The emergence of FinTech and e-commerce has been a welcome
change to global commercial transactions. Whilst FinTech makes it
easy for customers to pay bills, invest, save money, access
loans/other financial products at little or no additional cost,
e-commerce makes it easy for goods to be purchased online and
delivered to customers.
E-Commerce companies typically integrate their platforms with
FinTech to accept online payments. While this relationship has
proved beneficial to both parties, they have also had to suffer the
hurdles of running digital businesses in Nigeria.
Case Study
FinePay is a licensed FinTech startup based in Lagos, Nigeria.
On Friday, 6th July 2018, a Post No Debit instruction
("PND") was placed on its account with ABC Bank Ltd on
the instruction of the Nigerian Police Force. The account had more
than N500, 000, 000.00 (Five Hundred Million Naira).
The restriction from the Police was due to its investigation into
an alleged fraudulent transfer of N500, 000.00 (Five Hundred
Thousand Naira) from Mr. Charles Fred's bank account through
FinePay's platform.
FinePay was neither notified by its bank of the PND on its account
nor did the police seek any form of clarification from FinePay or
any of its representatives about the alleged fraudulent transfer
from Mr. Fred's account. FinePay only became aware of the PND
on Monday, 9th July 2018, when one of its merchants attempted to
conduct a transaction through its platform.
When FinePay made an inquiry with its bank, the bank advised
FinePay to call the number of the Police Officer handling the
matter. FinePay called the Police Officer and was asked to send its
representatives to come in for interrogation on Thursday, 12th July
2018 in Calabar, Cross River State. FinePay also received a formal
invitation to attend the interrogation.
It was at the interrogation that FinePay was then informed of the
alleged fraudulent transfer. The Police subsequently asked
FinePay's representative to write a Statement after which he
was granted bail. This was not supposed to be any more than an
inquiry. FinePay's representative asked the Police to withdraw
their PND instructions to the bank, but the Police refused, on the
ground that the PND could not be removed until after their
investigation.
The Police then asked FinePay's representative to return for
further interrogation on Thursday, 26th July 2018, and to present a
chart showing how its platform works, as well as a copy of its
certificate of incorporation, a copy of its Central Bank of Nigeria
(CBN) licence and Proof of Registration with the Special
Control Unit Against Money Laundering (SCUML).
In the course of providing financial solutions in a country trying
to increase financial inclusion, FinTech companies like FinePay
battle with numerous challenges such as the above scenario and
their success is continuously undermined by factors that impede the
growth of the space.
Key Challenges
FinTech has redefined financial services through technology,
speed, and simplifying transactions. It has led to the emergence of
new business models, products and solutions that are reshaping
financial services in Nigeria. It has influenced the approach of
banks to financial services. Nigerian banks now have
internet/mobile banking platforms while some are also leveraging
the social media to provide financial services to their
customers.
Since the introduction of the cashless
policy in 2012, the CBN has issued numerous guidelines that
have bolstered the Nigerian FinTech ecosystem. The Federal
Government also enacted the Cyber Crimes Act 2015 to combat
cybercrime, while the Electronic Transaction Bill and the Data
Protection Bill are currently before the National Assembly.
Notwithstanding the above, these regulations and laws do not
adequately address the numerous challenges the ecosystem faces. We
have provided details of some of the challenges the industry face
below.
1. Chargebacks
A chargeback is a payment returned to a credit/debit card after a customer debates the validity of an online purchase. Although it may occur as a result of an error from an e-commerce merchant or the unauthorized use of debit/credit card information, there are instances where the customer that received the purchased product denies receiving it or claims to have returned the product without being refunded (friendly fraud). In the scenario described in the paragraph above, the CBN mandates the merchant to refund the payment to the customer even where the transaction was a friendly fraud. As such, no regulation currently exists that protects e-commerce merchants and or FinTech companies from friendly fraud. Depending on the amount involved, the merchant and the FinTech company have to reach a commercial decision on loss sharing.
2. Fraud
The CBN mandates financial institutions to put security mechanisms in place towards protecting their system against fraud. FinTech companies are prone to cyber fraud, and their systems are consistently under attack. It has been estimated that Nigerian financial institutions lost approximately N159, 000, 000, 000.00 (One Hundred and Fifty-Nine Billion Naira) to cyber fraud between 2000 and 2013. Nigeria is ranked third globally in cybercrimes.
3. Barrier to Entry
Under the Guidelines for Mobile Money Services in Nigeria, anyone applying for a mobile money license from the CBN must provide evidence of having a minimum of N2, 000, 000, 000.00 (Two Billion Naira) as its shareholders' funds, or roughly $7, 000, 000 (Seven Million Dollars) and serves as a huge discouragement to FinTech startups from applying for a mobile money licence.
4. Law Enforcement Agencies' Ignorance of e-Commerce and FinTech
Law enforcement agencies rarely have the knowledge of how e-Commerce and or FinTech platforms work. Consequently, this tends to affect the course of their investigating cyber fraud committed on a payment platform. As you would have seen from the FinePay scenario, their first step typically is to instruct the merchant and or FinTech company's bankers to place a lien on the company's account, regardless of the amount involved in the alleged crime or in the respective merchant/Fintech company's account with the bank.
5. Unclear Regulation
The CBN Guidelines for Mobile Money Services in Nigeria stipulate that mobile money services can either be Bank-Led or Non-Bank Led. The Bank-Led model refers to a Bank and or its consortium acting as lead initiator, while Non-Bank Led refers to a company licensed by the CBN acting as lead initiator. The Non-Bank Led model allows a CBN licensed company to deliver mobile money services to its customers. The licensed mobile money operators under the Non-Bank Led model often integrate their platforms with other financial solutions provider (as customers) to onboard merchants or use their respective platforms to process payments. Although, the guideline permits the integration, the CBN requires all financial solution providers to be licensed. The CBN often fines the licensed mobile money operators for integrating its platform with an unlicensed financial solutions provider.
6. Lack of Trust
Despite the innovative products offered by FinTech companies, customers prefer to conduct financial transactions with Nigerian banks. The brick and mortar banks are considered safer than FinTech platforms, despite being faster. In the same vein, some customers do not trust e-commerce companies. They are skeptical about the quality of goods, return policies and data security. Some e-Commerce companies have introduced Pay-On-Delivery (POD) to encourage customers to order online and pay when the goods are delivered. However, the POD has drawbacks: customers may refuse to pay/collect the goods, which could affect profit since time, human resources, and other expenses would have been incurred in the delivery of the goods.
Conclusion
The challenges described above as well as the FinePay scenario
are typical of what e-commerce merchants and FinTech companies
alike go through in doing business on a daily basis.
It goes without saying that the ecosystem provides a unique
opportunity to promote financial inclusion in the country whilst
enabling the CBN reach its goal of reducing the percentage of
unbanked persons from 46 percent to 20 percent by year 2020.
To achieve this however, it is important for the CBN to realize
that in its role regulating the space, it must continuously review
it policies towards enabling the ecosystem blossom. Our law
enforcement agencies, particularly the Police also need a thorough
understanding of how FinTech and e-commerce work in order to enable
them conduct investigations properly and not stifle business.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.