Tuesday, December 15, 2020 / 11:00AM / By Davidson Oturu, Partner, Aelex / Header Image Credit: Aelex
The Nigerian financial technology (fintech) sector has made major
strides over the last few years. However, one factor that has always befuddled
investors and key stakeholders has been the absence of a comprehensive
framework and licensing regime for fintechs in Nigeria.
What has been prevalent in the sector has been the introduction of
multiple regulations and guidelines which makes it difficult for industry
participants to easily identify the licences that apply to the activities they
intend to provide.
However, this is set to change as on 10th December 2020, the
Central Bank of Nigeria (CBN) issued a circular on "New License Categorisations
for the Nigerian Payments System" (NPS Circular).
Before delving into the contents of the NPS Circular, we will briefly
examine what payment systems are and why this circular may introduce some well
desired changes to the fintech landscape.
What are Payment Systems?
Payment systems are mechanisms that facilitate the clearing and
settlement of monetary and other financial transactions. They are used in lieu of
tendering cash in transactions and are a major service provided
by banks and other financial institutions.
They include
infrastructure consisting of institutions, instruments, rules, procedures
and standards
that are set up to
effect the transfer of monetary value between parties discharging mutual
obligations.
Typically, payment systems can be classified as traditional (physical)
and electronic payment systems (EPS). Traditional
payment systems are negotiable instruments (e.g cheques) and documentary credits
such as letter of credits.
Conversely,
EPS facilitate payments
for electronic transactions without any need to use cash or cheques. It has many forms such
as credit and debit cards, virtual cards, electronic
funds transfers, e-wallets, mobile payments, internet
banking, cryptocurrency,
and ecommerce transactions.
Other than the convenience, and relative safety, of utilising EPS, they also have a significant
number of economic benefits which include mobilising savings and reaching
out to the unbanked community. Furthermore, an EPS can track individual
spending to facilitate the design of products by banks
and fintechs.
Categories of licences under the NPS
Circular
The NPS Circular seems to target different areas in the EPS ecosystem as
payments
system licensing has been streamlined into four
broad categories, namely:
a. Switching and Processing
b. Mobile Money Operations (MMos)
c. Payment Solution Services (PSSs)
d. Regulatory Sandbox
Each category is considered below.
Switching and processing
A switching licence is regarded as one of the most valuable licences a
fintech can have in Nigeria.
Switching companies facilitate the exchange of value between financial
service providers, merchants, customers and other stakeholders. They route payment
transactions between multiple acquirers and payment service providers.
The NPS Circular provides that the
minimum
share capital
requirement for a Switching and Processing Company is two billion Naira (N2,000,000,000). The permissible activities for
switching companies are;
Switching
and Processing companies are now permitted to perform the activities covered under the Super-Agent, Payment
Terminal Service Provider (PTSP) and Payment Solutions Service Provider (PSSP) licences.
Mobile Money Operations (MMOs)
Mobile money is a
technology that allows customers to receive, store and spend money using a mobile
phone. MMOs develops and deploys financial services through mobile phones and mobile telephone networks.
Some popular MMOs include Opay, Paga, Konga Pay and Palm Pay.
The NPS Circular provides that the minimum share capital for MMOs is two billion Naira (N2,000,000,000). MMOs
are permitted to
issue electronic money (e-money), create and manage wallets, and manage pool
accounts. They are also permitted to carry out activities that
can be performed with
a
Super-Agent licence.
Payment Solution Services
Payment solution services provide bridging infrastructure, end-to-end
electronic payment solutions, systems and services to stakeholders within the
financial services space. Some of the operators
that provide payment solution services are usually integrated
into the card schemes and core banking
systems.
The NPS Circular provides that anyone who
obtains a Payment Solution Services (PSS) Licence would be entitled to carry
out activities of Super Agents, Payment Terminal Service Providers (PTSP) and
Payment Solutions Service Providers (PSSPs).
The NPS Circular then goes on to highlight
the permissible activities and minimum share capital of Super Agents, PTSPs and
PSSPs as follows:
The implication of this categorisation is
that applicants may choose to apply for PSS Licences which would enable them
carry out all or some of the activities that are permissible for holders of
Super-Agent, PTSP and PSSP Licences. Such companies must however have a minimum
share capital of N250,000,000 (two hundred and fifty million Naira).
Regulatory Sandbox
CBN released a Draft Framework for Regulatory
Sandbox Operations (the "Draft Framework") on June 23, 2020 that is to serve as a guide in controlling how new tech-based financial products/services are
launched into the Nigerian market.
