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Fintechs in Nigeria: The role of regulation

I am highly honoured to be invited to deliver the Keynote address to this quarterly meeting of the Association. I would like to first congratulate fintech Association of Nigeria for organising the event and thank them for this most unexpected invitation. This is more so coming soon after my recent retirement from the NDIC.

What is Fintech?
Even though I know that I am addressing such highly skilled professionals and operators of fintech companies, I will remind us of a broad definition of fintech as advanced by the Financial Stability Board (FSB). The Financial Stability Board’s (FSB) working definition of fintech is “technologically enabled financial innovation that could result in new business models, applications, processes, or products with an associated material effect on financial markets and institutions and the provision of financial services”.

However according to Prof. Arturo Bris, Professor of Finance at IMD
The term “fintech” is a misnomer, considering the fact that all of traditional finance is based on some sort of technology. To Bris the extent to which new technologies are being merged with existing financial tools to create new business models results in what he likes to call “fintech Innovation”.

Fintech empowers the financial services consumers, operators and regulators to a wide range of applications, options, services and information relatively cheaply and securely. For operators, it reduces cost of acquisition and retention of customers and more cost-effective regulatory/supervisory compliance. It facilitates financial inclusion, reduces cost of integration and interoperability, and in the process supervisors and regulators have more efficient oversight tools.

Read Also: How banks can navigate fintech firms rise

Banks and Fintech-based Services
Banking has witnessed continuous innovation in products offerings and services. Wide-area networks, ATMs and mobile banking are just a few examples of fintech services that have transformed banking. fintech has improved the user experience and increase banking efficiency and profitability.

Ladies and Gentlemen, permit me to share with you an article on a case study titled “How a world early Bank in Singapore (DBS) successfully reinvented itself” published by IMD fintech Newsletter. In the interview, Paul Cobban, Chief Data and Transformation Officer of the Bank stated:

“In 2009 DBs was a traditional bank that had a reputation of being slow, having poor customer service and average financial performance. Our subsequent transformation journey has been an iterative process and it is by looking back and talking to other banks that we have identified our success drivers”.

What are these success drivers? They include the following:

• Paint a vivid picture of the future and motivate your team to move towards it.
• In achieving this create a new business models through and toward digital thinking by getting business and technology teams to work more closely together.
• Digital transformation is huge and complex and can even be confusing. You should break the tasks into manageable chunks and encourage the whole organization to buy in.
• Employee buy in cannot succeed without creating a climate for change in the whole organization championed by empowered cross functional teams and not confined to a handful of innovators.
• The Bank eliminated 250 million customers hours and enhanced its customers satisfaction rating within a year.
• The Bank relied on their ability to create a positive employee culture and behaviours which made the transformation an organic process for enhancement of service delivery and customer satisfaction.

According to Enhancing Financial Innovation and Access (EFInA), as at Sept 2020, there were over 200 fintechs in Nigeria that were able to attract over USD$560 million in funding in the last 3 years. The sector with the highest fintech participation is Payments at 39%, followed by Lending at 28% and Savings at 11%. The report further stated that fintech activity accounted for only 1.25%1 of retail banking revenues in 2019. There is an apparent link between fintech and the banking system. Most fintech innovation depend on connecting to banks for access to consumer deposits for comparison by data aggregators, mobile wallets or other services.

CBN’s website reported a huge leap in fintech-based transactions. For instance, the volume of fintech channels like web and MMO transactions were 2.23 million transactions, each, in 2012 but rose to 50.8 and 87.1 million transactions in 2018.

Consumers Protection
Globally, financial services consumers have a growing array of services they can choose from. While some of these services can be relatively easy to understand and operate like ATM or mobile money, some can be complex (like digital currency) that are even educated and sophisticated consumers could find confusing. The complexity of fintech products requires a deep understanding by both consumers and regulators. For instance, how do consumers know what is actually going on in the background when they are accessing a financial App. There are issues regarding consumer rights and privileges that need serious thought as we talk about data aggregation and terms and conditions on Apps/websites.

• fintech Innovation, Banks etc should guarantee the protection of customers Data. Europe is guided by PSD2 regulation. National Information Technology Development Agency (NITDA) is trying to enforce the protection of customers Data in Nigeria.

