Regulation as a Tool for Improving the Development of Fintech in Nigeria

Introduction

Financial technology commonly referred to as FinTech or Fintech, is a burgeoning financial industry that applies technology and innovation to improve activities in finance. It challenges conventional financial markets established by traditional financial institutions, with the advent of smartphones for mobile banking, open banking, investing services and cryptocurrency amongst other innovations. Fintech services include Peer-to-Peer lending, Digital Insurance, Digital Banking, Online Stock trading, Crowdfunding and CrowdInvesting. It completes most of its activities via the internet. Financial technology has been used to automate insurance, trading and risk management. The Fintech industry is thriving globally and received $17.4 billion in investment in 2017. According to Ernest and Young’s Fintech Adoption Index, a third of consumers are using two or more Fintech services, with 84% of customers saying they are aware of FinTech (Compare to 62% in 2015). Fintech companies are gaining traction in the financial market. In achieving this, they are blurring boundaries between financial products and lifestyle propositions as well as defining new standards within financial services. Two core values transcend all FinTech firms: a customer-focused service and a willingness to apply technology in novel ways in order to deliver the seamless and personalized user experiences that customers increasingly expect. With the increased use of Fintech services such as money transfers and payments, it is projected that Fintech adoption could increase to 52% globally. Fintech firms are establishing themselves not only as key players in the financial market but also the benchmark for financial services.

Advent of Fintech in Nigeria

It is safe to say that the introduction of the Cashless Policy in 2012; first as a pilot scheme in Lagos, heralded the full-blown adoption of FinTech in Nigeria. This policy stipulated a “cash handling charge” on daily withdrawals that exceed N500, 000 for individuals and N3, 000,000 for corporate bodies. In 2013, it was extended to six other states; Kano, Rivers, Anambra, Abia, Ogun and Abuja. In 2014, it was extended nationwide. This innovation marked the introduction of electronic transfers in financial institutions. It is noteworthy that this was not the first intersection between finance and technology in Nigeria; the latter has always played a key role in the former and has continually brought about innovation and evolution. The deployment of Automated Teller Machines by banks in Nigeria at first in 1989 and its subsequent use by customers laid the current foundation for financial technology infrastructure. Between 2005 and 2006, there was an increased use of ATMs owing to aggressive roll out initiatives by Nigerian Banks, powered by Interswitch. This has been consolidated by increased adoption of Information and Communications Technology in the banking sector, which has led to creation of a competent market, improved basic operational and planning activities and better services.

In February 2014, the Central Bank of Nigeria through the Bankers’ Committee and in collaboration with all banks in Nigeria launched a centralized biometric identification system also known as Bank Verification Number (BVN). Today, all Peer-to-Peer lenders rely on BVNs alongside other information for its lending models. In 2015, Interswitch disclosed that their annual transaction volume was N4 trillion yearly. In Nigeria, Fintech has evolved and most commercial banks are now integrating Fintech into their operations in order to capture more of their online market. Several commercial banks have their USSD code agent banking to gain the tech space. The competition amongst the different financial institutions has led to new and simplified solutions for transfer and payment services. Customers can now transfer money, pay bills, purchase airtime and perform other transactions from the convenience of their mobile phones. According to the Electronic Payment Fact Sheet of the Nigerian Interbank Settlement Systems, transaction values of N1.1 trillion were processed through mobile money operators in Nigeria between January and December 2017. In 2016, SunTrust was launched as the sole Fintech company in the Nigeria. Its creation reflected an innovation in the financial technology sector. It had the domino effect of creation of an ecosystem of FinTech startups providing services across all segments to drive financial inclusion in Nigeria.

Amongst which are:

• • Flutterwave which is a payment Application Programming Interface created by Iyinoluwa Aboyeji and Olugbenga Agboola in 2016. It makes payment seamless for banks and businesses to process payments across Africa. This service allows consumers pay for services in their local currency; by integrating banks and other payment-service providers into its platform so businesses are freed of the expense and burden of such rigorous process. With Flutterwave, Uber has; been able to focus on the ride-sharing experience as the former manages verifying transactions and ensuring payouts occurred consistently.

• • Funds & Electronic Transfer Solutions Limited (Fetswallet) which is a Central Bank of Nigeria licensed mobile money operator. It has strong background in Banking, E-Commerce and Information, Communication, Technology. It enables the transfer of money from one point to another (person, business, government) using electronic value of money on basic mobile phones.

• • GoFundMe which is a crowdfunding app which pulls together a community of people from diverse places to fund a project, business or cause via the internet. It has created the platform for entrepreneurs to pitch ideas to likely investors. It offers the best secure payment encryption technology. Donations via online payments are safe, and the donee’s   money is securely stored until one is ready for withdrawal. Its viability has been tested most recently in Nigeria for school fee donations, medical donations, campaign donations amongst many others.

• • Nairabox which is a social e-wallet application that allows users to pay bills on the go, buy airtime, and buy movie tickets, concert tickets at their own convenience, from anywhere.

