The CBN recently issued Guidelines for Licensing and Regulating Payments Service Holding Companies (PSHC). We discussed key features of the PSHC guideline and highlight the factors to be considered for entities who intend to provide more than any of the following services; mobile money operations, switching & processing and payment solution services.
In line with the CBN’s mandate to promote an efficient and viable payment system, the CBN issued a circular on August 3 2021 to all (DMBs) Deposit Money Banks, (OFIs) Other Financial Institutions and (PSPs) Payment Service Providers on the issuance of the Guidelines for Licensing and Regulating Payments Service Holding Companies (PSHC) in Nigeria.
This guideline stipulates the prerequisites for the operation of a PSHC and its subsidiaries within the payment ecosystem in Nigeria. The CBN’s circular issued in 2020 on New License Categorisations for Nigerian Payments System mandated Fintech companies who were desirous of operating a switching and mobile money business to establish a holding company structure (the structure) however there was no guideline for the implementation of the structure.
The guideline available was the Guidelines for Licensing and Regulation of Financial Holding Companies (GLRFHC) in Nigeria issued on August 29 2014 primarily for banking groups engaged in non-core banking activities. Interestingly, this PSHC Guideline is a replica of the GLRFHC with minute amendments as to the application fee and licensing fee. We would discuss key features of the PSHC guideline and highlight the factors to be considered for entities who intend to provide more than any of the following services; mobile money operations, switching & processing and payment solution services.
What is a Payments Service Holding Company?
A PSHC is a holding company emplaced with the sole aim of making and managing equity investment in two or more companies being its subsidiaries. These subsidiaries are to provide services in either of these categories:
1. Mobile Money Operations
2. Switching and Processing
3. Payment Solution Services
The subsidiaries of a PSHC are prohibited from acquiring shares in the PSHC or shares of other subsidiaries. Except with the prior written approval of the CBN
A PSHC must be non-operating, established solely to hold equity investment in its subsidiaries as well as have a minimum of two subsidiaries providing payment services in either of the categories above inclusive of a mobile money operator and a switching company. Notably, the PSHC retains a dual structure arrangement, where a PSHC intends to switch to a mono-line service the approval of the CBN must be sought. As an intending mono-line payment service provider the request for approval must include an annual audited financial statement for 3years prior to its request for approval and divestment plans from its subsidiaries.
What Requirements do Payments Service Holding Companies satisfy to acquire License?
The licensing process involves two phases namely Approval-in-Principle (AIP) and final license. The promoters of a PSHC are required to submit a formal application for the grant of a license. It is pertinent to note that, a financial holding company with a payment service provider as a subsidiary that has been licensed prior to the issuance of the guidelines, is not required to apply for a PSHC license. The licensing process begins with the AIP.
At this stage, an application is submitted to the CBN, accompanied by an application fee of ₦1,000,000, evidence of prescribed paid-up capital, detailed business plan or feasibility report and the promoters of the PSHC must also submit a written undertaking stating that the PSHC would be adequately capitalized at all times as well as under the supervisory authority of the CBN.
Regulated foreign institutional investors are also required to submit a no-objection letter from the regulatory body in their home countries to the CBN. Upon obtaining this, the promoters may proceed to implement activities permitted at this stage. However, this license should not be misconstrued as an authority to commence operations or perform any of the permissible activities of a PSHC.
Subsequently, an application for the grant of a final license must be submitted not later than six months after obtaining the AIP. The promoters of the proposed PSHC are to submit the application to the CBN accompanied with a non-refundable licensing fee of ₦5,000,000, evidence of investment of a payment service company and payment of capital contribution by each shareholder inclusive of the proposed head office location for the take-off of the PSHC, schedule of changes as well as evidence of achieving technical requirements and organizational structure.
Ownership, Control and Corporate Governance of a Payments Service Holding Company.
A PSHC must have a board size ranging between 5 and 10 members including an individual with requisite experience in the businesses of the subsidiary payments service. The approval of the CBN has to be obtained for ownership of shares from 5 per cent and a change in ownership which results in a change in control of the PSHC.
The subsidiaries of a PSHC are prohibited from acquiring shares in the PSHC or shares of other subsidiaries. Except with the prior written approval of the CBN, no PSHC director, shareholder or agent shall enter into an agreement to change the control of the company or transfer of shareholding of 5 percent and above as well as the sale or transfer of the whole or part of the PSHC, issuance of new shares, merger and takeover.