• Section 37 of Nigeria’s 1999 constitution forms the foundation of data privacy rights and protection in Nigeria. Section 37 guarantees and protects the right of Nigerians to privacy with respect to their homes, correspondence, telephone conversations and telegraphic communications. It deems Privacy in this respect a fundamental right which is enforceable in a court of law when breached. Prior to the enactment of the cybercrimes (prohibition, prevention) law and the Nigeria Data Protection Regulation (NDPR), most cases of data privacy breaches were enforced under this section

The Cybercrimes (Prohibition, Prevention, etc.) Act 2015
• The Cybercrimes (Prohibition, Prevention, etc.) Act, Nigeria’s foremost law on cybercrimes criminalizes data privacy breaches. Generally, this Act prohibits, prevents and punishes cybercrimes in Nigeria. It prescribes that anyone or service provider in possession of any person’s personal data shall take appropriate measures to safeguard such data.

The Nigeria Data Protection Regulation (NDPR) 2019
• Albeit a subsidiary legislation, the NDPR is the major law specifically aimed at addressing data privacy and protection in Nigeria. The regulation was issued by the National Information Technology Development Agency (NITDA) in 2019 to comprehensively regulate and control the use of data in Nigeria. A copycat of the EU GDPR, the regulation touches on principles of data processing, the requirement of Data Compliance Officers, requirement of data subject’s consent for collecting and processing data, requirements for international transfers of data and rights of data subjects, inter alia. It also prescribes penalty for non-compliance with the regulation.
The National Information Technology Development Agency (NITDA) has issued the Nigeria Data Protection Regulation (NDPR). The objectives of the regulation are as follows

• To safeguard the rights of natural persons to data privacy;
• To foster safe conduct for transactions involving the exchange of Personal Data;
• To prevent manipulation of Personal Data; and
• To ensure that Nigerian businesses remain competitive in international trade through the safe-guards afforded by a sound data protection regulation.
The NITDA Regulation imposes an obligation on persons involved in data processing or control of data to develop security measures to protect data including safeguards against hackers, setting up firewalls, employing data encryption technologies and similar approaches.
• However, despite the robust legislation, we need to have a good internal controls to safeguard customers Data security.

Risk Management
Ladies and gentlemen, although fintech Innovation have provided enormous advantages, we have to consider the various risks, challenges and opportunities that are associated with fintech Innovation. These include the following:-
i. Integrity of Data in the Banking System
ii. Consumers protection in view of fraud/cyber-attacks and data privacy
iii. Inadequate consumer protection frameworks which will reinforce the confidence of customers.
iv. Need for a level playing field through regulation and supervision
v. Fostering Innovation while ensuring effective regulation.
vi. Meaningful engagement with market participants so that regulators/supervisors can stay abreast of the benefits of new technologies and quickly identify emerging risks.
vii. Other major challenge of the electronic banking is the existence of ‘Ponzi’ schemes and unregulated digital currencies. Ponzi schemes are illegal and fraudulent investment schemes. Unfortunately fintech innovations have made it easier for unsuspecting and greedy economic agents seeking obscene returns to easily lose their funds.

The Role of NDIC in Promoting Fintech Innovation
“How do we find the right balance between innovation and regulation”?
Regulation plays a significant role in managing systemic risk. It is also observed that in some instances, regulations promote fintech innovation to the detriment of incumbents and in other cases they stifle innovation and discourage new-entrants to the benefit of existing players. “All said regulation should support innovation as countries compete to develop conducive Digital Ecosystems”.
1. The NDIC as a deposit insurer provides a unique role of enhancing the fintech Innovation in Nigeria from several angles.
i. First, banks are one of the most important components of payment system and critical channels of enhancing economic development. Banking supervision is jointly carried out by both CBN and NDIC, while the CBN is the primary institution that regulates the Payments System. The CBN, complemented by NDIC, provides the necessary oversight of banks to ensure the efficiency and effectiveness of the payments system.
ii. Second, the NDIC as a risk minimizer enhances financial inclusion and encourages digital financial services through policy formulation and supervisory oversight. The Pass-Through Deposit Insurance framework creates a level playing field for mobile banking while risk-based premium system ensures banks adhere to highest risk management standards. The NDIC also ensures robust resolution of consumer complaints.

