THE EVOLVING PRACTICE OF FINANCIAL TECHNOLOGY AND ITS REGULATION IN NIGERIA
The Financial industry is one of the most important industries in existence as they carry out financial duties and obligations necessary for the smooth running of human lives.
The banking industry, being a major provider of financial services has over time evolved from the use of Analog banking to the use of technology in accordance with the current realities.
Financial technologies are computer programs and technologies used to enable and complement banking and financial services. It is the generic term used to describe the technology (internet, mobile devices, software app, cloud services etc) which are used in delivering financial services that are exclusive to traditional financial institutions. It integrates various types of financial services into the day to day lives of customers. This generation is used to technology and wants to manage their money in an easy and quick manner instead of walking to physical branches to perform transactions and other operations. Thus fintech involves the use of smart phones and internet services for mobile banking, investments, borrowing services and crypto currency.
On a broader scale, fintech can be said to be any innovative idea that improves financial service processes by proposing technological solutions according to different business situations/challenges. In Nigeria, fintech is majorly introduced by tech startups whose aim is to ease the business of banking by providing rudimentary software easily accessible on mobile devices. The lively entrance of fintech startups into the Nigerian economy has grown so high that it is predicted that by 2022, the fintech revenue would have risen to 543 Million US Dollars (The Economist, Intelligence Unit 2020 report). This would be made possible through the use of smart phones amongst Nigerians. Some examples of fintech companies include; Square, Worldpay, Paypal, Paystack, Interswitch, Remita etc.
BRIEF HISTORY OF FINTECH
It is difficult to pinpoint when financial technology began but the 1950’s are a good reference point. The 1950’s saw the Introduction of Credit Cards. Instead of carrying cash, people used their cards to pay for their purchases. In the 1960’s Automated Teller Machine (ATM) were Introduced, meaning that people no longer had to visit bank branches for certain transactions. Banks also started using mainframe computers for record keeping and data storage. In the 1970’s, firms began to trade stocks electronically. In the 1981, the first IBM PC was invented, ending the dominance of time sharing terminal computing. In the 1990’s, e–commerce business models and the internet thrived. Because of this, retail investors could experiment with online stock trading.
In Nigeria, fintech can be traded back to year 2002, when interswitch founded by Mitchell Elegbe pioneered “The infrastructure to digitize the cash economy” by processing payments via the internet. NB; By October 2003, interswitch ATM started operating
In 2003, Etranzact was created. Interswitch was pre-occupied with providing quasi banking services while Entranzact carved its niche as a revenue collection firm for a lot of government agencies and universities.
In 2005, Remita was launched by Systemspecs limited founded by John Obaro and fully developed in Lagos, Nigeria. However, it didn’t have much impact until it won the payment into the National Treasury Account contract in 2015. It is imperative to state that fintech in Nigeria have diversified into small loans, provision through mobile lending for small and medium sized – enterprise (SMEs) thus allowing these businesses access to loans online mostly with little or no interest.
FINTECH REGULATIONS IN NIGERIA
It is pertinent to note that the concept of technology companies being launched into the banking services raises the issue of proper regulations. The regulations are necessary to keep up with the rapidly evolving fintech landscape on the one hand and to actively initiate policies to support innovation on the other hand. To this end, the CBN has tried to create an environment that fosters the growth of financial technology companies while protecting customers from the problems inherent with internet transactions. Vices such as Cyber fraud, identity theft and money laundering are problems that are synonymous with internet transactions hence it is necessary to properly regulate transactions of fintech startups.
There is no specific Legislation regulating fintech in Nigeria. The Electronic Transaction Bill which seeks to regulate certain aspects of fintech services is still pending in the Legislative Houses. This bill contains provisions regulating the protection of data in electronic transactions, electronic contracts and the use of electronic signatures. Despite the fact that there is no existing legislation in respect of fintech services, there are plethora of regulations and guidelines made by the CBN to govern various payment services including mobile money, card payments, switching services, e.t.c. Some of these regulations are;
- Guidelines on operations of electronic payment channels in Nigeria,2016
- Regulation for Bill payments in Nigeria, 2018
- Guidelines on Mobile money services in Nigeria
- Guidelines on Transaction switching in Nigeria 2016.
