The Financial Technology (Fintech) Landscape And Regulatory Framework In Nigeria

It is no news that technology is causing a major disruption to how financial services were hitherto rendered all over the world, and the Nigerian finance sector is not exempt from this disruption. The Financial Technology industry also known as the “FINTECH “industry comprises over two hundred Companies in Nigeria playing in this space, with the enormous potential of bringing about financial inclusion of individuals in remote areas all over the country. The birth of these FinTech Companies has resulted in a very substantial shift from conventional banking to a more technologically advanced means of offering financial services with the resultant effects of ease and efficiency.

FinTech is an economic industry comprising companies that utilize technology in the provision of financial services, encompassing a wide range of areas including financial literacy, wealth/asset management, lending, retail banking, fundraising, money transfer, payments, investment management, digital insurance and cryptocurrency.

It is imperative to state that although there is no specific Statute regulating FinTech in Nigeria, the Central Bank of Nigeria has over time issued several Guidelines to regulate the various operations of stakeholders in this industry. Some of these regulatory instruments include:

• Regulation for Direct Debit Scheme in Nigeria, 2018.

• Guidelines on International Money Transfer Services.

• Guidelines on International Mobile Money Remittance Service.

• Regulatory Framework for the Use of Unstructured Supplementary Service Data (USSD) in Nigeria, 2018.

• Guidelines on Operations of Electronic Payment Channels in Nigeria, 2016.

• Guideline on Mobile Money Services in Nigeria.

• Exposure Draft of new CBN Licensing Regime for Payment Service Providers, 2018.

• CBN Consumers Protection Framework for Banks and other Financial Institutions, 2016.

Other related regulations and Statute governing operations in the industry include:

• The Nigerian Data Protection Regulation 2019 issued by the National Information Technology Development Agency (NITDA) pursuant to its powers under the National Information Technology Development Act 2007.

• Nigerian Communications Commission Consumer Code of Practice Regulation issued by the Nigerian Communications Commission.

• The Cybercrime (Prohibition, Prevention) Act 2015

• The Risk-Based Cyber Security Framework and Guidelines for Deposit Money banks and Payment Services Providers.

This article will discuss the scope of each of these regulations within the legal framework operational in the industry.

Guideline on Mobile Money Services in Nigeria.

The Central Bank of Nigeria (CBN) Guideline on Mobile Money Services in Nigeria was issued in 2009 pursuant to the CBN’s mandate to promote a solid financial system in Nigeria. The primary aim of the Guideline on Mobile Money Services is to ensure a structured and orderly development of mobile money services in Nigeria. The guideline specifies the minimum technical and business requirements for the various participants engaged in mobile money services in Nigeria. It also seeks to promote the safety and effectiveness of mobile money services and to thereby enhance user confidence in such services.

The Guideline covers the two models of mobile money services in Nigeria. These models are:

• The Bank-Led Model: By this model, a bank or a consortium of banks, whether or not partnering with other approved organizations, deliver applicable services by leveraging on mobile payments system. In this model, the lead Initiator is a bank or a consortium of banks.
• The Non-Bank-Led Model: This model allows corporate organizations who are duly licensed by the CBN to offer mobile money services to customers.

Another aspect which is covered by the Guideline is the regulation of agent banking and agent banking relationships as it applies to Mobile Money Agent Network. Overall, the Guideline covers the business rules as it involves licensing, activation, transactions and rules of operations as well as the roles and responsibilities of participants.[1]

According to the Guideline, the participants in the mobile money industry are: Banks, Licensed Corporate Organizations, Infrastructure Providers, Mobile Network Operators and Consumers.[2]

Guidelines on Operations of Electronic Payment Channels in Nigeria.

 This Guideline was issued pursuant to the powers of the Central Bank of Nigeria to provide and facilitate the development of efficient and effective system for the settlement of transactions, including the development of electronic payment systems.

The Guidelines on Operations of Electronic Payment Channels in Nigeria regulates the activities of the Automated Teller Machines (ATM), specifying the standards on ATM technology, ATM Maintenance, ATM security and resolution of disputes emanating from use of card on an ATM.

