Thread by @Kenna_Partners

The fusion of technology with financial services continues to defragment many vital spects of financial services.
Join us as we host another discussion on the legal framework of Fintech transactions, tomorrow April 2, 5pm-6pm.
#Kennapartners #FintechFinance #Law

Today, we look to consider the regulatory framework for Fintech in Nigeria, particularly the adequacy or inadequacy of said regulatory framework.

Let us have your views on a controversial point, should Fintech even be regulated?

We established in our last discussion that there exists a causal role between banking access and the spread of industrial revolution in any given economy and that finance stimulates the process of industrialization by making capital available.

Financial inclusion has become the underlying strength of the rising growth and impetus of Fintech which basically is the digitalization of the financial services sector, where companies use technology and innovations to compete with traditional financial banking institutions.

Fintech offers financial services at affordable cost to individuals (unbanked inclusive) and businesses, irrespective of their net worth and size.

This has resulted in a monumental increase in the number of online sale transaction and bank transfers, so much so that in the year 2018 Fintech garnered approximately USD 86 million in funding in Nigeria.

With Fintech startups like Paystack and PiggyTech Global generating millions of dollars in revenue and funding, regulators in the financial services sector are beginning to pay close attention to the regulation of Fintech.

As a result of the dynamic and non-traditional nature of Fintech transactions and Fintech service providers, the existing regulatory framework for the financial services sector has always seemed inadequate to properly cater to the services and products offered by Fintech.

The Banks and Other Financial Institutions Act (BOFIA) which regulates banks and financial institutions, does not contemplate the nature of services currently being offered by Fintech service providers which are not licensed to operate as banks or as financial institutions.

While the BOFIA may apply to banks utilizing Fintech in the provision of services, it is uncertain if the BOFIA would apply to Fintech companies that do not require CBN’s permit to operate despite being involved in “banking services and business”.

In a bid to remedy this “anomaly”, the Central Bank of Nigeria (CBN) in 2009 released a Guideline on Mobile Money Services in Nigeria.

Under the Guidelines entities other than banks (excluding telecommunication companies), may offer mobile money services upon being licensed by the CBN on such terms and conditions as contained in the Guidelines.

The Guideline defines a mobile money operator as a body that offers services relating to mobile payment systems. This wide definition captures the activities of Fintech service providers such as Payments Terminal Service Providers.

The Guidelines were created pursuant to the CBN Act, 2007 which empowers the CBN to promote and facilitate the development of efficient and effective systems for the settlement of transactions, including the development of electronic payment systems.

The Guidelines impose a duty on Mobile Money Operators to ensure that the activation process of their platforms is not compromised or altered within their infrastructure, amongst other rules as to registration with the CBN.

The one disadvantage that stands out from the creation of the Guidelines is that the requirement of registration with the CBN may exclude Fintech startups not able to complete the registration process.

In another move towards ensuring the regulation of Fintech, the CBN in July 2018, released an Exposure Draft of the National Financial Inclusion Strategy Refresh.

In the document, one of the identified reasons why Nigeria has failed to meet its financial inclusion targets is the lack of an appropriately regulated level playing field that actively supports the growth of Fintech.

Other laws that seem to have some application to Fintech include the Federal Competition and Consumer Production Act, CBN’s Consumer Protection Framework and the National Information Technology Development Agency (NITDA) Guidelines on Data Protection.

The establishment of Payment Service Banks (entities that are not classified as Banks under the BOFIA) by the CBN Guidelines for Licensing and Regulation of Payment Service Banks is another notable move towards the regulation of Fintech by the CBN.

These Payment Service Banks are permitted to carry out payment and remittance services through various channels within Nigeria.

The registration of a Payment Service Bank with the CBN, however, is subject to the payment of registration fees by the entity seeking to register thus creating an entry barrier into this space.

What does Nigeria stand to gain from an increased regulation of Fintech transactions and Fintech service providers?

It would seem that a Fintech ecosystem not constrained by regulatory bottlenecks is potentially beneficial to the Nigerian economy given the guaranteed freedom to operate and innovate.

Without a robust regulatory framework, the low barriers of entry into Fintech will ensure that new players have an opportunity to build and provide innovative solutions to subsisting problems in the financial services sector without any hindrances.

The attendant risks of having aspects of the financial sector unregulated are however too great to ignore. It is thus important for regulators to find a balance between regulating Fintech on one hand, and adopting policies that ensure the growth of Fintech on the other hand.

This brings us to the end of our discussion for today! Please continue to share your thoughts on the topic with us.

Thank you.

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