NIGERIA POWER SECTOR PROGRAM PAYMENT SERVICES PROVIDER SELECTION TOOL – FRAMEWORK & RATIONALE November 2019 DISCLAIMER:

This publication was prepared for review by the United States Agency for International Development. It was prepared by Deloitte Consulting LLP. The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

NIGERIA POWER SECTOR PROGRAM (NPSP) PAYMENT SERVICES PROVIDER SELECTION TOOL – FRAMEWORK & RATIONALE IDIQ Contract No. 720-674-18-D-00003 Power Africa Extension (PAE)

Task Order No. 720-674-18-F-00003 Nigeria Power Sector Program (NPSP)

USAID | Southern Africa

Contracting Officer’s Representative: Edward La Farge

Submitted: December 13, 2019

Comments Received: December 14, 2019

Resubmitted: December 19, 2019

ACKNOWLEDGEMENT:

This document was produced for review by the United States Agency for International Development. It was prepared under Task Order No. 01: The Nigeria Power Sector Reform Program (the “Task Order”) of the Power Africa Indefinite Delivery, Indefinite Quantity (“IDIQ”) Contract No. 720-674-18-D-00003 implemented by Deloitte Consulting LLP

Cover Photo: Power Africa-NPSP

TABLE OF CONTENTS I. BACKGROUND .................................................................................................................... 1

A. LOCAL PAYMENTS LANDSCAPE: PAYMENT SERVICE PROVIDERS IN NIGERIA ...... 2

B. NIGERIAN MARKET CHALLENGES ............................................................................................ 4

II. OBJECTIVE OF PSP TOOL ............................................................................................. 4

A. OBJECTIVE ........................................................................................................................................... 4

B. PARTNERS AND BENEFICIARIES ................................................................................................. 4

C. APPLICATION OF PSP TOOL ....................................................................................................... 5

III. DEVELOPMENT OF NEW PAYMENT SERVICES PROVIDER TOOL ................. 5

A. FUNCTIONALITY OF THE PSP TOOL ....................................................................................... 5

B. USABILITY ............................................................................................................................................ 7

NPSP PAYMENT SERVICES PROVIDER SELECTION TOOL 1

I. BACKGROUND The rise of mobile-enabled pay-as-you-go (PAYG) solar solutions, notably solar home systems, as a response to underserved communities’ lack of reliable and affordable lighting and charging solutions in East Africa, highlights the opportunity for the PAYG model to scale into West Africa and Nigeria specifically. Successful PAYG solar service providers, such as M-KOPA and Fenix International, which have grown out of East Africa, have been exploring opportunities to replicate their models in Nigeria. A critical enabler for PAYG solar is the uptake of mobile money services to unlock customers’ ability to make small payments, through their mobile phone.

Mobile money uptake in Nigeria is low in comparison to other sub-Saharan counterparts with less than three percent of the adult population registered and actively using a mobile money platform. Until recently, prohibitive regulation, low financial inclusion and low awareness has hindered the uptake of mobile money. In addition to this, most rural areas have limited mobile network service and limited presence of mobile money agent. Therefore, the overall cost of collection for PAYG Solar Home System (SHS) companies in Nigeria is significantly higher than in East Africa. In particular, the North-West and North-East geopolitical zones suffer from low financial inclusion making it a challenging market for SHS companies to penetrate, due to the difficulty in collecting payments.

Figure 1: Comparison of Cost of Cash and Digital Payments

In response to the low mobile money uptake and financial inclusion, the Nigerian retail payments landscape has grown rapidly beyond traditional banking to include the evolution of mobile money operators, agent networks, and financial infrastructure providers. These forms of payment service providers (PSPs) are now regulated by the Central Bank of Nigeria (CBN) and offer the last mile delivery, or distribution infrastructure, that commercial banks currently lack. PSPs are thus seen as super-agent networks, or “Human ATMs,” offering services such as payment processing, merchant and transaction acquisition, innovative payment technologies, agency banking, or channel development. In addition, retail payments and instruments are significant contributors to the broader effectiveness and stability of the financial system, particularly influencing consumer confidence and commercial formalization.

Off-grid companies are now seeking alternative payment solutions, such as partnerships with payment services providers, to specifically target the rural and peri-urban demographic and reduce the overall cost of collections. As a result of the market need for alternative payment solutions, NPSP has developed a PSP tool to support off-grid developers in their selection of the best-suited payment provider for collections tied to the sale of PAYG SHS. The ultimate rationale for this tool is to reduce the market entry cost for off-grid companies and provide a framework for effective prioritization based on a predetermined set of fit criteria.

