The financial services industry in Nigeria is one sector that has always taken a proactive approach to its regulatory functions, especially in incorporating new technologies into the sector.
Banking in Nigeria has evolved from 1927, when the first indigenous bank -Industrial and Commercial Bank – was set up when customers needed to go to physical locations, have an account officer who helped to manage their accounts. To today they can make payments without carrying physical cash or putting a call through to their account officers. New payment technologies are now making it convenient and possible for consumers to pay by merely flashing their phones at a cashout machine.
In the new realities, it is the responsibility of every proactive regulator to provide a direction. The Central Bank of Nigeria (CBN) recently issued two documents including a Framework for Quick Response (QR) Code Payments and a Framework for Regulatory Sandbox Operations. With the regulation, the apex bank aims to standardise the payment transactions, enhance the use of a common QR code in retail payments as well as initiate practical, easier, more efficient, and safer payment transactions.
The frameworks for sandbox operations, in particular, will also enable the CBN stay abreast of innovations while promoting a safe, reliable, and efficient payments system to foster innovation without compromising on the delivery of its mandate.
Quick Response (QR) Code Payments
While the QR code feature may be nascent in Nigeria’s financial services, it is not new. First designed in Japan in 1994, a QR code is capable of storing lots of data. But no matter how much they contain, when scanned the QR code should allow the user to access information instantly – hence why it’s called a Quick Response code.
A QR code works in the same way as a barcode at the supermarket. It is a machine-scannable image that can instantly be read using a smartphone camera. Every QR code consists of a number of black squares and dots which represent certain pieces of information.
According to financial analysts, a QR code payment could lead to sizeable efficiency gains, more choice for consumers, and enhanced financial inclusion. However, the potentially disruptive growth of firms offering novel products and services poses new challenges for financial stability and consumer protection.
In response, policymakers around the world are creating a regulatory framework to foster innovation in the financial sector while keeping alert to emerging risks.
According to the CBN’s framework for QR in Nigeria, the codes can be used to present, capture and transmit payments information across payments infrastructure while the technology further enables the mobile channel to facilitate payments as well as presents another veritable avenue for promoting electronic payments for micro and small enterprises.
“The framework provides regulatory guidance for the operation of the scheme and aims to ensure the adoption of appropriate QR code standards for safe and efficient payments services in Nigeria,” the apex bank said.
According to the apex bank, the codes can be used to present, capture, and transmit payments information across payments infrastructure while the technology further enables the mobile channel to facilitate payments as well as presents another veritable avenue for promoting electronic payments for micro and small enterprises.
The framework provides regulatory guidance for the operation of the scheme and aims to ensure the adoption of appropriate QR code standards for safe and efficient payment services in Nigeria.
Benefits of QR code
According to analysts, a QR code comes with several benefits that can help both the service providers and its customers.
One of the biggest advantages of using QR codes, according to the analysts is that it facilitates instant payment.
“Making payment via QR codes is extremely quick as compared to other modes of payment,” a Lagos-based research analyst said, adding that “all a user has to do is simply open the QR code scan app, scan the QR code, and confirm to process the payment. Within a few seconds, the payments are made.”
Top-grade security is another highlighted by industry players as a benefit of QR. According to industry experts, making payments via QR codes is very secure. This is because the QR code is nothing but just a tool that is used to exchange information. Any data which is transferred via QR codes is encrypted thus making the payment fool-proof secure.
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Sandbox
A regulatory sandbox is a framework set up by a regulator that allows fintech firms and other innovators to carry out live experiments in a controlled environment under the supervision of a regulator. In the controlled space, incumbents and new startups can experiment with designs lying on the edge of or outside the existing regulatory framework.
A regulatory sandbox also creates an environment in which regulators are able to reduce future risks by working with fintech innovators by having a ring-side view of the potential problems.
Although the draft would still have to undergo public scrutiny, the CBN says it cannot be used to circumvent existing laws and regulations and is, therefore, not suitable for a proposed product, service, or solution that is already appropriately addressed under prevailing laws and regulations. It does not also recognise products already rejected by the regulators or the Nigerian government.
According to a report by CGAP, a global partnership of 34 organisations that seek to advance financial inclusion, there is evidence that regulatory sandboxes have become an important vehicle for regulatory monitoring and incremental change, sometimes bearing ties to financial inclusion efforts. With the CBN’s announcement, Nigeria’s regulatory sandbox joins the over 50 operational sandboxes in the world.
The CBN said the framework would enable it to stay abreast of innovations while promoting a safe, reliable, and efficient Payments System to foster innovation without compromising on the delivery of its mandate.
“This Framework, therefore, defines the establishment, rules, and operations of a Regulatory Sandbox for the Nigerian Payments System to promote effective competition, embrace new technology, encourage Financial Inclusion and improve customer experience, with a view to engendering public confidence in the Financial System,” it said.
Advantages of Sandbox
According to PwC, a sandbox acts as a layer between banks and their innovation initiatives and facilitates smooth collaboration between FinTech companies and incumbents.
“This enables banks and FinTech players to experiment with innovative financial products or services within a well-defined space and duration,” PwC said.
Additionally, with a sandbox, banks are relieved of the stress of dealing with multiple data requests (often the first step to solution development) as the sandbox serves as a ready reservoir of process-related information.
According to some research, many investors are attracted to markets with regulatory sandboxes as long as their primary goal remains aligning compliance and regulation with the rapid growth of fintech companies without drowning them in rules. In most cases, sandboxes bring about legal clarity by streamlining authorisation, occasionally accompanied or enabled by regulatory change.
In the CBN framework, participants are required to provide, among other things, an exit strategy should the test fail or be discontinued, and the next steps the firm would take if the test is successful.
There are no restrictions on transaction size as the sandbox is in a User Acceptance Testing (UAT) environment. A sandbox could also facilitate more partnerships between legacy and start-up companies.
