ABSTRACT
The objective of this paper is to enlighten the public of the emerging market known as fintech and the attempts by the authorities to create an enabling environment for smooth operations. Fintechs have made a foray into the Nigerian market with the aim of easing access to banking services through the use of electronic devices, specifically smartphones. Seeing as it is a relatively new venture in a sensitive industry, the need for regulations becomes the paramount concern of the Central Bank of Nigeria (CBN) and other relating agencies. The paper majorly contains the progress made so far in the bid to police the activities of these fintech while at the same time boosting their effectiveness and not to stifle their growth. The paper also outlines the intention to protect consumers through these regulations.
INTRODUCTION
Fintechs are basically computer programs and other technologies used to support or enable banking and financial services. The technology aims to compete with traditional financial methods in the delivery of financial services. It typically involves the use of smartphones for mobile banking, investing, borrowing services and cryptocurrency (Wikipedia)
On a broader scale, fintech can be said to be any innovative idea that improves financial service processes by proposing technological solutions according to different business situations, while the ideas could also lead to new business models. It is a breakthrough technology used to automate investments, insurance, trading, banking services and risk management.
In essence, fintech can be broadly considered to be any technological method used in easing the business of banking transactions for consumers by making all facets of banking easily accessible by way of mobile devices.
In Nigeria, fintech is majorly pushed by tech startups who aim to ease the business of banking by providing rudimentary software easily attainable on mobile devices. In fact, the lively entrance made by these tech startups into the Nigerian economy have grown so high that, according to The Economist: Intelligence Unit 2020 report, it is predicted that fintech revenue is estimated to reach 543 million US Dollars by 2022, all driven by smartphone usage amongst the unbanked populace of Nigeria.
These fintechs have also branched out from basic banking transactions to offering services in small loans, micro-investments, wealth management and insurance. Globally, according to KPMG’s The Pulse of Fintech published in July 2019, a boost in total investment from 51 billion US Dollars in 2017 to 120 billion US Dollars in 2019 has been observed. In the aforementioned global growth, Africa (and by extension, Nigeria) have not been left behind. According to ey.com’s “Africa Fintech”, the number of fintech companies in Africa grew at an annual rate of 24% between 2009 and 2019, fuelled by major proponents in the fintech markets in Nigeria, Kenya and South Africa.
It thus begs the question: What is responsible for the rapid grwoth of fintech in Nigeria and Africa as a whole. The Enhancing Innovation and Access (EFInA)’s Access to Financial Services in Nigeria 2018 survey opined that as of 2018, 37% of the adult population was unbanked. The reason being that traditional banks were unable to provide sufficient bank branches and ATMs. Raw statistics according to The World Bank in 2019 show that in comparison to other major players in Africa, Nigeria only had 4.3 bank branches for every 100,000 adult. This is in comparison to 5 bank branches for the same number of adults in Kenya, 8.6 branches in Ghana and 10.1 in South Africa.
FINTECH REGULATIONS IN NIGERIA
The history of fintech in Nigeria can be traced back to the year 2000 when Interswitch pioneered “the infrastructure to digitize the cash economy” by processing payments via the internet. Today, it is saddled with the responsibility of most of the tech undergrowth for Nigeria’s online banking system. Nowadays, these fintechs in Nigeria have diversified into small loans provisions through mobile lending for Small and Medium-sized Enterprise (SMEs), thus, allowing these businesses access to loans online, mostly with little or no capital.
It is pertinent to note that with the concept of technology companies wading into banking services, it raises the issue of proper regulations. The regulations would have to be promulgated in a manner meant to promote usage and continuous improvement of these technologies while protecting consumers as well.
Currently, there are no clear legislation specifically enacted for oversight over the conduct of fintechs in Nigeria, however there exist a myriad of regulations and policies meant to ensure that business and transactions conducted over the internet are subjected to proper standards. These regulations stem across easing entrance into the banking industry, ensuring consumer protection and overall profiteering for the government and the economy as a whole.