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A. LOCAL PAYMENTS LANDSCAPE: PAYMENT SERVICE PROVIDERS IN NIGERIA

What are payment platforms?

Payment platforms provide the physical and digital infrastructure and network on which payment solutions are built in Nigeria. They facilitate payment or collections transactions between customers and merchants by charging ATM/debit cards and/or bank accounts directly or by collecting cash from customers.

Who are the key financial services providers?

There are multiple players in the payments landscape in Nigeria, both foreign and local. They all provide various services along the payments value chain – switching, merchant acquisition, liquidity, channels, disbursement, last mile fulfillment, transaction acceptance, etc.

The payment services providers (PSPs) are companies that have been licensed by the CBN to provide the underlying infrastructure, end-to-end electronic payment solutions, systems and services to stakeholders within the financial services space. The companies that operate here typically have direct integration into the card schemes (Visa, Mastercard, and Verve) and a deeper relationship with banks and some have systems integrated directly into the core banking systems.

The most prominent of PSPs are Interswitch, Paga, etranzact, Unified Payments, Paystack, Flutterwave, Swifta, ITEX, Global Accelerex, PayCentre, Cellulant, OnePipe, TeamApt, eTop, VoguePay, Appzone and Kudi. The two largest platforms – NIBSS and Interswitch – typically serve the other platforms.

Below is a diagram that represents the Payment Services Providers relevant to off-grid/SHS providers and services offered in the Nigerian market:

Figure 2: Payment Services Providers

1. Core Participants (Payment Services Banks)

In October 2018, the Central Bank of Nigeria (CBN) issued the Guidelines for Licensing and Regulation of Payment Service Banks (PSBs) in Nigeria, in a bid to promote a sound financial system and enhance access to financial services for low-income earners and the unbanked segments of the Nigerian population. PSBs are companies licensed to facilitate banking services through physical access points or other digital interfaces, including mobile or internet-enabled channels. The CBN guidelines provide that PSBs will operate mainly in rural centers and unbanked locations and must have at least 25% of their 'financial services touch points' (to be defined by the CBN) in these areas. The CBN regulation provides a non-exhaustive list of entities that are eligible to apply for a PSB license, including:

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• banking agents;

• telecoms companies (through subsidiaries);

• retail chains (e.g., supermarkets);

• mobile money operators;

• postal services providers and courier companies;

• fintech companies;

• financial holding companies; and

• other entities that the CBN may consider eligible.

However, majority of the applicants and license holders to date include commercial banks and fintechs (who previously held mobile money operator (MMO) licenses) as well as telcos. The establishment of Payment Service Banks (PSB) by the CBN will ultimately enable telcos and other players such as bank agents and retailers to play a deeper role in providing financial services to the public. They also make use of agent networks as they provide a wider network for distribution; the agent network might be theirs, or exclusive to them, depending on the scenario.

Until recently, the impact of many potential providers has been largely undermined by regulatory issues that prevented the telcos from taking the leading role in the mobile money space Nigeria, which is contrary to the situation in most countries where mobile money has been largely successful. Countries like Kenya, Uganda and Ghana have been able to significantly increase the percentage of their populations with access to financial services by allowing telcos in those countries to freely operate in providing mobile money services to the unbanked population. Telcos are better suited to provide mobile money services to remote, rural parts of the country due to their existing customer base (mobile phone penetration) and network infrastructure. For example, in Kenya, the mobile money revolution spearheaded by M-Pesa, a mobile phone-based money transfer firm founded in 2007 helped reduce poverty in Kenya particularly among female-headed households by making them more financially inclusive. Additionally, nearly half of the country’s GDP was processed via M-Pesa in 2016.

