Introduction
Financial technology (fintech) is the use of technology to render financial services. Companies that render financial technology services are commonly known as fintech companies.
Fintech companies are prevalent in today's world for the ease they provide in rendering financial services such that a vast array of financial transactions can be performed within one's comfort zone without having to resort to the walls of a physical financial institution to perform such transactions. Examples of such transactions are payment services, digital asset offering and exchange, financial investments and credit services, amongst others.
A major challenge which start up fintech companies have been faced with in Nigeria is identifying a comprehensive framework which stipulates the licenses required for certain operations, the mini mum share capital for certain operations as well as permissible and prohibited activities.
This article identifies the licenses to be obtained, the minimum share capital as well as the restrictions to operate payment services in Nigeria.
Before delving into the crux of this article, it is important to note a general requirement of the law which is applicable to fintech companies.
This is the requirement of incorporation. Only companies incorporated in Nigeria and licensed by the Central Bank of Nigeria (CBN) are permit ted to conduct banking business whether digitally or physically1. Therefore, a fintech company which seeks to render banking services such as payment services, is required to be incorporated as a company in Nigeria2.
In recent times, certain companies like GoCash, Okash, EasyCredit, Easi Moni, KashKash, and Speedy Choice have been sanctioned for carrying out lending services without being incorporated in Nigeria3.
Payment System Services
A payment system, is a medium which facilitates the exchange of information between an issuing bank (payer) and a receiving bank (payee) for the purpose of paying and receiving money.
Fintech companies enjoy a lot of patronage in the payment service system as they fill in for the inadequacy of the traditional banks in certain areas. For instance, certain fintech companies such as Bitpesa charge lower fees for transfer compared to the banks. Fintech companies also offer a wider range of payment options as cryptocurrencies can be used to make payments on certain platforms and to certain entities.
They also facilitate payments in foreign currencies such as the dollar. Chipper Cash is an example of a fintech company which offers payment services in foreign currencies.
A payment service company is required to have a minimum capital of 100 million naira4.
For licensing purposes, payment system services are categorized according to their various operations under the New License Categorizations for the Nigerian Payments System 2020. The categories are:
- switching and processing,
- mobile money operations,
- payment solution services and
- regulatory sandbox.
While these categories will be discussed below, before delving into these payment categories it is pertinent to note that fintech companies which render both mobile money services and switching and processing services are required to set up a Payment Service Holding Company (PSHC), with the subsidiary company/companies carrying out each service5.
A PSHC is required to obtain a license for its operations6. PSHCs are required to first obtain a temporary license (Approval- In- Principle) after which they are required to obtain a permanent license in respect of their operations.
PSHC licenses are granted for an indefinite period of time or such period as the CBN deems necessary and are not transferable7. The CBN also seeks to ensure the optimal performance of PSHCs by restricting certain aspects of their activities.
These activities include holding of equities in their subsidiaries8, though they are however permitted to provide broad policy direction, shared services and/or enter into technical or management service contracts with any of their subsidiaries, with the prior written approval of the CBN, in respect of certain areas of their operation including; human resources services, risk management services, internal control services, compliance services, information and communication technology, legal services and facilities9.
They are also restricted from establishing, divesting and closing any of their subsidiaries, without the prior written approval of the CBN10. As regards their source of income, they are restricted from deriving or receiving income from sources other than dividend income from their subsidiaries/as sociates, income from shared services, interest earned from idle funds invested in government securities or placement with licensed financial institutions, patents, royalties and copyrights, profit on divestment from subsidiaries/associates and any other source as may be approved by the CBN11.
A PSHC is required to have a minimum paid up share capital which exceeds the minimum regulatory capital or the total equity of all its subsidiaries12. This is applicable where the PSHC owns 100 per cent of its subsidiaries. Where the PSHC owns less than 100 per cent of its subsidiaries, its mini mum paid-up capital should exceed the summation of its proportionate holding in its subsidiaries13.
Categorization of Payment System Services
Switching and Processing
Switching and processing involves the direction and control of payment transactions between service providers. It entails the verification and authorization of payments and facilitates the seamless integration of payment networks and providers into the payment systems.
Fintech companies which render switching and processing services are required to be licensed by the CBN14.
The minimum share capital for a switching and processing company is 2 billion naira15. Like every other operation carried out by fintech companies as discussed above, the activities of switching and processing companies are restricted. The operations of a switching and processing company is limited to card processing, transaction clearing and settlement agents services, non-bank acquiring services and the operations of Super-Agents, Payment Terminal Service Providers (PTSP) and Payment Solutions Service Providers (PSSP)16.
Thus, the switching and processing license has a wide coverage of operations as a holder is permit ted to carry out the operations of Super Agents, PTSPs, PSSPs amongst other operations.
Mobile Money Services
Mobile money service is basically the provision of banking services such as fund transfers and airtime purchases via mobile phones. Individual and corporate bank accounts are linked to mobile phones via mobile network service providers in order to render mobile money services.
Mobile Money Operators (MMOs) are key players in the finance industry in Nigeria today because of the huge role they play in financial inclusion such that the unbanked are easily banked by creating bank accounts using their mobile numbers. MMOs also render more effective financial services to their customers as they are able to mine data from the mobile devices of their customers which in turn enables them provide bespoke financial services to their customers. Some examples of mobile money service providers in Nigeria are commercial banks, Opay Digital Services and E- transact.
MMOs are required to have a capital of 2 billion naira and be licensed by the CBN to operate17. A licensing fee of N1,000,000.00 (One million naira) is required to be paid for the issuance of a final license18.
