The Nigerian fintech space has remained the most dominant segment of the evolving tech ecosystem in the country. While 2020 was a defining moment for fintech firms as they led the African continent in attracting the most investment in the entire tech ecosystem, regulations continue to evolve – often not living up to expectations of players in the space.
Fintech firms in the country operate with a mishmash of regulatory licenses including Mobile Money Operators (MMOs), Payment Terminal Service Providers (PTSPs); Super Agents; and Microfinance Banks among others. As their names differ so does the process and the rules that govern them. The degree of impact on the firms also differ. Many of them also evolve much too quickly sometimes catching the firms unawares.
“Most micro-lenders have adopted the MFB licences and it seems to have been a good temporary solution, but now the government has increased the requirements making them so high that it’ll be very difficult for most to acquire as they are still startups,” said an executive of an online lending firm who spoke on condition of anonymity.
Also, because most of the licences are legacy licences there tend to be an overlap of functions. This allows some firms who acquired the licences to do similar things to a certain extent with others with much costlier licences.
This has often led to the call for a single digital banking licence.
But some experts say the peculiarities of the fintech space makes the existence of different licences more practicable.
Adedeji Olowe, CEO of Trium, a venture capital firm, told BusinessDay that one licence would not be ideal because every firm in the space provides different products and services. For instance, Carbon is a full digital bank whereas Quickcheck offers micro-lending services.
“Fintech involves many things: payments processing, settlements, savings and wallets services, investment advisory, foreign exchange services, remittance services, cryptocurrency processing, etc. It would be impracticable to create one single licensing regime to capture the intricate nuances of all these services,” Enyioma Madubuike, legal advisor at KoraPay told BusinessDay.
The different licences still have something in common – payment processing. All the existing fintech product or technology has to be layered over some type of payment processing. Madubuike says this is possible because there is an elaborate licensing process with stringent requirements for enabling payment processing services in Nigeria and for good reason.
“Payment processing is the backbone of any financial system especially in the digital age and the infrastructure built for payment processing should be closely guarded to avoid a collapse of the system,” he said.
But not every country agrees that the licences should be separate. The digital bank licence in Hong Kong, for instance, is exactly the same as for the commercial banks. There are no different classes of licences or restriction on activities based on whether it is a fintech, commercial bank or consortium that holds the license. The licences banks are not subject to a test period before they become fully operating banks. There is also no restriction and cap on taking deposits and banks can launch any retail banking products and services, even join the existing ATM networks.
Simon Loong, founder and group CEO of WeLab says the Hong Kong model benefits one of which is to allow banks, through an agreement between Hong Kong and Beijing to access the 70 million population of the Guangdong-Hong Kong-Macau Greater Bay Area, a megalopolis consisting of nine cities and two special administrative regions in south China.
Aside from Hong Kong, Canada and the UK have also created a payments services licence that captures all fintech and payment-related services which may include for example an eCommerce platform seeking to offer its users savings or wallet services.
“The advantage is that it allows for innovation in an environment of light-touch regulations. It should be noted however that this encompassing payments services license will not obviate the need for regulation on specific fintech services like investment advisory and crypto processing,” Enyioma said.
The Nigerian fintech space consists of about 210 startups that are mostly small in terms of size and valuation compared to startups in Hong Kong and China.
“I think the way they factor in ‘tiers’ in the regular banking sector can also apply to the fintech sector, different tiers based on our offerings and capabilities, more tailored to our size and services offered, instead of lumping us all as fintech,” said a founder who pleaded anonymous to speak freely. “The government themselves have said the term is relatively broad, so why not break it down into groups.”
Currently, if you want to develop a consumer fintech product you must at least consider either obtaining a payment Solution Services Provider (PSSP) license from the CBN or you partner with a licensed party to bring your service to the customer.
“This means that one way or the other, Fintech services indirectly comply with minimum regulatory requirements. On the other hand, this drives up the costs of business for Fintechs who either have to cough up huge amounts for the payments services license or share revenue with licensed providers,” Enyioma said.
Salami Abolore, founder and CEO of Riby Finance, a fintech platform for cooperatives and trade groups existing licencing has brought some structure into the fintech space. However, there is a need for faster and fully online regulatory clearance and licencing with less bureaucracy.
“Enforcement is where Regulators should do the work. Licensing should be simpler and easier to encourage participation,” Abolore said.