The previous regulatory framework in Nigeria made provision for only two models for the implementation of mobile money services, namely: Bank Led model which allowed commercial banks and/or its consortium to act as mobile money operators and Non-Bank Led, which allowed other corporate organizations (excluding telcos) duly licensed by the CBN to act as mobile money operators. This MMO model (bank-led and non-bank led models) however failed to drive the financial inclusion agenda and has failed to meet the CBN target of achieving 80% financially included population by 2020. This was due to a number of reasons including a lack of proper understanding of the conditions of their licenses, paucity of funds, poor infrastructure in the rural areas and a lack of synergy in rolling out agent networks. Most of the licensed MMOs in Nigeria remained inactive and many have yet to officially commence operations. As a result, CBN took several actions to address these issues

• In October 2018, CBN introduced the PSB licenses which now allowed telcos as well as other non-banking players such as supermarket to obtain licenses

• The PSB license also increased the minimum capital requirement from N2 billion (previously increased from N500,000 in 2017) to N5 billion

Now that the regulatory hurdle has been removed, banks and telcos will be able to offer services previously unavailable to both the banked and unbanked. PSBs can potentially increase the ease, speed and safety of deposit, withdraw and transfer money for Nigerians by reducing the need for cash transactions or storage in homes. In order to maximize impact of the PSB on financial inclusion, CBN may need to increase the speed of approval for licenses. Since the regulation was introduced, over 30 business names have since applied for license with majority still awaiting final approval. The four major telcos (MTN, Glo, 9mobile and Airtel) have only been issued the Approval-in-Principle (AIP), while it took the CBN almost eight months to finally grant a ‘Full Agent License’ to MTN. Therefore, the speed of implementation needs to be improved. In addition to this, CBN and the DFS ecosystem

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need to work together to increase overall awareness of mobile money, especially in rural and remote areas.

2. Infrastructure Providers

These include system integrators and pure IT companies that build software and other IT infrastructure for the general electronic financial services ecosystem. Some of these companies are also Payment Terminal Application Developers.

3. Super Agents

These are third party companies licensed by the CBN and contracted by a financial service provider, who thereafter may subcontract other agents in a network while retaining overall responsibility for the agency relationship. A Super-Agent may identify, vet, train, monitor and manage sub-agents independently or as defined in the contract with the financial institution.

The idea behind ‘agency banking’ is to leverage businesses that have deep reach and distribution in places where the banks might not be able to or are not incentivized to setup branches. The operating model for agency banking was also referenced in the new PSP licensing regime meaning that going forward, companies that want to act as agents to PSBs will need to have a type of PSP license.

B. NIGERIAN MARKET CHALLENGES

Several barriers exist to leveraging digital payments to scale:

1. The first pain point is access to reliable agent networks to provide last-mile access to the consumers and no single agent network has nationwide coverage. When there is a lack of infrastructure or personnel to help facilitate repayments, PAYG systems usually have challenges with collections in areas where they have customers. Such areas could include a riverine area, an area with low economic activity, an unstable area (the north east of Nigeria), or an urban area with very few customers that makes traditional collection methods financially unviable.

2. The second pain point is that there is a cost to using payment platforms, but the costs of transactions differ and there is no uniform tariff across operators. In most cases, payment providers charge merchants a varied range of fees to connect to the platform, which are sometimes standardized, and other times based on perceived value proposition.

II. OBJECTIVE OF PSP TOOL

A. OBJECTIVE

The Payment Services Provider (PSP) Tool is designed to profile each of the major payment services providers available in the Nigerian market and allow business developers/operators in the off-grid power sector to review and prioritize the most suitable PSP for their targeted demographic based on pre-determined selection criteria. This tool is particularly important for several categories of off-grid companies including:

• International companies entering the market Nigerian market from existing market with active mobile money operations, and

• Local companies with limited access to funding for payment integration and own-agent network recruitment

B. PARTNERS AND BENEFICIARIES

This tool will allow business developers/operators in the off-grid power sector in the Nigerian market to develop a cost-effective market-entry and expansion approach that will invariably reduce the cost of customer acquisition and collections as well as help companies quickly achieve scale.

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C. APPLICATION OF PSP TOOL

The tool will enable developers to achieve the following:

• Geographic prioritization: business developers/operators in the off-grid power sector will be able to take their products to areas with the highest concentration of their most promising clients as well as identify PSP partners with agent networks concentration in priority locations

• Recommendations of appropriate market channels: Business developers/operators in the off-grid power sector will also be able to determine the right market channels to use to gain exposure to their potential clientele by identifying the target customers and their closest available PSP

• Lower customer acquisition cost: Companies can utilize methodical market entry strategies to lower customer acquisition costs by using geographic prioritization and going to markets with the highest concentrations of customers who can access financing, or PSPs

• Appropriate distribution partnerships: The customer distribution across Nigeria will also inform the right kinds of partnerships that SHS and mini-grid companies can develop to bring their products to market with high demand for their services.