While it is generally understood that regulators can make or mar a business, it becomes necessary to balance creativity in the fintech space and consumer protection. It is for this reason that the CBN has tried to create an environment that fosters the growth of financial technology companies while protecting consumers from the problems inherent with internet transactions. Cyber fraud, identity theft and money-laundering are problems that have plagued the country in recent times. Thus, the anonymity involved in internet businesses and banking transactions, if not properly regulated, will only serve to foster these cyber crimes.
In 2007, the Payment System Vision 2020 provided by the CBN struck the official beginning of electronic payment in Nigeria. Its introduction, according to ICLG’s “Nigeria: Fintech 2019” marked an increase in mobile and electronic payment. With the need to drive fintechs into proper financial inclusion within the banking industry, the National Financial Inclusion Strategy was published in 2012. This white paper set the financial inclusion target at 80% by 2020 and upon revision in 2019, the target was adjusted to 95% by 2024. In another aggressive bid for financial inclusion, the CBN recently reduced charges in a number of banking services.
Furthermore, in september 2019, three Payment Services Bank licenses were approved, thus allowing financial entities to accept payments, deposits, handle the sale of foreign currencies and operate personal remittances and electronic wallets. ( The Economist: Intelligence Unit “State of Play: Fintech in Nigeria”)
In a bid to provide access to the numerous licenses required in payments and money transfers, these licenses were consolidated into three Payment Service Providers (PSP) licenses: PSP Super License, PSP Standard License and PSP Basic License. Each proffer varying combinations of activities including transactions clearing, switching, mobile money operations and agent recruitment and management.
Despite the above provisions, constraints still exists due to the plethora of regulations originating from different federal and local authorities like the CBN, the Stock Exchange Commission (SEC) and Nigerian Communications Commission. The minimum sum of 50 million naira required to obtain theses licenses may serve as hindrance for young emerging fintechs to access. Frost & Sullivan’s “Digital Market Overview: Nigeria” also highlights that the numerous money laundering rules may be a major constraint for smaller fintechs to comply with.
Another major concern examined by the federal authorities is the issue of identity theft of consumers gleaned from security breaches within weaker secured fintechs, hence the SEC launched a Financial Roadmap Committee (FRC) whose 2019 report identified areas of cyber security concerns inherent in the digital nature of fintechs which may expose consumers to identity theft and fraudulent transactions through phishing emails to unsuspecting consumers, chatbot hijacking and a host of other problems. In answer to these possibilities, the CBN’s cybersecurity framework established guidelines to payment service providers on cyber risk management procedures.
Also in tackling the issue of fintechs being unable to fully access consumer data because of the restrictions of the Nigeria Data Protection Regulation 2019, the FRC recommended that regulators establish data protection policies specifically gerrymandered for use by fintech companies and consumers.
THE SANDBOX APPROACH
In preparation for the future, practices of sandbox policies used in the United Kingdom and Singapore are being introduced here in Nigeria. A sandbox approach simply creates a closely controlled test environment where new fintech products are introduced and closely supervised by regulators. Recommendations from the FRC stipulate that all fintech startups be first set up under a general sandbox environment before being fully introduced into the market.
As of this writing, the move towards such a closely regulated sandbox environment was pioneered in December 2019 by the Financial Service Innovators who launched the Financial Service Innovators Sandbox supported by a multi-year grant amounting to the sum of 250 million naira. The organization backed by the Nigeria Inter-Bank Settlement System and the CBN is, according to Mr Musa Jimoh, the director, Payment System Management of the CBN, aimed at “Promoting diversification, promoting innovation through fintech companies…”. He goes further to state that that “That’s why we are pushing regulations that will create an enabling environment for fintech in Nigeria.”
CONCLUSION
The above regulations, recommendations, procedures and policies are a clear indication by the CBN and other regulatory authorities in providing a stable and inviting environment for fintechs to start up and grow in the Nigerian market while balancing this emerging system with protecting consumers against cyber fraud and the likes.
It is hoped that these methods will facilitate an efficient system for investment both foreign and local. A system meant to hold fintechs to a high stand of operation. However, none of these regulations, although quite remarkable, amount to an all-encompassing law for the fintech industry. It is for this reason that the CBN has proposed that a dedicated regulatory framework for fintechs, similar to that of the SEC’s FRC, be established. Upon completion of an in-depth examination of the fintech market, a competent law covering every facet of the fintech industry should follow.
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