Besides its own goals on managing cryptocurrency (it is now for it via a national digital currency), I will score the Central Bank of Nigeria (CBN) an “A” on how it has regulated the broad fintech space. Yes, I understand that many wish we put our entire financial sector on auto-pilot where anything goes, similar to what we have done on cattle and crops. Personally, I do not think that should be the right playbook. Objectively, across most domains, the CBN has done a good job in the fintech space. It has worked really hard to avoid any systemic risk to the banking sector even as it has allowed innovation. Anyone who thinks otherwise must explain how Paystack, Flutterwave and amalgam of other entities have flourished.
A leading consultancy just published that 57% of Nigerian fintechs generate a revenue of at least $5 million per year. It shows a very dynamic sector. So, the news that the apex bank has updated the capital benchmarks for fintechs could have tripped many. This are the new requirements as published by CBN. Premium Times summarized them as follows:
Those in the top category, dealing with switching and processing, as well as mobile money operation, will have a N2 billion shareholders’ funds unimpaired by losses, the regulator announced.
According to a document conveying the guidelines published on the bank’s website on Monday, six categories of payment operators were newly approved by the CBN.
They include those involved in switching and processing, mobile money operators, Payment Solution Services (PSS), Payment Terminal Service Provider(PTSP), Payment Solution Service Provider (PSSP) and Super Agent licenses respectively.
The top category will escrow refundable N2 billion into a CBN account. The payment must be made in full single lump sum. Escrowed funds are to be invested in treasury bills, subject to availability of treasury instruments, which would be refunded accordingly.
For PSS, the CBN said an escrow of refundable N250 million must be deposited with the CBN, while for entities applying for the three licenses will e: PSSP – N100 million, PTSP – N100 million, and Super Agent – N50 million.
“All written applications should be addressed to the Director, Payments System Management Department, Central Bank of Nigeria, Abuja, accompanied by evidence of payments of application fee and other documentary requirements,” the CBN said.
For all of the aforementioned licences, the apex bank said all applicants would be required to pay an application and licensing fee of N100,000 (non-refundable) to the CBN, while a licensing fee of N1 million is to be paid before the issuance of the final license, if successful.
Looking at the requirements, these are not issues. The highly popular PSSP which usually goes with microfinance license for NUBAN-ready digital bank needs only N100 million (about $245,000). Sure, it is a big amount but any company which wants to join a club to issue bank accounts, and connect into our central settlement and clearing system, needs to have some resources to be admitted.
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The apex bank is not the owner of this fund, it is simply making sure that the startup has resources to hire the right people, and run the right technology, to protect our financial system. The deposit after the issuance of the license is returned to the startup with all accrued interests!
Any startup which cannot meet the requirements should consider selling maize and palm oil in any of our big markets. But wailing that these requirements are killing innovation is something I will not join: every club has admission requirements, and Nigeria is a big country, and our banking system needs order. The numbers as put by CBN are fair considering that we have dozens of these fintechs. Yes, merge and become stronger to meet these mundane regulatory requirements if you cannot go alone!
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Comment: That figure was outrageous, it got me screaming when I read this on an article this morning. But I think they put them in tier as well, while the article writter was offering solutions of partnering with bigger fintech with license. I am not sure if the rationale makes that sense, while other countries doesn’t need such money to establish a payment gateway or settlement companies and startup, why do we need this in Nigeria?
I wondered that some of the fintech do not hold cash to say CBN need a deposit guarantee in case of eventualities, they only act as a channel to process payment for third party. Do we need over 2Billion Naira to be able to launch these startups?
My response: “while other countries doesn’t need such money to establish a payment gateway or settlement companies and startup” – I think we can debate this. Could you share some of these “other” countries. CBN is essentially saying: we need you to have raised this money. After you have done so, we will give you license and return the money to you. There is a reason for that: it wants to be sure you have resources to run the business.
Comment #2: I have questions: At what point will this new rule be enforced? Will it apply to Fintech startups just entering the market: those with no significant revenue earnings yet, but promising ventures? If this rule were in place in 2014, what would have been Paystack’s fate? How then will this rule not stifle innovation, or are we already at an equilibrium point where “innovation” would mean “marginal” changes?
My Response: Most startups progress from one tier to another. The min amount you need for paid up capital is about N50 million (about $120k) [you get the money back when your license is issued]. That phase puts you under a bank which baby-seats you. Then, you can move to the next class at N100m, you do not need the bank now for certain things. But if you still have ambitions, you move to N250m.
The final phase is N2B which means you can ideally compete with banks as a mobile money operator. You hold and move money and become dominant. If you go offline for 3 hours, riots can start and people can faint thinking that financial Armageddon has happened. CBN wants you to graduate and be ready. Paystack and Flutterwave made some of those transitions.
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What are we even doing with most of the fintechs, and how many of the old problems have gone away? People just repeat what others did and give it a new name, that cannot qualify as innovation in my book.
For those who are bringing something different, I think they should start exploring merger and acquisition options at some point. It makes no sense crowding everywhere with services that are undifferentiated, just to earn the all important commissions.
The big companies in the US are merging and acquiring others, in order to have peerless capabilities and resources to serve customers; this quest to be known as CEO is something we must outgrow. Let’s nurture and grow companies with immense capabilities to serve the public.
The CBN is doing its bit in the fintech space, at the end of the day we still need to produce things, before transactions can become much more meaningful.