It also regulates Point of Sale (POS) Card acceptance services with the aim of providing minimum standards and requirements for the operation of POS card acceptance services. The Guideline in this regard spells out the stakeholders in this sector, their roles, responsibilities and minimum standards of operation.

These Guideline supersedes the previous standards and Guidelines on ATM Operations in Nigeria and Guidelines on POS card acceptance services, earlier issued by the Central Bank of Nigeria.

The Guidelines also provides for monetary sanction or suspension of institutions that fail to comply with any of its provisions.

Regulatory Framework for the use of USSD for Financial Services in Nigeria.

 There has been an increase in the use of USSD technology by providers of mobile telephone-based financial services. The range of services includes money transfer, account balance and other enquires, account opening, airtime vending, bill payment and others.

This framework seeks to establish rules for implementing USSD for financial services in Nigeria and limits associated risk of.  The participants in this sector are:

1. Financial institutions
2. Mobile Money Operators.
3. Mobile Network Operators
4. Value Added Service Providers/Aggregators (Nigerian Communications Commissions Licensees)
5. Customers

By this framework, Mobile Money Operators are eligible for the issuance of USSD short code upon satisfying the requirements stipulated by the Nigerian Communications Commissions.

The framework stipulates basic requirements the preservation of the integrity of for USSD transactions. It further provides penalties for any infraction by stakeholders, with the Central Bank of Nigeria and/or the Nigerian Communications Commission as the regulators.

Guidelines on International Money Transfer Services

By this Guideline, the Central Bank of Nigeria seeks to achieve the following:Provide minimum standards and requirements for international money transfer services operations in Nigeria.

• Specify delivery channels for offering international money transfer services in a cost-effective manner.
• Provide an enabling environment for international money transfer services in the Nigerian economy.
• Specify minimum technical and business requirements for various participants in the international money transfer services industry in Nigeria.
• Provide broad guidelines for implementation of processes and flow of international money transfer services from inception to completion.

As a pre-requisite for providing international money transfer services in Nigeria, participants- individuals or institutions – must be duly licensed by the Central Bank of Nigeria. However, if such an individual or institution seeks to engage a foreign technical partner for global and even regional payments or money transfer platform, a letter of no objection must be obtained from the CBN, while the technical partner shall satisfy the necessary CBN requirements.

The Guidelines prohibit Deposit Money Banks from operating as money transfer services operators but they can act as agents.

By these Guidelines, the permissible operations of international money transfer include allowable inbound and outbound international money transfer transactions.[3] The transactions shall consist of the following activities:

• The acceptance of monies for the purpose of transmitting them to persons resident in Nigeria or another country.
• Cross-border personal money transfer services favouring foreign tourists visiting Nigeria would be allowed under this arrangement.
• The money transfer services shall target individual customers mainly and the transaction shall be on “person to person transfer” basis to safeguard against corporate customers that might structure their transactions into smaller amounts to circumvent the statutory reporting threshold.

The Guidelines also spell out activities that a money transfer operator must not engage in, while expressly stating that a money transfer operator is not allowed to accept deposit or lend to the public. The allowable limit of the outbound money transfer under the Guidelines is US$2,000 or its equivalent per transaction. This is however subject to periodic changes by the CBN. Inbound money transfers to Nigeria, on the other hand, shall only be disbursed to beneficiaries through bank accounts or mobile money wallets.

The Guidelines prohibit an operator from deliberately splitting a transaction into small amounts to avoid being reported under the provisions of the Anti- Money Laundry Act.

Overall, the Guidelines provide for the eligibility criteria for appointment as an agent, mode of engagement as an agent, disclosure requirements, charges, dispute resolution, remedial measures and sanctions.

Guidelines on International Mobile Money Remittance Service.