• • Paystack enables Nigerian businesses accept online payments from internet users from anywhere in the world using MasterCard, Visa and Verve cards.

• • Paga which is a leading payment and mobile money business founded in early 2009. It delivers innovative and universal access to financial services across Africa. Paga is a direct-to-consumer mobile payment service licensed by the CBN.

• • Piggybank.ng which is a saving platform that works directly with financial institutions. Moneysaving could be done periodically at minimal stress. The funds in the user’s account is stored and monitored by the company’s partner bank, UBA Nigeria Plc. It automates the moneysaving process and allows users withdraw money only at preset withdrawal dates.

• Remita which is an e-payment and e-collection solution on a single multi-bank platform. It was adopted by the Central Bank of Nigeria. It is the payment gateway for Federal Government funds generated from levies, taxes and tariffs. It also has HR and payroll functions which aid business administration. It is a safe platform, as it is packed with advanced security features such as a combination of hard token, soft token, proprietary authentication protocols etc. and does not suffer from any time or space restraint.

Currently, mobile payments, mobile lending and personal finance are the most prevalent Fintech businesses in Nigeria.

Cryptocurrency and BlockChain Technology

At this juncture, it is pertinent to take cognizance of the fact that Fintech had before now transcended systems that facilitate trading in actual currency denominations regulated by different politico-economic systems. With the introduction to cryptocurrency and BlockChain technology, a new frontier was opened in form of the emergence of currencies not tied to a political system and which is not regulated in the sense of contemporary currencies. There are also bitcoin exchanges and other bitcoin wallet providers in Nigeria.

Pursuant to a warning from the Central Bank of Nigeria, banks and other regulated financial institutions are prohibited from dealing in virtual currencies. The CBN has also proscribed virtual currencies as legal tender in Nigeria and that dealers or investors in virtual currencies have no legal protection in Nigeria.

Prospects for Financial Technology and Concerns in Nigeria

The prospects for FinTech, most especially in Nigeria cannot be overemphasized. Nigeria is a largely cash-driven economy, characterized by the surge in e-commerce and smartphone usage. The payment segment is one of the most attractive features of FinTech in Nigeria and it has become a major source of revenue for banks and other service providers. This is even fueled by the cashless policy initiative already in place in Nigeria. It is therefore imperative that financial technology is tapped into, in order to achieve the Central Bank of Nigeria’s National Financial Inclusion Strategy (NFIS) target of reducing financial exclusion to 20%.

Even prospects lie in the area of Blockchain technology for Nigeria. Although blockchain is in its early stages of adoption in Nigeria, it has been widely used since the late 2000s. In the Bitcoin Market Potential Index, Nigeria was ranked sixth most likely to adopt bitcoin out of a total 177 countries.

The introduction of cryptocurrency and blockchain technology created new regulatory concerns which ranked equal in terms of financial security. The first concern has been introduced above; cryptocurrency existed in a space outside regulatory powers, akin to some sort of internet for money in terms of being tucked away from world governments.  The second concern is that cryptocurrency and blockchain technology leaves no transactional trail making it perfect for trading illegal goods and well as money laundering. This makes it imperative for tailored regulatory cryptocurrency policies to be put in place; current federal government Fintech regulations are inadequate.

Existing Fintech Regulations in Nigeria

The area of payments is currently the most regulated in FinTech in Nigeria:

• • Lending Services: Pursuant to the Banks and other Financial Institutions Act, Fintech businesses that provide marketplace lending ought to be registered as a bank or Other Financial Institution (OFI). The Central Bank of Nigeria licenses banks and other OFIs. Also, the interest rate chargeable is determined by the Money Lenders Laws of each state.

• Payment Services:  The Central Bank of Nigeria’s Regulation for Bill Payments in Nigeria (2018) lays guidelines relating to payments on various payment channels and payment platforms that aim to integrate the payment side of commercial activity and merchant aggregators in Nigeria. In furtherance of powers conferred on it by sections 2(d) and 47(2) of the CBN Act, 2007; the Central Bank of Nigeria’s Guidelines on Operations of Electronic Payment Channels in Nigeria (2016) which was formulated; to promote a strong financial system, to issue directives for the modus operandi of payment transactions as well as the development and maintenance of electronic payment platform and systems. In addition, the Central Bank of Nigeria’s Guidelines on Mobile Money Services in Nigeria which sets the basis for the regulation of mobile money services offered at different levels and by the participants; to create an enabling environment for the orderly introduction and management of mobile money services in Nigeria. Based on terms and conditions set out in “Appendix 1” of the guideline, all mobile operators must be licensed by the Central Bank of Nigeria.

