaction infrastructure providers to
leverage capabilities and share in revenue
producing opportunities that concurrently
provide an enhanced customer
experience.
Market
Technology
Access Points
Processing
(Cash and
Liquidity)
Sources: KPMG analysis

PSBscollaborationsmaybeplatformbased,linkingcustomerstoawidevarietyofserviceofferings…
Levers for success
Sources: KPMG analysis
Customer Base
Transport
Telcos
Utilities
Religious
InstitutionsRetailers
Schools
PSB Platform
Customer Relationships
Intelligent Data/ Secure Platform
DATA
DATA
DATA
DATA
DATA
DATA
Customers
Insurance
Fintechs
Large third-party developer
ecosystem that supports content
creation on the platform.
Efficient matching
capabilities.

KeyTakeaways
• PSBs are well positioned to address financial inclusion
• “Challenger Bank’s” have the potential to disrupt the current banking
structure
• PSBs partnerships with fintechs is crucial to achieving their digital agenda

kpmg.com/app
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there
can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice
after a thorough examination of the particular situation.
© 2019 KPMG Advisory Services, a partnership registered in Nigeria and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (‘’KPMG International’’), a
Swiss entity. All rights reserved. Printed in Nigeria. The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International Cooperative ("KPMG International").
Olusegun Zaccheaus
Senior Manager
Management Consulting
KPMG Advisory Services
M: +234 7034170139
Olusegun.Zaccheaus@ng.kpmg.com

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