In a circular that accompanied the Draft Framework, the CBN explained that the regulatory sandbox will serve as "a formal process for firms to conduct live tests of new, innovative products, services, delivery channels, or business models in a controlled environment, with regulatory oversight subject to appropriate conditions and safeguards."
Although CBN is yet to finalise the Draft Framework,
it appears that CBN is set to implement it as indicated in the NPS Circular.
Subsequently, any company that intends to participate in the regulatory sandbox
will apply to CBN with its products and solutions which will be reviewed.
Entities that are permitted to apply to participate in
the regulatory sandbox include licensed institutions, fintechs, innovators and
researchers. The CBN did not set a minimum share capital requirement for
companies that can apply to participate in the sandbox.
Other Notable Provisions in the Payment
Systems Circular
In addition to setting out the categories of licences, the CBN also set
out some additional matters that fintechs need to be aware of which include the
following:
1)
Only
MMOs are permitted to hold customer funds
Due
to the uncertainty surrounding the licensing of fintechs, holders of different
licences were set up in a way that enabled them to hold customers funds.
However,
with the introduction of the NPS Circular, it is now clear that other fintechs,
such as PSSPs, can no longer hold customers funds.
2)
Switching companies and MMOs can only operate under a
holding company structure
Fintechs
are now prohibited from combining switching and MMO activities under the same company. This is to prevent
comingling of activities under the same entity. However, they may operate as
different subsidiaries under a holding company and must have clearly delineated
activities.
3)
CBN Approval required for
collaborations between fintechs and financial institutions
Fintechs operating in payments system sphere must now
obtain the approval of the CBN before they can collaborate with other payment
companies, banks and other financial institutions with respect to products and
services.
4)
Restriction to permissible activities in the memorandum and articles of
association
Payment service providers must now ensure that the object clauses in their Memorandum and Articles of Association (MEMART) are limited to the permissible activities provided under their
licences. So, for instance, a PTSP will not be permitted to have objects in the
clause of its MEMART that imply it can operate as an MMO.
5)
No-objection from CBN
All fintechs that hold any of the categories of licences covered under
the NPS Circular, or that intend to acquire a new licence, are required to obtain a no-objection from the
Payments System Management Department of the CBN.
6) Compliance expectations for companies
Companies with new licensing requests, as
well as those that presently have Approvals-in-Principle from CBN, are required
to immediately comply with the provisions of the NPS Circular.
However, companies that have already been licensed
by CBN are expected to comply with the NPS circular no later than 30th June
2021.
Our Takeaway
The NPS Circular has implications
for fintechs and it is expected that there may be some changes in how fintechs
will be structured over the next few months. Some of these implications include
the following:
1)
with the loose licensing
regime that has existed, some fintechs have collaborated with banks in rolling
out new products and services and probably circumventing some of the regulatory
restrictions that exist under their licences.
However, with the requirement for fintechs to seek the approval of the
CBN before they can proceed with collaborations, CBN will be able to examine
the proposed products and services and determine if they are suitable for the
parties to operate with, taking into consideration the provisions of their
respective licences.
2)
The launch of the
regulatory sandbox means that innovators and fintechs can now apply to have
their new products and services tested in the sandbox environment.
With no share capital restrictions or limitations, it is indicative that
start-ups and entrepreneurs would be able to take advantage of this and have
their innovations reviewed by the CBN.
3)
The permissible services
that can be carried out by the different fintechs are now clearly identified
and so this reduces the ambiguity around what sort of activities each fintech
can undertake.
Furthermore, it is now clear that only MMOs can hold customers' funds
and they are prohibited from setting up in a way that leads to them comingling
their activities with switching services.
4)
The minimum share
capital requirement for the different fintechs have been set out in an explicit
manner. Consequently, industry participants can determine if they want to
recapitalise to acquire additional licences and meet up with the minimum share
capital requirement for the category of licence(s) they intend to acquire.
5) By obtaining a PSS Licence, a fintech can carry out a range of activities that could position it as a strong player in the ecosystem.
Conclusion
Although EPS such as cryptocurrency and digital currencies were not addressed, the introduction of the NPS Circular by the CBN is commendable and introduces a level of certainty to the fintech landscape in Nigeria.
It is therefore hopeful that CBN will remain proactive in monitoring these policies, and also introduce progressive regulations, as the fintech ecosystem remains attractive to investors and other stakeholders in the financial sector.
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