The scope of the Guidelines on International Mobile Money Remittance Service covers business rules, agent networks, roles and responsibilities of participants under the scheme

The primary objective of these Guidelines amongst other things, is to provide minimum standards and requirements for the operations of international funds remittance over mobile devices in Nigeria. The permissible activities according to the Guidelines shall consist of inbound and outbound transactions.

Inbound transactions are limited to the receipt of monies transmitted through phones and other hand-held devices to persons resident in Nigeria and abroad. Outbound transactions on the other hand include remittances from Nigerians towards family maintenance and in a bid to prevent any circumvention of the stipulated statutory threshold, the International Mobile Money Remittance Services (IMMRS) targets individual customers.

Under the Guidelines, an institution seeking to offer IMMR services must first obtain a valid approval upon satisfying the necessary requirements stipulated by the CBN.

Participants in this sector according to the guideline includes: Banks, Infrastructure providers, Mobile Network Operators, Consumers

Regulation for Direct Debit Scheme in Nigeria

Direct Debit is a cashless form of financial settlement that facilitates recurring payments. The Scheme allows the Originator of the instruction known as “Biller” to collect amounts due from a payer through the payer’s bank by leveraging an instruction or mandate provided by the payer.

The Direct Debit transaction normally involves five parties: The biller, the biller’s bank, the Payer, the Payer’s bank, the Payment Service provider.

The Regulation has stipulated some control mechanisms for participants in the scheme and for consumer protection. The direct debit transactions are in two parts; Fixed Direct Debit and Variable Direct Debit.

The Fixed Direct Debit allows the debit of fixed amounts from the payer’s account up to the maximum amount stated in the payer’s mandate. The Variable Direct Debit on the other hand, enables the debit of variable amounts from a payer’s account up to the maximum amount allowed in the payer’s mandate.

The regulation further mandates every Biller to execute an indemnity in favour of the Biller’s Bank and it also stipulates penalties for defaulting parties.

CBN Consumers Protection Framework for Banks and other Financial Institutions.

This framework seeks to guarantee high operational standards for efficient customer service delivery and generally to ensure that customers are not ill-treated or exploited by the financial system.

In very clear terms, the framework seeks to protect the assets of the customer, ensure timely treatment of customers’ complaints, ensure effective customer risk management, empower customers to make informed decisions and to outline the rights and responsibilities of consumers.

The framework contains the following benchmarks:

• Legal, Regulatory & Supervisory Structures
• Responsible Business Conduct
• Disclosure & Transparency
• Consumer Financial Education
• Fair Treatment
• Protection of Consumer Assets, Data & Privacy
• Complaints Handling & Redress
• Enforcement

Under this framework, consumers have a duty to report unethical practices, fraud or illegitimate charges and changes to interest rates which the customer is not notified of to the Central Bank.

Although, there are no exclusive incentive schemes for FinTech Companies in Nigeria. FinTech companies can take advantage of some of the general incentives available in the country, such as pioneer status, incentive for venture capital companies, reduction for research & development.

Conclusion

There is no gainsaying the fact that Nigeria has the potential of emerging as one of the most vibrant Fintech markets in the world due to its large population. However, it is important to highlight, that as a result of the several innovative product emanating from the various FinTech companies, the Central Bank of Nigeria by a Circular on The Exposure Draft of New CBN Licensing Regime for Payment Service Providers dated 15^th October 2018, proposing new licensing regime for all categories of payment service providers and FinTech companies. The proposed structure will help the banks in combating the emerging issues of cyber risk, management framework, capital adequacy and overall provide a better focused regulation and insight operations.

It is the writer’s opinion that governmental influence in the FinTech space in the form of robust and progressive laws such as the Regulatory Sandbox for FinTech Start-ups will help the industry thrive beyond its current state.

1. Agent banking is the process of providing banking services to bank customers through the use of agents, who are not employees of the bank.
2. These are organizations that provide infrastructures that enable switching, processing, and settlement facilities for mobile money services. Settlement here refers to Inter-Scheme Settlement.
3. These are organizations that provide infrastructures that enable switching, processing, and settlement facilities for mobile money services. Settlement here refers to Inter-Scheme Settlement.