The operations of MMOs are restricted to wallet creation and management, e-money issuing, agent recruitment and management, pool account management, non-bank acquiring and card acquiring19.
Mobile Money Operators are not permitted to grant any form of loans, advances and guarantees, accept foreign currency deposits or deal in the foreign exchange market engage in insurance underwriting, accept any closed scheme electronic value (e.g. airtime) as a form of deposit or payment or establish any subsidiary20.
Amongst all payment service providers, only mobile money operators are permitted to hold customer funds21.
Payment Solution Services
Payment solution services are the same as payment services as they facilitate the exchange of information between an issuing bank (payer) and a receiving bank (payee) for the purpose of paying and receiving money. Therefore, for the purpose of licensing they have similar classified operations as other payment solution services discussed above22.
Payment Solution Service Providers (PSSP) are required to have a capital of Two hundred and fifty million naira (N250,000,000) and be licensed by the CBN to operate23.
Regulatory Sandbox Operations
A regulatory sandbox is a regulatory environment put in place to test financial technological innovations and business models in the Nigerian payment system in order to ensure that these innovations do not breach existent laws, infringe on the rights of consumers and that they are safe for use. These innovations are launched and tested under strict supervision and safety measures to ascertain whether they are in breach of any existing regulation, safe for use, infringing on the rights of individuals or against public policy or interest.
A regulatory sandbox is not a payment system but a medium through which payment systems are tested.
For a fintech company to be eligible to partake in the regulatory sandbox, the following requirements must be met24:
a The product, service or solution must be innovative with clear potential(s) to:
a Improve accessibility, customer choices, efficiency, security and quality in the provision of financial services
b Enhance the efficiency and effectiveness of Nigerian Financial Institutions risk management
c Address gaps in or open up new opportunities for financial benefits or investments in the Nigerian economy.
b The proposed project must be within a limited transaction (value and volume) for better risk management and mitigation and the limits shall not be exceeded during the testing period.
c The applicant must have conducted an adequate and appropriate assessment to demonstrate the usefulness and functionality of the product, service or solution and identified the associated risks which should be devoid of adverse effect to existing structures and consumer experience.
d The applicant has the necessary resources to support testing in the sandbox. This includes the required resources and expertise to mitigate and control potential risks and losses arising from offering of the product, service or solution.
e The applicant has a business plan to show that the product, service or solution can be successfully deployed after exit from the sandbox.
The regulatory sandbox provides certain benefits to participants, this includes the fact that they are availed with practical experience on the operation of their innovations. It also increases their access to capital as participation confers credibility and as such, investors are likely to invest in the business of a participant. In addition to this, participation ensures compliance with the laws and reduces the chances of any futuristic breach.
Upon completion of participation in the regulatory sandbox, where the CBN ascertains that the product, service or solution has unintended negative consequences for the public or the product fails the tests it was subjected to, the CBN may prohibit deployment of the product, service or solution into the market25. Successful participants are issued an Approval- In- Principle License for their operations.
Given the innovations which come up in the tech space, the need for a regulatory sandbox cannot be overemphasized.
Conclusion
Having identified the licenses, share capital and restrictions required for the operation of payment services, payment systems remain an area which would benefit a lot from fintech investment in Nigeria in order to provide better and wider payment services to the populace.
Footnotes
1. Section 2 of the Banks and Other Financial Institutions Act (BOFIA) 2020
2. Section 2 of BOFIA 2020
3. https://techcabal.com/2022/03/12/nigerian-govern ment-shuts-down-6-illegal-digital-loan-companies/
4. CBN Guidelines for Licensing and Regulation of Payments Service Holding Companies in Nigeria 2021
5. CBN Guidelines for Licensing and Regulation of Payments Service Holding Companies in Nigeria 2021
6. 2.2.2 of the CBN Guidelines for Licensing and Regulation of Payments Service Holding Companies in Nigeria 2021
7. 9.0 of the CBN Guidelines for Licensing and Regulation of Payments Service Holding Companies in Nigeria 2021
8. 5.1 of the CBN Guidelines for Licensing and Regulation of Payments Service Holding Companies in Nigeria 2021
9. 5.2 of the CBN Guidelines for Licensing and Regulation of Payments Service Holding Companies in Nigeria 2021
10. 6.0 of the CBN Guidelines for Licensing and Regulation of Payments Service Holding Companies in Nigeria 2021
11. 6.0 of the CBN Guidelines for Licensing and Regulation of Payments Service Holding Companies in Nigeria 2021
12. 7.1 of the CBN Guidelines for Licensing and Regulation of Payments Service Holding Companies in Nigeria 2021
13. 7.1 of the CBN Guidelines for Licensing and Regulation of Payments Service Holding Companies in Nigeria 2021
14. 2.2 of the CBN Guidelines on Transaction Switching in Nigeria 2016
15. New License Categorizations for the Nigerian Payments System 2020
16. New License Categorizations for the Nigerian Payments System 2020
17. New License Requirements for the Payment Systems 2021
18. New License Requirements for the Payment Systems 2021
19. 7.2.1 of the Guidelines on Mobile Money Services in Nigeria
20. Guidelines on Mobile Money Services in Nigeria 2021
21. Circular on the New License Categorization for the Nigerian Payment System 2020
22. New License Categorization for the Nigerian Payment System 2020
23. New License Categorization for the Nigerian Payment System 2020
24. 1.3 Framework for Regulatory Sandbox Operations 2020
25. 3.3 Framework for Regulatory Sandbox Operations 2020
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.