Either with technology or vanilla traditional finance, operating within the finance space in Nigeria, as in every country, is heavily regulated. Providing financial services without a license can be a criminal offence for some and definitely attracts heavy sanctions for all. It’s pretty simple — playing with someone’s money is like playing with someone’s life — you have to prove you know how to do it. Even when you prove you can do it, sometimes failure occurs — it is for this reason that the Nigeria Deposit Insurance Corporation (NDIC) was established in 1988 to engender confidence in the Nigerian Banking System and guarantee payments to depositors, in case of imminent or actual suspension of payments by insured banks.
As finance evolves and is driven by technology, regulators are slowly catching on: the Central Bank of Nigeria (CBN) has licensed switches, processors, payment service providers, etc for ages. But when it comes to hard-core digital finance, the apex bank still has some distance to cover. The Securities and Exchange Commission (SEC), Nigeria’s apex capital market operator, has also spent the better part of its 41 years of existence licensing traditional Capital Market Operators (CMOs) until recently when it switched up to fintech licenses.
The power of technology for finance is evolving so fast that there now exists a significant gap between what’s possible (fintech) and what’s permissible (licensing). This has led to the war between regulation and innovation. Who’s going to win? Not to give up, start-ups have increasingly turned to twisting and contorting existing licenses to fit what they want to do with the hope of either escaping the regulatory hammer or getting some modicum of legality.
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Consider these scenarios.
Digital banking: This is where a bank is 100% branchless and banking is done with web and mobile apps. With the increasing number of digital banks, one would have expected the CBN to roll out corresponding digital banking regulations. Unfortunately, no such license exists. So digital banks buy into the existing unit Microfinance Banks (MFB) framework and then turn the new organization into a digital bank. Kuda and V Bank by the VFD Group are examples.
Investments: Investment techs such as Bamboo, Chaka, Rise Vest, and Trove have opened the eyes of Nigerians to the possibilities of snagging significant returns within the US capital market. As a result, in April 2021, the SEC issued a Major Amendments to the Securities and Exchange Commission Rules and Regulations, 2013 making significant changes to the provisions relating to Sub-Brokers which these companies fall under.
Payments (real-time transfer): The ability to move cash from bank to bank is core to payments. And to do payments, you have to be connected to core switches like Nigeria Inter-Bank Settlement System Plc (NIBSS). Participants to NIBSS Instant Payments (NIP) include commercial banks, Micro-Finance banks (MFBs), and Mobile Money Operators (MMOs). Fintechs connect to NIBBS through commercial banks.
Deposit-taking/savings: The ability to take cash deposits and investments from the general public is limited to banks, finance houses, CMOs, and insurance companies. But this cash-taking is core to the business model of many fintech companies such as PiggyVest and CowryWise. It more likely enhances their value offering by making it a one-stop-shop for financial services.
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Insurance: Cassava, AutoGenus and Aella App are popular InsureTechs in Nigeria, a space regulated by the National Insurance Commission (NAICOM) It was until 2018 that NAICOM provided the guideline for Microinsurance operation in Nigeria, thereby theoretically making tech-driven insurance permissible.
How alliances in fintech could be a disaster
While these alliances may have been good for the industry so far, it portends risks for the ecosystem. The reasons aren’t far-fetched: core pillars of financial stability are sometimes alien to the tech companies which then makes license repurposing a significant system risk ahead of everyone. But clamping down on tech companies is an even bigger risk as the action would stall Nigerian economic growth. The burden is therefore on the regulators to create new categories of license with the necessary regulatory guardrails. If this isn’t done, there could be a systemic failure, resulting from the quest of tech companies to survive through alliances.
Reviewing the financial and time cost required to acquire a license would encourage more players in the ecosystem, increased competition and innovation, employment potentials, simplification of financial services and financial inclusion, etc. Lest we forget, the Government makes a lot from taxes on transactions. In summary, license repurposing is an important consideration for growth in Nigeria’s financial services industry. Activities of licensed companies reviewed based on data made available to regulators could create a body of new licensing.
To read the exhaustive article, visit:https://www.linkedin.com/pulse/regulatory-license-repurposing-engine-fintech-nigeria
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