In a newly-surfaced draft policy document from the Central Bank of Nigeria (CBN), licensing requirements that could harm fintech businesses have come to the forefront of the regulatory conversation. In this document, the CBN requires Payments Service Providers (PSP) to have minimum shareholder funds ranging from $275,000 to $14 million before obtaining licenses. This blanket categorization and the incredibly high capital requirement are contentious aspects of the document.
Why did it happen?
The fintech space in Nigeria, and Africa to a larger extent, has experienced considerable growth over the past couple of years, ergo, more regulation was only a matter of time. From savings products to payment services, wallets and investment, the fintech space has been vibrant. The CBN acknowledges same in its policy document, saying fintech startups “have been evolving with innovative products” that have “gained acceptance” across the country. It recognises the growth, potential value and importance of innovation within the space.
However, in the same breath, the apex bank says the emergence of these tech-driven businesses “accentuates” the known risks within Nigeria’s financial system. The bank also goes further to say “an increasing reliance on” and “acceptance of” fintech platforms by banks and consumers means the operational risk dynamics within the space are “fast evolving”. Value and innovation aside, it also wants to keep it in check. This draft gives some perspective on how high the CBN is willing to set the bar to accomplish that.
Previously, the apex bank segmented businesses in the financial services sector into license pots like Payment Terminal Service Providers (PTSPs), Mobile Money Operators (MMOs), Payment Solutions Service Provider (PSSP) and switches. With this new policy, however, it is applying a blanket “Payments Service Providers (PSP)” tag, grouped all the previous categories together and tiered its licenses (and required minimum shareholder funds) accordingly.
Who does it affect?
It is unclear which startups the draft policy affects and in what ways it could affect them. From conversations with fintech startup founders and CEOs, there may not be much of an effect in the short term. Most of them currently operate on either a microfinance license, or an “Approval in Principle” setup which allows them certain sandbox privileges like testing product/market fit. Where startups worry that this policy may be problematic is down the line when they want to expand their product offerings or build out their services beyond the current scope.
As should have been obvious to the central bank, fintech companies are tech companies – not banks. They typically do not operate with or need such heavy balance sheets. Should the CBN stick to its guns with this licensing policy, it would mean these startups will have to raise at least $300,000 to be able to get a license. That is, fintech startups that are already operational will need to shore up their capital base, if they are to be licensed, and new businesses will need to have at least that amount before attempting to get a license. While the apex bank claims it is trying to protect consumers of these fintech products, it could end up hurting not just the startups but the consumers that already depend on them for financial services as well.
Also, the minimum shareholder fund requirement significantly raises the barrier of entry for new business and goes contrary to the sandbox model CBN Deputy Director of Payment Systems at the CBN, Musa Itopa Jimoh, mentioned in this interview with Proshare. With such high MSF requirements, innovation will be suffocated and existing players will struggle to scale.
What happens next?
According to two fintech startup entrepreneurs who spoke to Techcabal and asked not to be named, they are unsure of what this means for them at this time and have written to the apex bank for clarity. “With the MFB license we’re regulated deposit takers but we’ve reached out to them to see if this puts our building out process at risk,” said one of these entrepreneurs.
According to the second entrepreneur, fintech startups “are all working on a presentation to the apex bank,” particularly over concerns that the draft policy may be a cause for concern in building out features or service offerings.
Also, this document is yet to become law and stakeholders in the space will be engaging with the CBN to figure out a common ground before it does. There are already solutions like this being put forward. Bottom-line is: there is a lot of uncertainty at the moment about the fate of fintech businesses in Nigeria and most of it rides on this piece of regulation that could potentially set the pace for the future of innovation, or lack thereof, in financial technology in Nigeria.