THE LEGAL HURDLES OF THE FINTECH INDUSTRY IN NIGERIA: THE CHALLENGES AND PROSPECTS

Without contradiction,  over the past decade, Financial Technology (FinTech) has dominated the landscape of the Nigerian market place, having carved a niche for itself by disrupting the traditional methods of conducting business transactions.

Many disruptions that have taken place within this terrain have most undoubtedly warmed their way into the hearts of many Nigerians and transformed the business landscape of Nigeria. Most certainly, many factors are directly and indirectly responsible for Nigeria’s climb by fifteen places in the World Bank’s ease of doing business as of 24th, October 20191 including the lack of hostility FinTech received in respect to the laws and policies which have been made in recent years as a newly brewing phenomenon.2 According to Frost and Sullivan,  due to the novelty, the phenomenon has brought in the financial ecosystem of Nigeria, and its ease of doing business, Nigeria’s expected revenue from Fintech is predicted to reach $543.3 million by 20223. Thus, it appears that from all indications, within Nigeria, FinTech has come to stay due to its impact on business growth and convenience in carrying out financial transactions.

The Nigerian FinTech ecosystem comprises of about 210-250 FinTech companies, three stakeholders, and four enablers and partners who have invested over $250 million since 2014. Of these Fintech companies, over 60% are clustered around payment and lending. The focus of these ones is to provide convenience by bridging the gap between the consumer and the service(s) he hopes to enjoy as well as that of the lender and the money he intends to borrow. The others are clustered around retail trading platforms, digital investment management and Life and personal insurance. This reflects the vast spectrum that FinTech covers in Nigeria as it contributes a large amount to consumer satisfaction across various industries.

 As one would imagine, there exist governmental bodies and regulating authorities4 governing these numerous areas with laws and policies ideal for the areas in which FinTech help to provide services and creates solutions. Ideally, the Government should be a reliable teammate for the private sector for ease and flexibility in doing business.   Thus,  in a bid to take even bigger strides,  whether the Nigerian environment will be a catalyst for FinTech to thrive even more or not will be dependent on the flexible laws and policies of the  Government which will be made within this decade.  Optimists say that with eyes on the future and with Nigeria’s prospects for taking a leading position in Africa’s FinTech market, the nation’s government is more conscious than ever before of the dire need to make laws which will propel FinTech at a geometric progression.5 No rate, no matter how fast, should be too alarming to birth innovative and cutting edge disruptions in the business environment which can radically be brought about by disruptive innovations like FinTech.

In observing the trajectory of FinTech’s birth, growth and progress especially in the payments and remittances subsector, what certainly stands out to be noticed is the huge role the Government played in creating a warm and receptive climate to host the nascent patterns which financial payments were taking around that time.

It would be recalled that Nigeria witnessed an increase in the mobile and electronic payments solutions after the Central Bank of Nigeria released the Payments Systems Visions 2020 (PSV 2020)  in 20076. The PSV 2020 greatly encouraged electronic payments methods. This novel approach was fostered through the adoption of Blockchain, Unstructured Supplementary Service Data (USSD) and the use of artificial intelligence via ChatBox. All these would act as convenient alternatives to the already existing Point Of Sale machines. 

Mobile lending also witnessed astronomical growth in Nigeria. Lending money has been made to be without difficulty with the advent of websites that make it easy to complete the lending process online without collateral.  Through these websites,  ease in retail lending to Small and Medium Enterprises (SMEs) has been achieved through machine learning and data science for credit analysis. Noteworthy is the fact that Small and Medium  Enterprises is a focus area that has become a major investment hub since intentional attention and efforts have been given to it by the government through its agencies especially the  Presidential Enabling Business Environment Committee7 thereby making a path for FinTech to contribute its quota to the supply of credit facilities. Worthy of note is the convenience and relief this has brought to the lending industry. For example, Kwikmoney, an online lending platform offers quick and instant loans on USSD platforms in partnership with banks and technology companies with an astronomical crash of interest rates from the traditional 30% to about 5 to 12.6 % (the interest rates vary and depend on the risks involved)

Irrespective of the warmth FinTech has received in the Nigerian business space through governmental policies and regulations. There has, no doubt, been some obstacles established by the laws which would no doubt discourage many FinTech startups. Focusing on the trajectory of  FinTech in relation to these legal hurdles and how they were scaled,  regards shall be made to the futuristic possibilities that lay in wait in the  FinTech industry is propelling more disruptive innovations in the Nigerian market in the face of futuristic ‘interruptions’ of unfriendly laws and policies.  Before discussing this in subsequent paragraphs, it should be borne in our minds without delay,  that three parties will be focused on in relation to the burden of unfriendly laws on FinTech and the ‘cycle of burden’ is shared between these three viz a viz the Consumers, the Banks and the Financial payment platforms such as Flutterwave  Opay, Apt Pay   PayStack etc.   