In 2007, the Payment System Vision 2020 provided by the CBN fosteredthe official commencement of electronic payment in Nigeria. Its introduction marked an increase in mobile and electronic payment. The innovation in this subsector includes the adoption of unstructured supplementary service Data (USSD) services for payment by operators, blockchain and the use of Artificial Intelligence (AI) via chatbox. In January 2012, the CBN also released its cashless policy with the aim of developing and modernizing Nigerians payment system, providing more efficient transaction optionsand greater reach to achieve a reduction in the cost of banking services while driving financial inclusion and improving the effectiveness of monetary policy in managing inflations. In 2013, CBN initiated a further formal assessment of the payment market, resulting in the PSV 2020 Release 2 where it envisioned Nigeria to be among the top 20 economies in the world by the year 2020.
On the 14th February 2014, the CBN launched a unique biometric identification system for the Banking Industry called Bank Verification Number (BVN). Banks are now mandated to capture biometric details of customers and issue BVN’S to their customers.Fintech companies assisting the banks to carry out this mandate must first be licensed by CBN before it starts operation. It must also comply with the CBN (Anti – Money Laundering& Combating the Financing of Terrorism in Banks and Other Financial Institution in Nigeria) Regulations 2013 which requires financial institutions, fintech startups inclusive, to implement internal controls so as to prevent the use of their facilities for money Laundering and terrorist financing. They are also required to undertake customer due diligence and report any suspicious transactions.
Other laws which apply to financial institutions and by extension fintech companies are;
- Advance fee fraud and other fraud related offences Act 2006.
- Corrupt practices and other related offences Act Chapter C31, LFN 2004.
- Economic and Financial Crimes Commission Establishment Act
- Terrorism (prevention) Act 2011 as Amended.
- Money Laundering (prohibition, prevention,) Etc Act 2015.
- Cyber crimes (prohibition, prevention, etc) Act 2015.
- The Federal Competition and Consumer Protection Act 2018
- The National Information Technology Development Act,2007
The main regulatory bodies in relation to the fintech sector are the Central Bank of Nigeria, the Nigerian Deposit Insurance Corporation, the Securities and Exchange Commission, the National Insurance Commission, the Nigerian Communications Commission and the National Information Technology Development Agency.
- THE CENTRAL BANK OF NIGERIA
The CBN has primary responsibility for regulating financial services in Nigeria. It is the principal regulator mandated to issue licences to Banks and other Financial institutions by virtue of the Banks and other financial institutions by virtue of the Banks and other Financial Institution Act 1991 (BOFIA).Fintech companies offering financial services to Nigerian consumers must obtain necessary licences and comply with CBN’s applicable guidelines.
- THE NIGERIAN DEPOSIT INSURANCE CORPORATIONS (NDIC)
The NDIC is responsible for insuring all deposits liabilities of licenced banks and other deposit receiving financial institutions in Nigeria. Fintech business whose main objective is obtaining and saving money deposited by Nigerian consumers must be registered with NDIC pursuant to S. 15 of the NDIC Act, 2006.
- THE SECURITIES AND EXCHANGE COMMISSION (SEC)
The SEC is the Securities and capital market regulator in Nigeria pursuant to ISA 2007. Fintech companies desirous of raising capital from the capital market must register their securities with SEC and comply with Investment and Securities Act.
- THE CORPORATE AFFAIRS COMMISSION (CAC)
The CAC regulates the Incorporation of and official record keeping for companies in Nigeria. S. 7 of CAMA. Fintech companies must be incorporated at the CAC to carry on business in Nigeria except otherwise exempted from this requirement in accordance to S. 54 & 56 of CAMA.
- THE NIGERIAN COMMUNICATION COMMISSION (NCC)
The NCC is empowered by the Nigerian Communication Act, 2003 to regulate the telecommunication industry in Nigeria. Thus Fintech companies offering services that involve the use of mobile networks or mobile phones are subject to NCC’s regulatory purview and must obtain requisite operating licences from the NCC.
f.) THE NATIONAL INFORMATION TECHNOLOGY DEVELOPMENT AGENCY (NITDA).
The NITDA is responsible for creating and enforcing data protection regulations in Nigeria. Recently, the NITDA issued the Nigerian Data Regulations 2019 which seeks to safeguard the rights of natural persons to data privacy and foster the safe conducts of transactions involving the exchange of personal data.
Having elucidated the above, it is imperative to state that there is an urgent need for a legislation regulating fintech and stating punishments for fractions is passed into law. This law needs to create an orderly and reliable market which would attract customers and instill a level of trust in financial technology.
It is also important to sentisize the public on the importance of fintech and the need to be attentive and alert to fraudulent activities so as to reduce the level of internet vices that are prevalent in modern times.