With an estimated $17.4 billion in global investment in 2016 alone, fintech—short for financial technology, is the new frontier the age of information. Fintech generally refers to businesses that use software and other modern technology to provide financial services. Fintech companies are now popular all over the world with many in competition with conventional banks to reach customers quickly and with the most innovative services. Fintech services include and are not limited to, money transfers, lending, investing, betting, payments, etc. These companies are not only targeting technologically advanced and sophisticated people; their services cater to a wide range of customers allowing them to access financial services wherever they find themselves.
As you might already know, the tech industry in Nigeria is experiencing a boom right now and one of the subsectors driving that is the financial technology sector. Nigeria currently has about 210-250 fintech companies and the bulk of their services—as much as 60%, is clustered within the lending and payment sector. Between 2014-2018, the cumulative investment in the Nigerian fintech sector exceeded $250 million and the upward trend will likely be sustained for a few more years. Various factors have led to the growth of fintech in Nigeria, including efforts by the Central Bank of Nigeria (CBN) to drive up financial inclusion by up to 80% in 2020; an increase in the penetration of smartphones; as well as an increase in the rate of e-commerce in Nigeria.
While many people are aware of the growth of fintech in Nigeria, many—including potential investors and company owners, are not necessarily familiar with the process of establishing a fintech company or the process of acquiring a license to run one. In 2018, while announcing a new requirement for fintech companies in Nigeria, the CBN stated that their presence could compound existing risks within the Nigerian financial system. The CBN then went on to establish a requirement for Nigerian fintechs to have a minimum shareholder fund that ranges from $275,000-$14 million before they can obtain the necessary operating licenses. While this requirement might constitute a constraint for fintech companies, it is not the only one; the CBN has other conditions which it demands potential fintech companies to meet before they begin operating in Nigeria. Below we take a step-by-step look at what the conditions potential fintech companies are currently required to meet before they commence operations.
So, you have decided you want to launch a fintech company, this is great news! However, fintech companies do not all do the same things. Within the broad fintech category, we have companies that are into insurance, savings, money lending, etc. So, before you begin to consider the conditions you will be required to meet, it’s good to be certain what category your company would be operating under. It is worth noting that fintechs who deal in virtual currencies cannot obtain licenses in Nigeria due to a prohibition by CBN that outlaws doing so on basis that virtual currencies are not recognized legal tenders and thus have no legal protection.
Registration of your Fintech Company
Even before a company or individual is ready to acquire a license to operate in the Nigerian fintech industry, they must complete a company registration process with the Nigerian Corporate Affairs Commission (CAC). The process for company registration is outlined below:
- Ensure the proposed company name is available or ask the CAC to reserve it
- Include the address of the company office
- Authorized Capital of the Company (the regular authorized share capital for a local company is N1 million)
- Particulars of 2 company directors and shareholders.
- Statutory Declaration of Compliance with the requirements of CAMA by a Legal Practitioner
Additional documents will be required for a second stage of the incorporation process with CAC, they include:
- Signed and copies of the Memorandum and Articles of Association
- Original documents authorizing the incorporation where applicable
- Photocopy of the information page of the passport or the national identity card of each director or shareholder.
If the company has foreign shareholders, they will be required to:
- Register with the Nigeria Investment Promotion Commission (NIPC)
- Obtain a business permit
- And register with the National Office of Technology Acquisition and Promotion (NOTAP)
After successfully completing the CAC process, companies can now look towards obtaining a license that allows them to operate in the Nigerian financial system.
The Central Bank of Nigeria is the main regulatory body for fintech institutions in Nigeria and in 2018, it established a licensing regime for what it called Payment Systems Providers (PSP) which covers all fintech institutions (e.g. Payment Terminal Service Providers (PTSP), Mobile Money Operators (MMOs), Payment Solutions Service Provider (PSSP), and switches, etc.) in an effort to tackle emerging issues such as cyber risks, risk management, and capital adequacy, etc. The licensing system has been organized into three categories Super, Standard & Basic licenses discussed below.
Super License: This license is a requirement for companies that operate payment gateway platforms such as POS services and switching services. To acquire this license, fintech companies are required to maintain at least N5 billion shareholder funds and pay a licensing fee ranging between N1-2 million per year for a tenure of three years.
Standard License: Companies that operate as e-money issuers, agent recruiters and managers, wallet creation and management, etc. are required to have the standard license. These companies are also required to maintain a shareholder fund of at least N3 billion and pay a licensing fee of about N1 million- N500,000.
Basic License: This license is required by companies that run either POS (point of sale) deployment or terminal services and those that provide payment processing gateways, portals, and payment applications/solutions. It has the least shareholder requirement at about N100 million as well as the least licensing fee ranging from about N100,000-50,000.
As previously stated, obtaining these licenses might be a hindrance to companies and individuals looking to get into the Nigerian fintech market, however, there is nothing that stops potential fintech companies from entering into agreements with operators who already have licenses.
While obtaining, a license is a major achievement in breaking into the fintech market, it is only one of the hurdles fintech companies have to scale through to get their businesses fully operational in Nigeria. There are different regulations that apply to fintech companies depending on the type of services they offer. For instance, companies that deal strictly with lending services might be required to register as banks or Other Financial Institutions (OFI). In addition, such institutions are subject to the Money Lenders Law that prevails in the state where their operation will be based. Such laws dictate things like interest rates that can be charged on any money lent.
For companies that are into payment/cash transfers, there are various CBN issued guidelines that regulate their activities including the CBN Guidelines on Mobile Money Services in Nigeria (2015); Guidelines on Operations of Electronic Payment Channels in Nigeria; and the Framework for the use of Unstructured Supplementary Service Data, etc. Additionally, because many customers of fintech companies access services through mobile phones, the Nigerian Communications Commission (NCC) also serves as an important regulatory agent. The License Framework for Value Added Service (VAS) by the NCC provides its guidelines and requirements for fintech companies.