After the stride of FinTech in Point Of Sale (POS) machines, which gave Banks the opportunity to change the narrative of financial transactions in Nigeria by bridging the gap between Merchants and the consumer’s money without necessarily holding it, the seamless cardless transfers through mobile banking and mobile payments platforms like the Unstructured Supplementary Service Data (USSD)8 came on board. To flow with the gusto in the market place, certain laws were made which changed the ease, in a rather downward curve as far as the consumers were concerned, with which they would engage in financial transactions through the online platforms their Banks provided for them. Once upon a time,  the USSD shortcodes were gotten by the mobile money operators from the National Communications Commission after meeting the required guidelines. However, as of April 2017, the CBN released unfriendly regulations which were not convenient to the end consumers ( with the exception of the mobile network providers). The following are the things to note about the policy in relation to online banking services. Firstly, before approaching the NCC for USSD codes, banks were required to obtain a letter of no rejection from the CBN. Secondly, banks were required to put in place a proper message authentication mechanism to validate that requests are generated through the authentic users. The policy also set Real Time Gross Settlement Transfers (RTGS)9 at ₦550. In addition, there was to be a limit of ₦100,000 per customer in a day’s transaction. Apart from the ₦50 charge which individuals would be ‘coerced’ into paying on POS transactions above ₦1000  and the ₦4 on bank transfers using USSD codes, every individual’s ATM card will be maintained at $20(₦7,300) per annum.  

According to a  directive issued by the Federal Competition and Consumer Protection Commission, PoS transaction charges imposed by the CBN is to be borne by businesses10. Thus, the act of passing it on to individuals is tiresome and counter-productive. This quagmire, most analysts say, is as a result of the lack of clarity by the CBN on who should bear the grudge of the stamp duties between the customers and the businesses. 

In recent times, following the policy by the government to impose a 5% Value Added Tax (VAT) on all local online purchases with an ATM card, one legal hurdle that does not favour e-commerce platforms like Konga and Jumia is that their clientele will be attracted to purchase from non-Nigerian based e-commerce platforms such as Amazon, as transactions with non-Nigerian based online platforms do not attract a VAT of 5%.  The opinion of analysts and professionals in the services sector is that the Government should have instead supported such home-grown e-commerce platforms that rely heavily on FinTech by instead charging a 5% VAT  to foreign e-commerce platforms which have ‘significant economic presence in Nigeria. According to Omotolani Ashiru, Lead Internal Audit, Competence and Tax at UPS, the online purchase tax proposal appears “at odds with Nigeria’s long-held ambition for a cashless economy, given the possible effects of dissuading online purchases”.  This burden is also shared together with the Nigerian populace because it implies first that any increase in VAT prices would affect the poor people due to the consequent increase in the price of goods and services.

For FinTech companies who are registered as other Financial Institutions which are involved in lending, and those who are in the payment services sector, their activities are also regulated by the  CBN (especially by the CBN guidelines on Mobile Money services in Nigeria and the CBN guidelines on operations of Electronic payment channels in Nigeria) and the Nigerian Communications Commission. A lot of bureaucratic barriers are common with these regulating bodies as public-sector bodies have slowed and hampered the pace of growth in the FinTech sector. Regards should also be made to the CBN policy proposal ( drawn up in 2018) which require minimum shareholder funds ranging between $275,000 to $14 million before obtaining a license to start.11. Also, the licensing structure set up by the CBN includes a payment services platform super license with a minimum capital requirement of  ₦5 billion for a three year period, including a PSP license with a minimum capital base of ₦3 Billion for a three year period. This would put quite a lot of pressure, no doubt, on emerging FinTech companies who seek to raise offerings to penetrate the Nigerian market and have a competitive edge in the changing narrative of the Nigerian business space as raising quite a lot of funds in such a competitive environment could be a herculean task.

Existing FinTech companies such as Flutterwave and AptPay would together with this burdensome law, also have to deal with dispute resolution issues that arise when there is a glitch in the transfer of funds from one customer to another. In light of this, where an online payment services platform has been asked to refund money back to a merchant or a customer due to common claims such as issues of a bad or slow network, or where an erroneous transaction was made, but the receiving entity does not reverse such a credit, and such payment services platform refuses to because it could not verify the transaction or the glitch was not their fault, such a customer may report such to the Director of Consumer Protection of CBN, putting such organization in the risk of being watched.

