The Nigeria Inter-Bank Settlement System (NIBSS) has expressed concern over unlicensed financial service entities assuming the role of deposit-taking institutions, signaling an enhanced regulatory focus in response to increased instances of fraud and customer verification challenges within the payment sector.
“Unlicensed financial service entities” refer to companies or entities that operate in the financial services sector without the necessary regulatory licenses or approvals from relevant financial authorities.
These entities may engage in activities such as accepting deposits, processing payments, or providing other financial services without adhering to the legal and regulatory frameworks set by the governing authorities.
NIBSS, in a memo to banks and fintechs, warned against listing companies with switching, payments processing, and superagent licenses as beneficiaries for bank transfers, clarifying that these are non-deposit-taking entities.
This advisory was explicitly to highlight that these entities lack the authority to accept deposits.
To simplify, NIBSS is urging traditional banks to disconnect these entities, particularly payment solution services primarily represented by fintechs, from their NIP (NIBSS Instant Payments) transfer outward portals, as their licensing does not authorize them to hold customer funds.
The memorandum specifically highlighted the pivotal role played by superagents, payment solution service providers (PSSPs), and switches in payment infrastructure and offline distribution, particularly in advancing financial inclusion.
The warning underscored observed violations of the Central Bank of Nigeria‘s (CBN) electronic payment guidelines by these entities.
Ngover Ihyembe-Nwankwo, the Executive Director of Business Development at NIBSS, pointed out that including such entities as beneficiaries contradicts CBN guidelines.
Consequently, financial institutions were directed to deactivate outward fund transfers into wallets operated by these entities.
Switching licenses empower fintechs to autonomously settle transactions outside real-time infrastructure, while superagent licenses, held by companies like Nomba and Quickteller Paypoint, foster financial inclusion by authorising retail agents to provide payment services.
In the context of regulations restricting superagent companies to rely on banks for POS devices and digital wallets, concerns have arisen due to some of these companies now offering deposit-taking services.
This has raised concern about potential illicit fund transfers and inadequate verification processes.
NIBSS reiterated that entities with switching, PSSP, and superagent licenses should not receive inflows, reiterating their limited licensing permissions.
This regulatory initiative aims to address concerns regarding these entities holding customer funds.
Anticipated as a strategic move to enhance oversight over illicit fund transfers and rectify weak verification processes, this regulatory action may impact various fintechs actively participating in consumer payment applications.
Unlicensed Fintech Incident Sparks NIBSS Intervention to Rebuild Consumer Trust
NIBSS’s recent memo was prompted by the rising cases of fraudulent activities in digital transactions, with reported instances of unlicensed entities posing as deposit-taking institutions.
According to the Central Bank of Nigeria (CBN), financial fraud cases increased by 35% in the last quarter, underscoring the urgency for regulatory interventions.
Recent cybersecurity breaches in major payment systems highlighted vulnerabilities in the financial ecosystem, has also compelled NIBSS to take pre-emptive measures.
A survey by a cybersecurity firm revealed a 50% surge in attempted cyberattacks on Nigerian financial institutions in the past six months.
The aftermath of a major fraud incident involving an unlicensed fintech saw a decline in consumer trust, prompting NIBSS to intervene.
A consumer sentiment survey indicated that 78% of respondents expressed concerns about the security of their digital transactions.
The growth of innovative fintech platforms brought convenience but also raised questions about regulatory adherence, prompting NIBSS to clarify licensing requirements.
The fintech sector in Nigeria received over $400 million in investments in the last year, emphasising the need for robust regulatory frameworks.
NIBSS aligning with global electronic payment guidelines follows international trends where regulators are tightening oversight on non-traditional financial players.
A report by the World Bank highlighted that cross-border financial transactions involving unlicensed entities are on the radar of international financial watchdogs.