A PSHC shall cease to be a PSHC and be required to return its license to CBN where:
1. It loses control of either its switching and processing subsidiary company or mobile money operation subsidiary, for a period exceeding six (6) consecutive months
2. It has only two subsidiaries and loses its controlling interest in either of the subsidiaries for a period exceeding 6 consecutive months.
Furthermore, subsequent to the cancellation of its license, a PSHC shall divest wholly and completely from that subsidiary within a period of six months or any other period as may be determined by the CBN, to enable the subsidiary to continue operations as an independent entity.
Scope of Permissible Activities and Non-Permissible Activities
With the prior written approval of the CBN, a PSHC can provide broad policy direction, shared services or enter into a management service contract with any of its subsidiaries in respect of the following areas namely, human resources services, risk management services, internal control services, compliance services, information and communication technology, legal services and facilities such as office space. Shared services may also be provided however the consent of the subsidiary’s board of director's consent is required.
The guideline is restrictive as it fails to encompass Fintech companies engaging in non-Mobile Money Operations and Switch services
Subsequently, a PSHC is prohibited from establishing, divestment and closure subsidiaries without the prior written approval of the CBN as well as receiving income from other sources other than dividend income from subsidiaries, income from shared services, patents, royalties and copyrights, interest earned from idle funds invested in government securities, profit on divestment from subsidiaries and any other source as approved by the CBN.
Minimum Paid-up Capital, Capital Reserves, Payments of Dividends and Acquisition of Subsidiaries
The guidelines mandate PSHC's to have a minimum paid-up capital which shall exceed the sum of its minimum regulatory capital and equity of its subsidiaries. Where it owns less than 100% of its subsidiaries, its minimum paid-up capital shall exceed the summation of its proportionate holding in the subsidiaries. Excess capital in one subsidiary shall not be used to augment a shortfall in another.
A PSHC capital is applied for the benefit of its subsidiaries. A PSHC shall ensure that its subsidiaries comply with the minimum capital requirements for each license category. In addition, a PSHC can acquire its subsidiaries however, the PSHC must satisfy that it has adequate capital resources to execute the acquisition. The consideration for acquisition shall be on a cash basis or as approved by the CBN.
Furthermore, a PSHC shall not pay dividends on its shares except all its operational, preliminary and organizational expenses, losses incurred and other capitalised expenses not represented by tangible assets have been completely written off excluding goodwill, adequate provisions have been made to the satisfaction of the CBN for actual and contingent losses as well as compliance with any capital requirements as stipulated in the guidelines.
Supervision of PSHC
A PSHC and its subsidiaries shall be supervised by the Payments System Management Department (PSMD) of the CBN on a consolidated basis. PSHCs shall render returns to the PSMD and include information pertaining to whistleblowing, internal control, intra-group transactions, risk management, internal control, compliance with corporate governance guidelines and assets and liabilities of the PSHC.
Positives going forward ...
The PSHC guideline is undoubtedly commendable as it acts as a navigating instrument for Fintechs seeking to restructure upon issuance of the new license categories for payments system namely switching and processing, mobile money operations and payments solution services. The PSHC is a noteworthy innovation borne out of the holding company structure introduced by the CBN in 2010 which mandated financial institutions combining banking with non-banking activities to set up a holding company
Consequently, it provides Fintech companies with an opportunity to expand by offering new products and services. Through this Hold Co structure rather than Fintech companies operating as distinct entities while offering various products and services, this affords them an opportunity to operate as separate but connected entities. In addition, the Hold Co structure stimulates efficiency and facilitates the management of risks as it adopts the principle of separation of powers ensuring the holding company doesn’t provide all services, it will as well as stimulate efficiency and facilitate the management of risks.
Furthermore, it facilitates funding for Fintech companies as investors are encouraged to invest by affording investors opportunities to diversify their portfolios with single investments in holding companies. Hence, an investor investing in a PSHC, is indirectly investing in either of the subsidiaries. There is an opportunity in this guideline for entities licensed under payment solutions to be eligible promoters of a PSHC.
Oluwayemisi Adeluoye | Research Analyst, Banking Policy | firstname.lastname@example.org
Ayotunde Abiodun | Research Asisstant, Banking Policy | email@example.com
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