With the new finance bill aforementioned which is in its early stages of implementation, the Nigerian Government, as explained by the Minister of Finance, will broaden the triggers for domestic taxation of income earned by non-resident companies in Nigeria through dependent agents and via online market platforms. According to Bill, digital businesses will be taxed if they have a significant economic presence in Nigeria. With the lack of clarity as to what ‘significant economic presence ‘ is, this may probably affect FinTech companies since they are online payments platforms which offer digital services to people. This will certainly mean that users of services on platforms like  FlutterWave, Opay and PayStack provide may soon discover a spike, perhaps in a few percentages of the price of the services which they offer to people.  One major probable outcry to this bill is in the use of FinTech for health. With health and FinTech now forming a duo in the market, the new digital tax bill may probably lead to a plunge of morale in the Health-FinTech sector as Hospitals who are already involved in innovative health services solutions through disruptive FinTech may also be taxed for saving lives.  This will also put the recuperating Agricultural Sector which is recording strides in its use of FinTech and Agric-Tech to provide simple solutions to farmers and their customers who deal with a wide span of products ( some of which incur tariffs). With the already existing tariffs and the new digital tax proposed by the Government, small-scale farmers who largely depend on tech-based platforms to sell their products would obviously have an increase in expenses as this tech-based middlemen-like platforms themselves would increase the prices of their services as a result of being taxed.

With the new CBN revised policy for electronic transactions which put the charges of all transfer below ₦5000 at ₦10, the erstwhile ubiquitous competitive advantage of FinTech companies like Opay who charge ₦10  per transaction fee has been taken away. This no doubt puts every organization in this class at an equally plain level as everyone except those who charge lower than ₦10 will be forced to make do with the new policy, no matter how unpleasurable.  Companies who charged above ₦10 per transaction may have to expand the customer base ( to supplement for the obvious losses that will emerge from the new policy) through novel approaches in their services. While this will no doubt encourage healthy competition in the market place, this puts existing  FinTech companies at a dangerous precipice since the environment is getting more stifling. Without fast and innovative approaches, these existing players may soon be poached over by foreign competitors with large tentacles and very promising pockets.

Not too long after this, the Lagos State Government banned the use of motorcycles, popularly known as Gokada which is the main forte of Opay’s O’Ride. This policy, no doubt, is an uncreative way of solving the transportation problems which currently plagues Lagos State to which solutions have been innovatively provided by FinTech companies such as Opay and Gokada. The effect of the policy is that a huge chunk of the FinTech dominated- transportation sector has been put to rubbles, making FinTech lose majorly in the road transport market.                                                             

Nonetheless, with these challenges put in place, the FinTech space is obviously galvanizing even much more energy than ever before as new prospects, challenges and opportunities are becoming apparent and new moves are being made to put more innovative trends into action in the marketplace.

For example, with the acquisition of a switching license by Team Apt, owners of AptPay, money can now be moved across the banks without putting their own money down. This puts the financial services platform on the same level as Tier-1 financial technology companies. Thus money can move from bank to bank through the AptPay platform without AptPay actually putting its own money down.  This will probably imply that other FinTech companies may soon move to acquire the same license to make their payment solutions also simpler. However, this does not pose an immediate threat to existing FinTech companies who are unable to clinch this license. What is likely to happen is that more bank to bank transactions will be made much simpler with an easily relatable user-friendly interface. 

Also, with the nascent approach of payments through the first of its kind WhatsApp banking by Access Bank,  there is likely to be a  slight decline in the use of already existing customer to customer means of payments through mobile phones using USSD codes. In this new decade,  ‘cost-effective’, time-saving familiar ‘terrain’ will most likely bring out the creative genius of FinTech as most platforms opt for this. Perhaps it is most likely that perhaps even mobile networks may soon emerge as players in the FinTech space by creating very bold payment services from bank to bank ( probably without the presence of the USSD charges) at ridiculous cost as part of a move to strengthen their hold in the FinTech market.

With the new crash of charges of ETPs by the CBN and the imposition of digital taxes by the Federal Government, it is quite noticeable that the Government is a very careful player in the Financial sector, especially with FinTech chanting a changing narrative.

Following the birth of a new decade, an obvious lesson that has been learnt and will still be learnt is that the line between people and their money is becoming seamless, almost invisible. With innovative disruptions taking place, laws and policies must likewise be made seamless and flexible as well to make it easier for FinTech to navigate into a wider audience reach.

Much more striking is the astronomic rate at which FinTech startups, unlike startups in any other field, are raising seed funds, while existing ones are increasing their capital base. For example, amongst any FinTech companies raising grants and capital, Nigerian FinTech company, Aella Credit, aimed at supporting financial inclusion in emerging markets by providing loans on its platforms, has raised  $10 million to expand its services to consumers. 