III. DEVELOPMENT OF NEW PAYMENT SERVICES PROVIDER TOOL

A. FUNCTIONALITY OF THE PSP TOOL

The primary basis for provider selection is the ability to reach the target demographic (largely rural, low-income and unbanked population) for business developers/operators in the off-grid power sector, followed by affordability (from the merchant and end-user perspective). As such, this tool incorporates the profile of major payment services providers, organized into three main sub-categories:

1. Banks (Commercial or microfinance banks)

2. Mobile Network Operators (MNOs)

3. Fintechs

The tool provides a side-by-side comparison of their leading PSPs to develop the ‘Payment Collection Provider Matrix’, a framework to help SHS companies and mini-grid developers choose amongst competing providers. These categories will enable these companies to optimize their PSP selection and maximize advantages associated with each different provider type, as most PSPs do not fit into a single type of payment collection provider but are a hybrid of the different types.

In addition, the tool has been developed to include the key determinants that off-grid developers’ study when considering the expansion of their service lines and respective payment provider, namely:

• End user affordability

Assesses affordability of using a given PSP from the customer perspective, considering convenience or transaction fees paid to the PSP agent that may apply for using the service

• Merchant affordability

Assesses affordability of using a given PSP from the SHS or mini-grid company’s perspective, considering two main components:

o Integration fees

Upfront cost that merchant (SHS or mini-grid company) would have to pay to connect to, or be listed on, the payment platform

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o Transaction fees

Fees incurred by the merchant (SHS or mini-grid company) on a transaction-by-transaction basis. Typically charged as a percentage of the gross transaction amount that the customer is paying

• PSP Reach

Assesses reach or accessibility of a PSP from three main perspectives:

o Size of agent network

Assesses the national footprint of the PSP and how accessible the provider is for bottom-of-the-pyramid customers based on the number of agents across the country

o Number of active states

Assesses geographic presence and fit of PSP to merchant’s market entry or expansion plans based on number of states where PSP has active agents across the country

o Regional agent network concentration

Assesses concentration of agent network across the six geopolitical zones (North East, North West, North Central, South West, South East and South South) in Nigeria to determine fit to merchant’s priority or focus locations

The below represents an example of the parameters included:

Figure 3: Legend for Payment Collection Provider Matrix

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In this manner, off-grid companies can select the PSP best suited to their business model and expansion plans and begin to develop strategic partnerships for scaling up to access their consumer market.

B. USABILITY

The tool has been designed to be user-friendly with engagement in four simple steps to develop a total score and relative ranking of PSPs for a particular use case:

1. Merchant (SHS companies and mini-grid developers to indicate PSP priority criteria on a scale of 1-5:

• Reach (number of active states)

• Reach (size of agent network)

• User affordability (agent transaction fees to end-user)

• Merchant affordability (integration cost)

• Merchant affordability (transaction fees)

2. Merchant to select highest priority geopolitical zones considering regional agent network concentration in Nigeria

3. Merchant to select priority locations for service delivery (Geographical presence)

4. Merchant to indicate maximum threshold for integration cost in order to eliminate PSPs outside of threshold

5. PSP tool to then systematically rank PSPs based on the particular criteria listed above

To illustrate: The developer launches the tool, specifies the priorities in the input section as shown below:

Figure 4:Illustration of user input

The tool then uses the selection criteria to return a list of PSPs to the user with scores based on fit to identified priorities, where the maximum scoring PSPs have the best fit. Instead of focusing on the

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total score, the user can also choose PSPs based on the highest scoring for the categories that are the most important to them. For example, if the size of agent network is the most important for the user, then the user can select the PSP based on what provider has the highest score.

Figure 5:Illustration of user output

The output of the tool lists payment services providers based on the total score ranked in descending order. The scores of the PSPs are estimated based on consolidating the weighted average of rankings across the various criteria. Therefore, the scores should not be seen as a final recommendation for integration, but an indication of the likelihood of a successful partnership based on criteria fit and alignment of interest. Off-grid companies are advised to conduct additional due diligence on shortlisted PSPs and may be able to negotiate better rates in terms of integration cost and transaction fees. Therefore, this tool should be used as a directional starting point for selection with follow-on engagement required to support final decision making. It is important to note that the ultimate accuracy of the scores will be largely dependent on obtaining accurate data and information from the PSPs.