Under this guideline, the Central Bank of Nigeria identified two models for the implementation of mobile money services- bank led and non-Bank led. Under the former, banks act as lead initiators solely or in partnership with other approved organizations. In the latter, licensed corporate organizations act as lead initiators instead of banks and telcos. The exclusion of telcos from being licensed as mobile money operators is in sharp contrast to what obtains in other climes where mobile money is successful because Telcos are given a level playing field and they are able to leverage on their mobile base, integrated identity systems and distribution network to offer financial services. For example, in France, Orange acquired 65% of Groupama Banque in 2016 and in 2017 launched Orange Bank, a mobile-centric retail bank offering current and savings accounts, credit and payment products.

In this light, it is therefore imperative that the Central Bank of Nigeria reviews its policies precluding telcos from being licensed mobile operators, because they boast of a larger customer base than banks and they are a sure way of achieving the government’s vision for financial inclusion in 2020.

Recently, the Central Bank of Nigeria- in liaison with banking agents, telcos, retail chains, postal services, mobile money operators, FinTech companies- proposed draft guidelines for the creation of new set of financial institutions called Payment Service Banks. This is aimed at enhancing financial inclusion in the rural areas by increasing access to deposit products and payment services to small businesses, low-income households and other entities through high-volume, low-value transactions in a secured technologically driven environment. The guidelines also reveal the structure, permissible and non-permissible activities of the payment service banks as well as other requirements, amongst which are a non-refundable application fee of N500, 000, minimum capital of N5 billion and non-refundable licensing fee of N2million. This action however laudable begs the question as to whether it stifles the growth of FinTech startups, considering the large amount of capital stipulated.

While other FinTech segments in Nigeria suffer from scanty or inadequate legislation. For instance, crowdfunding in Nigeria has faced stifled growth owing to lack of tailored legislative frameworks. Currently in Nigeria, there is umbrella legislation instead- The Company and Allied Matters Act (CAMA) and the Investments and Securities Act (ISA). The latter restricts invitation of the public to investment. Hence, the result of the application of this Act is that the Securities and Exchange Commission has informally indicated that equity crowdfunding is prohibited. This illustrated the problems of regulating new models of financial services with existing rules with do not cater for innovations.  The risks associated with crowdfunding in Nigeria such as fundraising scams and exploitation emphasizes the dire need for regulatory policies. It might be appropriate that the Security and Exchange Commission creates its own rules regulating the activities of crowdfunding, especially activities involving equity-based crowdfunding or lending-based crowdfunding.

Exigency of Regulatory Policies for Cryptocurrency in Nigeria

In a Press Release by the Central Bank of Nigeria, in February 2018 titled “Virtual Currencies Not Legal Tender in Nigeria; it reiterated that further to its previous circular on January 12, 2017 to banks and other financial institutions on virtual currency operations in Nigeria, that cryptocurrency and exchanges such as NairaEx are not licensed or regulated by the Central Bank of Nigeria. It thereby means that dealers and investors in any kind of cryptocurrency in Nigeria are not protected by law. This was premised on the fact that virtual currencies are traded in exchange platforms that are unregulated, all over the world. Hence, customers may therefore lose their money without any legal redress. The CBN then disclaimed that virtual currencies are not legal tender in Nigeria. Although till present, only Japan recognizes cryptocurrency as legal tender.

It is imperative to note that Blockchain Technology is fast becoming a pervasive platform for conducting modern payments: It provides strong value propositions around security, digitalization and trust; and has created a wave of innovation that has the power to revolutionize business, trade and finance. It is a testing ground for monetary models and socio-economic theories that will serve as subject to scientific studies in years to come. If the gold-backed currency is maximized, coupled with the size of our economy, it could be a major means to boost economic growth. The success of cryptocurrencies as at today is a total market cap equating $740 billion, with more than 1400 different crypto-coins and tokens, and tens of thousands, possibly even millions of new jobs created. It is therefore important that Nigerian regulators understand the workings of blockchain technology and its usability for everyday life in order to harness the potential of blockchain technology.

In the United States of America, the Federal Reserve Bank is already considering the creation of its own centralized digital currency running on blockchain technology. A single well-defined and stable currency being used as a medium of exchange, unit of account and store of value is an essential component of a stable national economy. Bearing in mind the fears of the government such as threat of money laundering, taxation, regulation of foreign exchange trading and their legal status as securities, commodities or legal tenders; it is safe to say that these problems can be abated and the advantages far surpass the doubts. The US government has taken bold legislative steps to tackle tax evasion by cryptocurrency users. Also, there are regulatory bodies charged with overseeing the on- and off- exchange trades, in order to stem fraud or manipulation involving cryptocurrencies. Just recently, DJ Khaled and Floyd Mayweather were charged with cryptocurrency fraud by the Security and Exchange Commission. The CBN can allay its fears and borrow a leaf from these regulatory policies.

Conclusion

It is imperative to take cognizance of current world trends which are pointers to the fact that Fintech in Africa (Nigeria inclusive) will continue to expand however poses limited threat to the country’s well-established financial institutions. It is high time we made regulations to foster its development. Nigeria can borrow a cue from Kenya, whose Fintech sector is growing tremendously owing to Fintech-friendly regulations and the attendant innovations.