The onslaught of Nigerian government regulators on fintech startups is very worrisome considering the fact it is one of the most vibrant sectors driving the economy.
Investors from all over the world are taking advantage of digital finance, microcredit needs of Nigerians and the largely unbanked population to invest heavily in these startups.
Paystack, a wholly Nigerian startup was acquired by Stripe for over $200 million. Also, Flutterwave earlier this year raised a whopping $170 million to expand into North Africa. Cowrywise, Termii, and Afriex among many others having raised between 1m and 4 million dollars.
It is estimated that there are over 250 Fintech startups in Nigeria and Nigerian startups contributed more than 17% of the over $1 billion funds raised by African startups in 2020. In March alone, five Nigerian startups raised $202 million.
You see the dollars are rolling in not only for the fintech startups but the whole Nigerian tech landscape or ecosystem. Perhaps this is one of the reasons why the regulators are tightening the noose around these fintechs. If this continues, it may affect these dollars.
Additionally, the fintechs are giving banks a serious run for their money in the race to boost financial inclusion in Nigeria. They are innovative, fast and tech-driven. Another assumption is the banks alongside the CBN are trying to clip the drawn-out wings of the fintechs?
The CBN Governor is ‘unwelcoming of Fintechs’
Even the utterances of the CBN governor, Godwin Emefiele lends some credence to the aforementioned.
Emefiele at the investiture of Mr. Uche Messiah Olowu as the 20th President and Chairman of Council of the Chartered Institute of Bankers of Nigeria (CIBN) back in 2018 admitted that financial technology (fintech) companies pose big threats to the banking industry in the country.
The apex bank chief called on bankers in the country to address these threats to avoid crisis in the financial sector.
“In our industry, we have a common threat, the threat posed by fintech. I call on CIBN to up its ante. As far as advocacy is concerned, it should be your major focus, to find lasting solutions to the threats posed by fintech,” Mr Emefiele, who was represented at the event by his deputy in-charge of Economic Policy, Mr. Uche Nnanna, disclosed.
So are you surprised where all these regulatory attack is coming from?
The probable regulatory starting point: New license categorisations for the payments systems
The CBN approved a new license categorisation system for the Nigerian Payment System dated 9th December 2020. According to the CBN, the license categorisation is meant to help promote a strong and credible payment system and offers “clarity for new and existing market participants, given the significant evolution and innovation in the Nigerian payments system.”
According to the new guidelines, Payment Systems are now to operate within 4 broad categories.
a. Switching and Processing
b. Mobile Money Operations (MMOs)
c. Payment Solution Services (PSSs)
d. Regulatory Sandbox
It further clarified that “only MMOs are permitted to hold customer funds. Companies with licenses within any of the other categories are not permitted to hold customer funds,” meaning operators who offer Payment Solution Services cannot for any reason hold customer funds or deposits.
Well the intention of the CBN may be good. This is because it categorised the different fintechs and ensured that one does not offer all the services. Regardless, this was probably the beginning of the regulatory clampdown.
Follow-up regulations that may derail fintech achievements
A couple of weeks ago, CBN directed that all deposit money banks (DMBs), non-bank financial institutions (NBFIs), and other financial institutions (OFIs) should close accounts related to cryptocurrency transactions or exchanges. This adversely affected crypto startups like Buycoins Africa, Binance, Quidax, and NairaEx e.t.c.
It reminded the financial institutions of the circular dated January 12, 2017 that cautioned the financial institutions and the public of the risk associated with transactions in cryptocurrency. The circular stated that virtual currencies such as Bitcoins, Monero, Ripples, Litecoin, Dogecoin, Onecoin, e.t.c and other similar products were not legal tender in Nigeria, thus any bank or institution that transacts in such businesses did so at its own risk.
The Security and Exchange Commission (SEC) has warned that online investment and trading platforms should stop selling securities of foreign companies listed on Securities Exchanges outside Nigeria.
This means that companies like Bamboo, Trove, Chaka, Rise that currently offer subscribers the opportunity for Nigerians to buy foreign traded stocks like Apple, Facebook, Zoom e.t.c not listed on any Exchange registered in Nigeria, should stop henceforth.
SEC Nigeria is the apex regulatory institution of the Nigerian capital market supervised by the Federal Ministry of Finance. It has the dual responsibility of
- Regulating the capital market with a view to protecting investors; and
- Developing the capital market in order to enhance its allocative efficiency, and pave the way for a private sector led economy.
SEC also says in its statement released recently that Capital Market operators (CMOs) working with these online platforms should desist henceforth.
A couple of days after the Security and Exchange Commission (SEC) warned stock trading and investment platforms like Bamboo, Rise, Trove, and Chaka among others against selling securities of foreign companies listed on Securities Exchanges outside Nigeria, the CBN has now ordered non-banking institutions in the country from using the Bank Verification for validation of its customers.
This was made public via an email Paystack and non-banking institutions sent to its customers informing them about the new regulation.
What should fintechs do?
It’s easy to conclude that the Nigerian financial regulators are going after fintechs. But since they are operating in a harsh Nigerian business environment, they have no choice than to simply liase with the regulators to seek a common ground.
The only other option is for them to sue the regulators which may result in a witch-hunt typical of the Nigeria business environment. This is why the banks and CBN have a smooth relationship. When CBN says yes, it is yes, and when it says no, it’s no. This is exactly the same control the CBN wants with fintechs.
But is this the end of the regulatory clamp down? The simple answer is no! There is more to come.
