The Central Bank And The Regulators Of Fintech

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Thursday, November 15, 2018   09:15PM / By Dr. Aloy Chife   @ChifeDr


This is a submission in response to the Central Bank of Nigeria’s recently published circular on the Exposure Draft Of New CBN Licensing Regime (License Tiering) For Payment System Providers


The Submission

The new licensing regime appears to be focused on banks in relation to their relationship with Fintech companies and is not necessarily designed to provide a broader regulatory framework/enabling environment within which they could thrive


This intent is clearly spelt out in the document (page 1):

"will properly position the Bank to adequately address the emerging issues of FinTech with respect to cyber risks, risk management framework, capital adequacy, better focused regulation and oversight operations..."


Although FinTech companies occupy positions in the transactions-processing value chain but they’re not banks (inasmuch as the “business of banking” includes any of the three core banking functions of receiving deposits, paying checks, or lending money.


In view of this reality, a different type of risk management framework and regulatory oversight are required. The issue of capital adequacy is totally out of place and unwarranted.


This is an important point because the entire regulatory framework focuses on considerations customarily having to do with the business of banking. This would very much explain the actual requirements for operators (Page 3).


Consider the segmentation of PSPs into 3 licensing categories (essentially Switches, MMOs and PSSPs, with side dishes), why would a PSP (Super license holder) 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 wouldn’t be able to persist value on their platforms? (Even Starbucks operates a wallet for its 12m App/Card members with $1.2 billion loaded for future lattes/snacks).


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?


Yet, the most crucial aspect of the requirement remains the almost insurmountable financial hurdle it requires would be Fintech operators to jump! 5 Billion ($15m) and 3 Billion ($9m) minimum shareholder funds for PSP (Super) and PSP (Standard License) respectively!


Why is this requirement at all necessary? If the need is to protect the consumer (remember, FinTechs take positions in the transaction processing value chain only as pass through operators while banks settle/keep deposits) then the CBN should introduce a Bonding requirement.


That is precisely what obtains in the US and elsewhere! (and I am familiar with this process because our VC firm owns registered FinTech companies in the US and the EU).


It's quite simple: Let the CBN require FinTech companies to bond themselves out.


The US, EU? Precisely! It’s a global market and there’s nothing stopping Flutterwave from acquiring a merchant from New Zealand should it wish to do so!


We must keep in mind that FinTech companies are not banks- they are essentially Tech companies and Tech companies do not ordinarily operate with, or need such heavy balance sheets.


And I daresay it is contradictory to talk about innovation as did the document in the introductory section to wit, "Financial Technology companies (FinTechs) have been evolving with innovative products which are gaining acceptance within the country..." on the one hand.


..and on the other hand impose a practically insurmountable barrier to entry. Are we simply trying to protect interests that are already entrenched in the marketplace?



What about Start-ups?

That fresh graduate of Covenant University who happens to invent a new tokenization protocol to change retail payments as we know it?


What should we tell him? Go away? Yet, start-ups have been the engine room of all Tech innovations in the last 25-years!


The new licensing regime should aim to provide an open framework for accelerating the growth of FinTech companies, and should not in any way seek to impose a toll gate to hinder innovation and creativity.


Finally, the CBN needs to shorten the application cycle to a maximum of 3-6 months or less. That is precisely the average cycle for FinTech license in the U.S and the E.U (I have deposited template documents to support these processes with the CBN for guidance).


A Vignette: For our EU license, after the initial registration process in Estonia involving an Apostille, we were required to visit the Tallinn Police for the acquisition of biometric data. We have since collected our eCitizenship Green Card and free to operate in the EU.


Btw: the founders of TransferWise are native Estonians, a country of 1m population that still manages to lead Nigeria in FinTech, as does Kenya which Central Bank allowed SafariCom to experiment with mPesa, the most successful of its kind in the world.


The CBN's narrow regulatory focus elides a wider context, namely the crucial importance of FinTech to the national economy.


As a Mckinsey Report has correctly noted, "Digital payments and financial services are part of the vital infrastructure of a modern economy, enabling individuals, businesses, and governments to transact cheaply and efficiently."


Indeed, digital payments and digital finance have the potential to transform the lives and economic prospects of individuals, businesses, and government agencies across the country, boosting GDP and making the aspiration of financial inclusion a reality.


We must look at regulation differently.

  • Kenya Safaricom Q1 2018 Vol of MM $48B
  • Ghana Vol of MM transactions $33B PA
  • US recently opened core banking functions: receiving deposits/paying checks/lending money to Fintech
  • China: WechatPay and AliPay now dominant payment modes


I am presently in Accra and available to meet with you to discuss these important matters which relate directly to our national economy. Do let me know when you're available to meet.


And if capital requirements must be imposed, it must be affordable.


Using Malta as an example, minimum capital requirement is €20,000, €50,000 and, €125,000 depending on the category of Fintech license.


This is an EU license because once licensed, you can passport to the EU



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About Dr. Aloy Chife

Dr. Aloy Chife, Ph.D (Econs) Lond, was educated at the London School of Economics as a British Foreign and Commonwealth Office scholar, Dr Aloy Chife is the highest-ranking Nigerian-American to serve in an executive-level capacity at a Fortune 100 technology company in Silicon Valley, USA (Apple).


Dr Chife was responsible for the implementation of many successful systems currently operated by the Nigerian government including the Federal Road Safety Commission (National Drivers License), the Nigeria Immigration Service (e-Immigration project), the National Communications Commission (NCC) (telecomm users (Sim Card) registry) and the National Population Commission (NPopC) (National Births & Deaths Registry), etc. Much of the support for the implementation of these technology platforms have come from the International Finance Corporation (IFC) the private sector arm of the World Bank by way of investment and loan financing. Dr Chife has also exported software to countries beyond Africa (including Sri Lanka via a World Bank contract).


In addition to winning the Central Bank of Nigeria (CBN) “Best Entrepreneur Award”, Dr Chife has been featured in many international news articles and magazines including the Wall Street Journal, Foreign Affairs, and The Economist, etc. He has also served as ICT consultant to the Federal Government of Nigeria and as Advisor, Global Entrepreneurship Program (GEP) to the U.S. Department of State.


Dr Chife runs a venture capital firm in Princeton, NJ with portfolio companies located in the U.S. and Africa. Contact him on Twitter vide @ChifeDr



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