Regrettably, frauds and other financial crimes persist in electronic and traditional banking. The 2006 NDIC Act mandates all banks to submit statutory returns on frauds and forgeries to the NDIC. The NDIC investigates petitions and complaints received from bank customers and other stakeholders on such frauds. The number of reported cases of attempted frauds in the banking industry witnessed a substantial increase. A total of 52,754 fraud cases were reported in 2019, against 37,817 and 26,182 in 2018 and 2017, respectively. However, total actual loss declined from N15.15 billion in 2018 to N5.46 billion in 2019.

In view of the realization of the importance of fintech Innovation, the Board and Management of the NDIC undertook a study tour to South Korea and Taiwan, Deposit Insurance Corporations in 2019 to study their system of supervision and regulation of fintech Innovation. Consequently, on the 16th of October 2019, the Corporation established Innovation and fintech Unit in the Insurance and Surveillance Department (ISD) as well as an Inter Departmental Committee with the following responsibilities:

i. Identify disruptions and associated impact on Deposit Insurance;
ii. Articulate the use of fintech for Early Warning Signals (EWS) and Prompt Corrective Action (PCA);
iii. Identify current deposits for the purpose of Insurance Coverage;
iv. Identify Supervisory measures for digital banks;
v. Collaborate with other stakeholders on fintech Innovation Issues.

Digital Currencies Debate
Ladies and Gentlemen, we are very much aware of the controversies surrounding the incursion of Digital Currencies (DCs) into the payment system. The most well-known digital currency is Bitcoin, but other examples include LiteCoin, Ethereum and Ripple. Bitcoin is declared illegal in a few countries like Bengladesh but Japan passed a law categorizing it as a kind of prepaid payment instrument. Bitcoin is used globally for payments but without any legal protections for the participants. It should be noted that, there is no protection of refund rights or redress for users of digital currencies in case of any losses. Also consumers can lose all their monies due to theft and fraud. Digital currencies are also prone to abuse by criminals.

Digital Currencies are not recognized as legal tender by the CBN and therefore cannot be insured by the NDIC. Undoubtedly, the recognition or otherwise of such Digital currencies depend on the legal and regulatory regime of any country. It also reflects the level of the depth and sophistication of the financial system.

According to https://www.statista.com/statistics/1195753/bitcoin-trading-selected-countries/, in 2020, roughly 420 million U.S. dollars worth of Russian rubles were used to buy Bitcoin on an exchange, against 400 million U.S. dollars worth of Nigerian naira.

Bitcoin trading volume on online exchanges in various countries worldwide in 2020 (in million U.S. dollars)
https://www.statista.com/statistics/1195753/bitcoin-trading-selected-countries.

According to https://qz.com/africa/1947769/nigeria-is-the-second-largest-bitcoin-market-after-the-USA/ as of 1st September, 2020, “In the last five years, Nigeria has traded 60,215 bitcoins, valued at more than $566 million which, apart from the US, is the largest volume worldwide on Paxful, a leading peer-to-peer bitcoin marketplace.

Conclusion
In conclusion, Ladies and Gentlemen, as we all know the COVID-19 has had a devastating health and economic impact on the global economy and has threatened the stability of the global financial system. The importance of a stable global financial system to the health of the global economy cannot be over-emphasized. The damages that COVID-19 pandemic wreaked on global and national economies are monumental.

Your Companies have been enable to continuously provide crucial financial services during the pandemic without which our lives will be more miserable and challenging.

fintech Innovations are fast catching up globally. Happily we are not left behind. However, there is need for continued concerted efforts by both supervisors/regulators and operators to foster the development of fintech in Nigeria, through the provision of responsible financial services and products, good risk management, appropriate regulation and consumer protection.

Finally, it is increasingly being recognized that there is need to enhance the digital and financial skills of executives and business leaders with new finance tools to enable them have a good knowledge of the fintech Innovation landscape, hence the importance of continuous education for all of us cannot be overemphasized. I believe the fintech Association of Nigeria will continue to champion this through its numerous stakeholder engagements.

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