By Efeomo Olotu, Partner, Feyisayi Lari-Williams, Consulting Associate, Demola Makinwa
Associate, Martins Okoli NYSC Associate, George Etomi & Partners
The rise in technology development, coupled with the increasing need to create financial solutions able to meet current financial challenges has birthed what has come to be referred to as Financial Technology (FinTech). It covers both the financial and technology sector.
Financial technology refers to a technological innovation that offers a different outlet to how financial transactions are conducted. FinTech companies leverage on technology to deliver services similar to that offered by conventional financial institutions (Banks), usually with added benefits and ease. Thеѕе FinTесh соmраniеѕ have bееn christened “mаrkеt diѕruрtоrѕ” due to thе fасt that their ореrаtiоnѕ dеviаtе frоm thе trаditiоnаl ѕуѕtеm оf commercial trаdе аnd bаnking. These companies, usually startups, have digitized financial processes that were previously handled with paper money and human interaction.
The impact of FinTech to the financial sector has been significant. It has made noteworthy impact in the areas of Payment Services, Bank Account Opening, online real-time securities trading, etc. FinTech is also gaining traction in the areas of lending and alternative financing (such as peer-to-peer lending, business-to-consumer lending, and so on), as well as financial and insurance products.
In Nigeria, the regulatory bodies governing these sectors have over time created regulations that passively regulate the industry. The Banking and other Financial Institutions Act (BOFIA) is one of such existing legislations that regulate the banks and financial institutions. The provisions of BOFIA does not contemplate FinTechs offering the nature of services they currently offer without a licence to operate as a bank or other financial institutions designated by the Central Bank of Nigeria (CBN). To this end, there are no provisions in BOFIA governing the industry.
Regardless of the provisions of BOFIA, The Central Bank of Nigeria (CBN) actively provides regulations through circulars to govern the activities of all players in the industry.
Following the release of the Payments Systems Vision 2020 (“PSV 2020”) by the Central Bank of Nigeria in 2007, Nigeria has witnessed an increase in the number of mobile and electronic payments solutions. One of the recommendations of the PSV 2020 was to encourage electronic payment methods. The innovations in this subsector include the adoption of Unstructured Supplementary Service Data (“USSD”) services for payments by bank and non-bank operators and the use of artificial intelligence via chatbox. The competition among the various participants has resulted in new and simplified solutions for funds transfer and payments services.
Effective financial regulation is clearly crucial to innovation and the future of the financial services industry and, in specific, FinTech. Although there is currently no comprehensive regulatory framework for FinTech services and operations in Nigeria, some CBN regulations have effect on FinTech, albeit very narrowly. Pursuant to the Banks and Other Financial Institutions Act, Chapter B3 LFN 2004, an entity that wishes to provide marketplace lending may do so by registering as a bank or Other Financial Institution (“OFI”). Banks and other Financial Institutions are licensed and supervised by the Central Bank of Nigeria.
In accordance with CBN Guidеlinеѕ оn Mоbilе Money Sеrviсеѕ in Nigeria 2015, thе CBN guidelines оn Operations оf Elесtrоniс Payment Chаnnеlѕ in Nigeria, the CBN Guidеlinеѕ оn Intеrnаtiоnаl Money Trаnѕfеr Sеrviсеѕ in Nigеriа аnd other rеgulаtiоnѕ, all mobile payments in Nigeria are controlled and regulated by the CBN. The Mobile Money Guidelines define a mobile money operator as an entity that provides “the infrastructure for the mobile payment systems for the use of participants that are signed-on to their scheme”. Mobile money operators must be licensed by the CBN on such terms and conditions as contained in “Appendix I” to the Guidelines.
Due to the increasing realization of the importance of financial technology solutions, there have been considerable regulatory development, the effectiveness of which is anticipated for the coming years. For example, there is the Draft Policy on Licensing Regime [License Tiering] for Payment System Providers, which promises to introduce a new licensing regime for payment service providers. The new licensing regime shall completely re-categorize licenses for payment service providers, and also stipulates financial requirements. Currently licenses were organized under different categories including Payment Terminal Service Providers (PTSPs), Mobile Money Operators (MMOs), Payment Solutions Service Provider (PSSP), switches, super agents and a few others. These various categories have been merged under the new regime, simply as Payments Service Providers (PSP) licenses, which is sub-divided into PSP Super License, PSP Standard License and PSP Basic License.
The existing licenses types under the Super License include switching, PSSP, PTSP, non-bank Merchant Acquiring and Super Agency. The proposed permissible activities under the Super License is all encompassing and, as such; include switching, processing transaction clearing and settlement and agent services. The Shareholders Fund (SHF) is N5Bn while licensing fee and renewal is N2m and N1m respectively. The tenor is three years.
The existing licenses types under the Standard License include e-Money issuers, agent recruitment and management as well as pool account management. Other activities are merchants acquiring and settlement services. The SHF is
N3bn while licensing fee and renewal is N1bn and N500,000 respectively. The tenor is three years.
The existing licenses types under the Basic License include payment processing gateway and portals, payment solution/application development and merchant service aggregation. Other activities are POS terminal deployment and services, POS terminal ownership, PTAD, merchant/agent training and supports. The SHF is
N100m while licensing fee and renewal is N1000 and N50,000 respectively. The tenor is three years.
