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Can Fintechs be Trusted in Nigeria? What Technology and Regulators Say

Fintechs would take over finance and what we should be focused on is how to utilize the opportunities provided by techs to the maximum, writes Abdulazeez Akintide Shittu

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Can Fintechs be Trusted in Nigeria
Author: Abdulazeez Akintide Shittu (LinkedIn) is a penultimate student of Law in the University of Ilorin with a keen interest in Law, Modern Technology, Fintech and regulations. He can be contacted via his email address [email protected]

From bank-apps to Mobile banks, payments service banks etc., there has been a lot going on in the field of fintech which leads to the indication that the sector is still a fast rising one.

Although, fintech is not new, the rise in discussions surrounding fintechs would make one who is not abreast with happenings in the tech world believe that fintech is a new thing.

Writers have discussed what Fintech is and how it is going to change the world of finance, the main crux of this article is to touch an area that is generally overlooked by the writers on and of fintech and that is the issue of trust.

And on this, we are going to look at it from two perspectives, one is trust by customers towards the new Fintech Products enough to make full use of these products and second is the level of trust the products have among the regulatory authorities to allow them accept their permeability.

What is Fintech?

When we talk of Fintech, we refer to all the payment systems that allow for people to make financial transaction without the need for physical and tangible cash.

From the use of debit and credit cards in making retail purchases to making of mobile transfers using bank apps; foreign exchange of currency within seconds using modern technology, investments and lending using apps or websites et cetera.

Summarily, any system that allows people to perform financial activities with the use of modern technology can be tagged as Fintech.

And with innovation comes new problems which call for solution; part of the problems that modern fintechs products are facing is the problem of knowing how to regulate them. Before adequate regulations can be made over a thing, the full potential of such thing has to be discovered and this is evident from the attitude of the Central bank of Nigeria to the emrgence of transactions using cryptocurrencies which are all but part of the Fintech ecosystem.

Although Fintechs include Digital banking and bill payment systems, payment service banks, digital exchanges and wallets, online stocks, investments and trading platforms the most widely used FinTech product is the Digital banking and payment system Almost all of us make transfers or have received money via a bank transfer at some point in time.

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Traditional Banks and Financial institutions all have their mobile apps these days, apart from the traditional banks we have countless online banks now that are solely Fintech business such as Kuda, PalmPay and Opay.

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They offer almost the same services as the normal banks but all these are done 90% electronically or through the internet.

How are these banks regulated? The Central Bank of Nigeria is the regulatory body that is charged with the responsibility of ensuring safety in the Nigerian financial ecosystem and this does not exclude Fintechs.

The Usage of Fintechs

For some consumers, these online banks are a no go area as they do not have any form of trust whatsoever in these systems, they will prefer to transact with banks that have physical branches all around the country in case they have complaints or issues.

One example was the issue a twitter user with the username @ayam_jamotech whose brother Olakunle Abdulgafar’s account was blocked by Kuda because they believed there was fraud in his transaction, he claims that his brother was a POS operator who uses the Kuda account to perform his business transactions. He had to make himself available in their Lagos branch to sort it out.

These issues died down as they were all solved, but there was not much publicity on the solutions like the problems. But what do we say about someone who lives far in the North?

So can Fintechs be trusted at all?

What should be noted is that these tech systems to a very large extent are trustworthy; customers should understand that all products put out to the market must comply with certain regulatory procedures before they can be used by the consumers as well as the countless technical security measures being put in place to make the products safe.

As posited earlier before these Fintechs can operate they must comply with the directives of the central bank since there are no definite regulations on operation of fintechs but there are certain categories of licensing which these fintechs can fit into based on the services that they offer.

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  • Microfinance Licence
  • Payment Service Banks Licence
  • Finance companies License.

1. Microfinance License:

Most online banking platforms apart from those owned by Deposit Money Banks are registered as Micro-finance Banks. Kuda, Eyowo, Mynt, Sparkle, et cetera. Transactions like deposit of money, providing loans …….There are three main categories of micro-finance banks when registering with the CBN;

i. The single branch Microfinance also called the UNIT MICROFINANCE BANK which can only have a single branch.

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And can only offer their services to the people of the location where their branch is situated. To register with the CBN, there must be a minimum paid up capital of N20, 000, 000. twenty million naira.

ii. State Microfinance, these category of micro-finance banks are only licensed to operate within a single state, they must have a minimum paid up capital of N100 million before operating.

iii. The last category are those that are permitted to offer their services to all the state of the federation, the national microfinance banks. 

They cannot transact with foreign currencies. There must have been a minimum paid up capital of N2 billion before they can be allowed to operate. They can have branches in all the states of the federation.

This is the license that is used by Fintechs like kuda, eyowo and all of the rest.

The CBN regulation that covers this was released in December 15, 2005 and it is the ‘Microfinance Policy, Regulatory and Supervisory Framework’ which has been reviewed with the latest review being that of 2020.

2. The payment service banks license allows its holder to accept deposits from their customers but they cannot issue loans to the customers.

The requirement to fulfil to be issued this license is 5 billion naira and the license is mostly issued to telecommunication companies, existing financial institutions and Fintech companies, etc.

The other conditions and requirements for registration of Payment Service Banks are contained in the CBN’s ‘Guidlines for Licensing and Regulation of Payment Service Banks in Nigeria’ which was revised on 27th August 2020. Section 14 of the regulation provides that all guidelines that covers electronic payment methods would apply as well to Payment Service Banks.

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3. The Finance Companies License allows its holder to perform different financial transactions but they cannot accept deposits, they can provide credit facilities like loans and asset management services, debt securitization and other forms of credit facilities to customers.

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How does the CBN know if these products are safe enough to trust them?

Before the CBN can issue any license to Fintechs, there would have been prior testing of the features of these products countless times to ascertain the level of security available in them.

There are regulatory sandboxes similar to what is obtainable in some advanced countries.

A framework which is set up in place by regulators to allow Fintech Startups to conduct live experiment under supervision is what is called a sandbox and we have regulations that apply to this from the CBN.

The CBN’s Framework for Regulatory Sandbox operations specify the conditions that must be followed by these startups in test driving their products before it can be said to comply with the acceptable standards.

The process for this can only be covered by an entire article.

Conclusively, customers should also be aware that all Fintechs have cyber security experts to oversee all the activities that go on while they are been used to this is to prevent security breaches, malware and more importantly hackers from sabotaging the system.

The world is evolving and we as people have to evolve with it, and no matter how much we try to deny the fact, we in no time would be fully into an era where almost everything we do would be fully Virtual; with the exception of eating, maybe.

However, technology is speedily taking over the world and we would all have to adapt.

Fintechs would take over finance and what we should be focused on is how to utilize the opportunities provided by techs to the maximum.

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The regulatory authorities especially the lawmakers should be abreast with these innovations and find ways to create an enabling environment for them.

There should also be enough sensitization among people / prospective customers to make them conversant with these innovations.

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