The surety of FinTech’s success in Nigeria has never been more footed at any time than it is now. FinTech will, in the next decade alter the entire business and enterprise culture in the next decade due to the innovative solutions which are springing up to enable MSME expansion and accelerate economic growth by aiding those at the lowest rung of the ladder in ease of doing business.

In conclusion, with this trajectory of the interplay of laws and policies together with FinTech, there is most certainly more in the FinTech space for all the three ‘burden sharers’ listed above even as the financial environment revolves more and more. The ability to therefore marshal and galvanize today’s  FinTech trends to birth more futuristic disruptions together with realistic and friendly laws will go a long way in opening up the Nigerian business space more to future investments and place Nigeria as Africa’s foremost investment hub.

FOOTNOTES

1  Nigeria’s position in the World Bank’s Ease of Doing Business References jumped from 146th to 131st  position. (See https://edition.cnn.com/2019/10/24/africa/nigeria-improves-in-world-bank-ranking/index.html )

2  The aspects of FinTech currently regulated in Nigeria includes digital payments, FinTech Testing, Data protection, cybersecurity and consumer protection. Some of these policies include CBN’s published Guidelines on The Use of Mobile Money Services released 2009; The CBN’s Guidelines on Operation of Electronic Payment Channels in Nigeria, released in 2016; The CBN’s draft Risk-based cybersecurity framework and Guidelines for Deposit Money Banks and payment services providers released in 2018.

3    Frost and Sullivan is a research and consulting firm which help clients accelerate growth. To see their reports and analysis on Nigeria’s FinTech industry, check https://ww2.frost.com>industry>fintech.

4. Examples of these supervising bodies which help to regulate FinTech organizations in Nigeria are The FinTech Association of Nigeria,  The Central Bank of          Nigeria, and the Nigerian Communications Commission

5.  Dr. Uche Olowu; President, Chartered Institute of Bankers in his appearance on The Business edition of TVC News Business Talk on January 7 2017. To have a full grasp of his analytical predictions, see https://www.tvcnews.tv-cibn-says-sector-remains-stable.   

6.    PSV 2020 was launched in March 2007 by the Central Bank of Nigeria. Through its implementation, the Banking community of Nigeria has witnessed a move from the dominancy of cash as a means of payment. See https://www.cbn.gov.ng understand the holistic approach  of the PSV 2020 by the CBN

7.  The Presidential Enabling Business Committee was inaugurated in July 2016 to oversee reforms that would reverse barriers and bureaucratic constraints to doing business. On February 2017, it launched a 60 day National Action Plan with a bid to introduce some reforms to deliver improvement in 7 of the key indicators in the World Bank’s ease of doing business. These reforms focused on automation of services to promote online procedures and reduce the prior manual way of business transactions.

8. Unstructured Supplementary Service Data (USSD), sometimes referred to as ‘Quick Codes’ or ‘Feature Codes’ is a communication protocol used by GSM cellular telephones to communicate with the mobile network computers. USSD can be used for WAP browsing, prepaid callback services and mobile-money services. Unlike short messages, USSD messages create a real-time connection using a USSD session. The connection remains open, allowing a two-way exchange of a sequence of data, making it more responsive than services that use SMS. (To know much more about the intricacies of the  USSD, the reader can be referred to https://en.wikipedia.org/wiki/unstructured_Supplementary_Service_Data)

9.     Real Time Gross Settlement Transfers is a fund transfer system that allows for the instantaneous transfer of money and/or securities. RTGS is the continuous process of settling payments on an individual order basis without netting debits with credits across the books of a Central Bank ( Sourced from https://www.investopedia.com/terms/r/rtgs/asp).

10. On Tuesday, December 24, 2019, the Federal Government through the Federal Competition and Consumer Protection Commission (FCCPC) stopped business owners from deducting a ₦50 service charge for payments made by customers using the POS machine. A statement by the FCCPC on the impasse caused to consumers was further given more light in a statement it released on December 26, 2019, where it stated that an assessment imposed on Merchants necessarily is a component of their cost of doing business and should not be passed on to the consumer except in limited circumstances. ( The reader is referred to http://fccpc.gov.ng/news-events/releases/2019/12/26/₦50-stamp-duty-pos-charge/ ).

11. See https://www.cbn.gov.ng/Out/2018/FPRD/Guidelines%2520for%2520the%licensing%2520and%2520regulation%2520of%2520of%2520payment%2520Services  to have a full view of the directive of CBN to that effect.

About the Author

Favour Popoola

Favour is a 500 level law student of Obafemi Awolowo University. He is ardent about the fusion of technology and law and every aspect of human living as well as how this  fusion changes human and corporate culture. In his free time, he enjoys reading and watching movies.