To “address the emerging issues” such as risk management and capital adequacy, the policy proposal will require FinTech startups to have minimum shareholder funds ranging from $275,000 to $14 million before obtaining licenses for their operations. This draft policy, if adopted, shall represent a significant barrier to entry for new FinTech businesses which like most startups depend on revenue growth and investor backing after they launch to scale operations. Most Nigerian early stage startups raise well below the CBN’s new capital requirements.
The Nigerian Communications Commission (“NCC”) also regulates FinTech businesses where the service offered involves mobile network providers pursuant to the Licence Framework for Value Added Service (“VAS”) issued by the NCC. A VAS Provider is any person or organisation that engages in the provision of value added mobile/fixed services, including premium rated services, and such provider is required to obtain a licence from the NCC. The use of airtime for the repayment of loans to a mobile lender could constitute a premium rated service, the provision of which requires the approval of the NCC.
Thе Nigerian Insurance Aсt рrоvidеѕ the оvеrаrсhing framework fоr ореrаtоrѕ оf аll types of inѕurаnсе and аѕѕеt mаnаgеmеnt businesses in thе country and thе Nаtiоnаl Insurance Cоmmiѕѕiоn (NAICOM) iѕ thе industry rеgulаtоr. The Act provides that any legal entity that intends to carry on asset management business, muѕt bе dulу registered with NAICOM bеfоrе еngаging in thе buѕinеѕѕ of Asset Mаnаgеmеnt. If аn entity wiѕhеѕ to рrоvidе services such аѕ asset-management оr ѕесuritiеѕ-trаding, it must bе rеgiѕtеrеd with thе Securities and Exchange Commission (SEC). Hence, to the extent that FinTech companies operate in any form of securities trading, they must obtain the NAICOM licence.
FinTech Solution-specific Regulations
FinTech companies have been licensed by the Central Bank of Nigeria (CBN) to provide the underlying infrastructure, end-to-end electronic payment solutions, systems and services to stakeholders within the financial services space.
The payments subsector remains the most active (and arguably) the most developed area of the FinTech sector in Nigeria. Sequel to the release of the Payments Systems Visions (PSV 2020) of the Central Bank of Nigeria in 2017, Nigeria has witnessed an increase in the number of mobile and electronic payments solutions. Indeed, under the 2018 Revised National Financial Inclusion Strategy, driving the adoption of cashless payment channels has been identified as one of the key ways to achieve financial inclusion in Nigeria.
However, to avoid abuse of this mode of transaction, the Central Bank of Nigeria has introduced some guidelines to regulate payment related services. The CBN regulates mobile payments pursuant to the CBN Guidelines on Mobile Money Services in Nigeria 2015 (Mobile Money Guidelines), the CBN Guidelines on Operations of Electronic Payment Channels in Nigeria, CBN Guidelines on International Money Transfer Services in Nigeria and other regulations.
Other participants in the payment space such as Switch Companies, Payments Terminal Service Provider and Card Scheme Providers are also regulated by the CBN.
The CBN on October 5, 2018 issued an Exposure Draft (ED) on the Guidelines for the Licensing and Regulation of Payment Service Banks in Nigeria. The essence of the regulation is to leverage on technology to promote financial inclusion and enhance access to financial services to the rural poor, low income earners and financially excluded of the society.
Based on this Exposure Draft, the Minimum Shareholder Capital for Payment Service Bank (PSB)
Apart from the above Minimum Shareholder Capital, there are also other fees involved in participating and this includes
N500,000 application fee and N2,000,000 licensing fee.
This is a clear indication that this will not give room for startups. Not many ambitious FinTech companies can presently meet the
N5 Billion Shareholder Fund.
Clearly, this is a significant amount, one that most “startups” cannot afford. This is a clear signal that the CBN is not particularly interested in startups filling this space. This leaves the space for the well-to-do or bourgeoisie of the society who have interest in financial services to venture into.
However, it must be noted that the Minimum Shareholder Capital though payable up front during application process, will be refunded (with interest, minus administrative expenses and taxes) after the application process is completed.
A globally emerging dimension to financial technology is in the use of cryptocurrencies. Currently, thеrе are no regulations or laws governing cryptocurrency activities in Nigeria. Although there is a huge surge in cryptocurrency trading or activities in Nigeria, there are expectations by the stakeholders in the field that they may soon be categorized as part of the emerging FinTech sector, but at this time, cryptocurrencies activities are still largely unregulated in Nigeria by any government agency, including the CBN. It is hoped that the CBN and the other Nigerian regulatory agencies may in the nearest future seek to regulate cryptocurrency activities or alternatively tow the line of the United States of America where cryptocurrencies are classified as personal valuable properties for the purpose of taxation.
Recommendations and Conclusion
The emergence of financial technology software and platforms have opened up a world of possibilities for all businesses. Large institutions like banks now have quicker access and deeper reach to the general public while small business have been able to conduct their businesses with ease. To this end, businesses can offer more services than ever and for a fraction of the price of what it would have cost before.
Some of provisions of the proposed law introduced by the Federal government to govern the industry could however stifle its growth. An example is the mandatory financial requirements for FinTech companies. Although FinTech companies occupy positions in the transactions-processing value chain, it needs to be emphasized that they are not banks; although they may engage in the business of banking (three core banking functions of receiving deposits, paying checks, or lending money). In view of this reality, a different type of risk management framework and regulatory oversight is required. The issue of capital adequacy is totally out of place and unwarranted.
The aim of any government regulation is to create a healthy environment for innovation and creativity not stifle it. While the sandbox being proposed is a good initiative, more needs to be done.
Efeomo Olotu Partner