Understanding the licensing regime of the Nigerian payments system
Users of digital payment in Nigeria have risen by 35%, the Central Bank of Nigeria (CBN) revealed lately. One factor for the burgeoning rate of payments transaction volume and value in Nigeria is the growing investment by banks, telcos and fintech companies in payment technology infrastructure. Many foreign companies also participate in the Nigeria payments ecosystem.
Local and foreign investors looking to provide certain payment services in Nigeria must hold one of the licences prescribed by the CBN, the apex regulator. Thus, this article serves to address some of the major payment licences in Nigeria vis-à-vis their permissible and non-permissible activities.
Licencing Regime for the Nigerian PaymentsSystem
This section presents a concise analysis of the various payment licences through the lenses of three key CBN payment instruments.
a. Circular on the New LicenceCategorisations for the Nigerian Payments Service Providers (NLCCircular)
For a long while, participants in the Nigeria payments system were doused with uncertainties as there were no clear regulations on their permissible activities and other grey areas. In a bid to quell the confusion, the CBN published the NLC Circular, setting out four different categories of payment activities, to wit:
· Switching and Processing: This activity involves routing (switching) and processing the exchange of value between financial service providers, merchants, their customers and other stakeholders. Permitted activities under this category include switching, card processing, transaction clearing, settlement agent services, non-bank acquiring services, and all activities permitted under Payment Solution Services.
· Mobile Money Operations: Mobile Money Operators (MMOs) allow users to save, receive and spend money from the convenience of a mobile phone. Permissible activities under this category include wallet creation, electronic money issuing, agent recruitment, non-bank acquiring services, card acquiring services, local and cross-border payments and remittances services, among others. However, MMOs are not permitted to grant loans, advances and guarantees, accept foreign currency deposits, deal in the foreign exchange market other than as permitted nor engage in insurance underwriting.
· Payment Solution Services (PSS): This broad category comprises Payment Solution Service Providers (PSSPs) Payment Terminal Service Providers (PTSPs) and Super-Agent. An institution looking to secure a PSS licence will have to select one or all of the three aforementioned licences. PSSPs serve to deploy payment gateways through online channels. PTSPs essentially engage in Point of Sale (POS) Terminal deployment, ownership and services. Super agents, on the other hand, are licenced companies that recruit agents for agency banking. Agency banking involves the provision of financial services within communities on behalf of banks.
· Regulatory Sandbox: This fourth category is a formal process for institutions to carry out live tests of new products, services, delivery channels, or business models in a controlled environment, with regulatory oversight, subject to appropriate conditions and safeguards.
b. Guidelines for Licensing and Regulation of Payments Service Holding Companies (PSHC Guidelines)
Among the provisions of the NLC Circularwas the requirement for companies desirous of operating switching and processing services alongside MMO services to set up a payment service holding company. Following this, theCBN issued the PSHC Guidelinesto regulate the implementation and operation of holding structures by payment and fintech companies in Nigeria.
A Payments Service Holding Company (PSHC) is a holding company with the principal objective of managing equity investments in two or more companies, which are Payments Service Providers. A PSHC is required to have a minimum of two subsidiaries, which should include at least an MMO and a switching company. PSHC are permitted to hold equities in financial and technological subsidiaries, provide broad policy direction, shared services and enter into service contracts with any of its subsidiaries. They are however not permitted to establish, divest or close any of their subsidiaries without the prior written approval of the CBN nor receive income from sources other than from those prescribed in the PSHC Guidelines.
c. Guidelines for Licensing and Regulating PSBs
In a recent financial inclusion report, it was revealed that only 45% of Nigeria’s adult population are banked. In a bid to lessen the financial exclusion rate particularly in rural communities, the CBN issued the Guidelines for Licensing and Regulating PSBs.PSBs are often subsidiaries of telecommunications companies (telcos) or large retail outlets that acquires a license to provide financial services by leveraging their existing telecommunications or distribution infrastructure. According to a 2020 survey by the Nigerian Communications Commission (NCC), telcos reach up to 98% coverage and are present in 773 local governments in the country. The sheer coverage of telcos suggests that their offering of minor banking especially in rural areas could further improve the country’s financial inclusion index. The more reason why the approval-in-principle recently received by MTN’s Momo and Airtel’sSmartcash is a welcome development.
PSBs are generally permitted to offer limited financial services to consumers in rural areas and unbanked locations within Nigeria. They may accept deposits from individuals and small businesses, carry out local and cross-border payments and remittances services and sale of foreign currency from inbound cross-border personal remittances to authorised foreign exchange dealers, issue debit and pre-paid cards, operate electronic wallets, render financial advisory services and also invest in Federal Government and CBN securities.
The various CBN instruments analysed above have helped to usher in some level of clarity to participants in the payment ecosystem, particularly concerning their permissible activities, among other things.
It is however noteworthy that lately, the licence processing period, especially regarding payments applications to the CBN, has become rather protracted. This could potentially discourage investors and companies looking to procure licences and kick off their operations within a good and predictable timeframe.
The apex regulator should also reconsider its stance on cryptocurrency and look to regulate the Nigerian crypto space. Some of the largest global foreign crypto payment companies consider Nigeria an attractive destination to offer their services, thus creating a clear path for the adoption of cryptocurrency could usher in a lucrative inflow from additional foreign direct investments (FDIs).
Fabusiwa is a corporate law and finance practitioner, as well as an advocate for career development. email@example.com