The Central Bank of Nigeria (CBN’s) efforts to provide a level-playing field in digital banking and encourage innovations that have potential to boost its chances of achieving a cashless economy by 2020 have encountered a serious hurdle. This barrier was erected, unfortunately, by none other than the apex bank itself, through its latest policy statement on the issue of fintech licensing.
The release of the Circular on the Exposure Draft of New CBN Licensing Regime has many fintech startups and investors at odds regarding CBN’s real aspirations. If the new guideline was truly intended to encourage fintech startups to participate in bringing about a cashless economy and spur financial inclusion, then it may deserve a second review.
Fintech companies may be in the business of banking; receiving deposits, paying checks, or lending money, but the reality is they are not banks. They are fundamentally technology companies leveraging their core competence to plug loopholes in financial services delivery. In that sense, it would be in order for the CBN take a different approach in regulating them.
“They have placed a significant barrier to innovation as it is only those with deep pockets that can now apply for services. Another thing is, fintech is beyond just banking which they have no idea about,” an executive in one of the notable fintech companies who pleaded anonymity told BusinessDay. He echoes the sentiment of every fintech stakeholder who spoke to this writer.
The wording of the guideline from the beginning justifies their worry. It appears directed at mitigating perceived “risks” of fintech startups to banks, hence the “punitive-like” capital requirements for license acquisition.
Rahmon Ojukotola, an investment coach and director at Start Credit, told BusinessDay that it is likely the CBN did not meant for fintech startups to get Payment Service Provider (PSP) license.
“It is targeted mainly at telcos,” he pointed out. “The capital requirement of N5 billion is a huge barrier to entry for most fintechs. They even raised the capital requirements for microfinance unit license from N20 million to N200 million. All these moves are intended to reduce the amount of firms operating.”
The PSP also has a provision for mandatory three years tax returns which effectively rules out new startups.
The first paragraph of the guideline reads thus: “Financial Technology companies (Fintechs) have been evolving with innovative products which are gaining acceptance within the country and banks have been collaborating with these technology companies, in order to remain competitive…The emergence of FinTechs in the financial system accentuates the known risks within the financial system. In particular, the operational risk dynamics within the financial system is fast evolving with an increasing reliance in FinTech platforms and the growing level of acceptability of their services by both traditional financial service providers (Banks) and consumers of financial services (the public).”
The emergence of fintechs may pose a threat to banks, but stakeholders – including bank executives like Jim Ovia of Zenith Bank – acknowledge that their existence is good for competition and innovation in the financial industry.
Aloy Chife, managing partner and chief executive officer of a venture capital firm, Saana Capital, also highlighted the segmentation of PSP’s into three licensing categories, namely Switches, mobile money operators (MMOs) and Payment Solution Service Providers (PSSPs) and questioned why a PSP (Super licence holder) should be excluded from operating a Wallet, a functionality traditionally associated with retail payments switch operators.
“Are we saying that if PayPal, Stripe, etc were licensed by CBN they would not be able to create value on their platforms? Can you imagine PayPal without a Wallet? But we expect our Switches to compete globally with PayPal, Stripe, and other international switches. Why then hobble them in the name of regulation?” Chife asked in a Twitter tread.
The CBN may have a long-term view of the market according to Ojukotola, “The reason is so you have stronger, more capitalised firms that can withstand economic shocks and recessions without affecting the customers.”