Ideally, fintech regulation in a country like Nigeria is meant to be seamless as the country is just transiting from a traditional method of payment cum transaction to a completely digital terrain. Unfortunately, there seems to be an underlying rift between the more established traditional banks and the new fintech entrants.
The financial technology regulation is more complicated than we think. It is presumed that the Central Bank of Nigeria (CBN) should gladly embrace innovative tech ideas from fintech startups while traditional banks get prepared for their own demise, right? But it is not particularly so!
The complexities behind fintech regulations in Nigeria and the unhealthy rivalry between traditional banks and fintech played out recently at a fintech roundtable organized by Banwo & Ighodalo, a Lagos-based law firm known for providing innovative, competent, cost-effective and well-timed legal solutions.
In attendance at the roundtable were two top executive officials from the CBN and the Securities and Exchange Commission (SEC), fielding questions from representatives of startups, big banks, and big fintech.
During the roundtable meeting, myriads of concerns were raised. However, here are critical concerns raised by fintechs at the roundtable:
Fintechs are very interested in the regulatory conversation. The most cynical of the lot sometimes believe regulations try to stiffen innovation and make it hard for them to disrupt the ecosystem for obvious reasons.
A major concern raised was the issue of licensing. Startups in the payments space don’t take licensing lightly – it’s a crucial stage every fintech must go through to be officially recognized by the regulatory bodies. But the time and cost of acquiring these licenses (sometimes) can be highly prohibitive for companies.
A representative of the fintech company – Eyowo (a financial app that provides simple, modern and reliable financial services to anyone with a phone number) said he understands that CBN wants fintech to show that they have the capacity and the resources, but that resource is just sitting with the CBN, it’s of no value to him. According to him, Eyowo recently renewed its payment license but had to lock down as much as ₦100 million to do so. The first time the company secured its license, it took about a year – which was obviously too long for an innovative tech startup.
In 2018, the CBN revealed a draft for a new payment license regime. While the actual license cost between ₦50,000 and ₦2 million, the capital requirements of ₦3 billion ($8.207 million) and ₦5 billion ($13.679 million) disenfranchise many startups.
Many don’t have the funding, and the ones that do would prefer to invest in their growth rather than a single license from the regulatory body. The license concern is also important because not all fintech needs one. Yet, as shared at the roundtable, banks ask fintech to get a CBN license before they can work with them.
Traditional banks are worried too! Here are some of their concerns as raised at the fintech roundtable meeting…
Olayinka Oni, the Chief Digital Officer for Sterling Bank explained that banks are heavily regulated as well. There is a hefty capital requirement of ₦25 billion and they are mandated to keep 25% of deposits as Cash Reserve Ratio (a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank); there’s the loan-to-deposit ratio that forces banks to take on more risky lending, among many others.
Banks have invested billions in their operations, from physical branches, technology, data centers, and staff. Fast-moving fintech represents a threat to these investments. Technology has made it easier for startups to emerge, gain traction and disrupt banks.
Cloud computing reduces their need for data centers; mobile devices allow them to go branchless and target more people; while open banking APIs drastically reduce the challenges of integrating with other financial services.
The Regulators had this to say to the fintech startups:
In his response, the assistant director at the Payment Management System of the CBN, Olubukola Akinwunmi explained that regulators are struggling to find a balance between supporting innovation and protecting the market. He took the audience down memory lane, recalling that in the mid-2000s, there were more technology companies enabling banks. The banks were at the forefront, technology companies were in the background.
He added that the present realities have changed. For instance, technology companies are saying they want to be at the forefront. They want to do exactly what banks are doing. This appears to be highly disruptive.
He advised fintech to partner with other industry players and leverage industry sandboxes to offset the cost and need for licenses.
While the roundtable might not have completely answered all the fintech questions, its goal is to shed more light on dark areas for up and coming innovative fintech startups.