The Regulatory Framework Governing Payment Service Holding Companies in Nigeria

The Central Bank in Nigeria in it’s 2020 Circular for the Nigerian Payments System was aimed at creating a streamlined corporate structure for companies interested in offering a bouquet package of Fintech licenses that mainly revolve around engaging in Switching & Mobile Money Services. 

This led to the birth of Payment Service Holding Companies(PSHCs) which differ from the typical Holding company structure and which will be the focus of this article which aims to deal with the following topics of :-

– The definition of a Payment Service Holding Company.

– The Regulatory Framework governing PSHCs.

– The Licensing requirements for PSHCs.

– The permissible and non-permissible activities which PSHCs can engage in.

What are Payment Service Holding Companies?

PSHCs are defined as companies whose principal objects clause includes the business of a Holding company set up for the purpose of making equity investments in  2 or more companies being its subsidiaries which are Payment Service Providers (PSPs) across the following categories:-

– Mobile Money Operations.

– Switching and Processing.

– Payment Solutions Services.

What is the Regulatory Framework governing PSHCs?

PSHCs in Nigeria are licensed, supervised and regulated by the Central Bank of Nigeria through the Banks and Other Financial Institutions Act BOFIA and specifically the CBN Guidelines For the Licensing &  Regulation of Payment Service Holding Companies in Nigeria 2021.

What is the operating structure of a PSHC?

Under the CBN Guidelines, PSHCs are basically non-operating structures, created solely for the purpose of Investment in approved subsidiaries without engaging in the day to day management and operations of subsidiaries.

PSHCs are also corporate entities required to be registered with the Corporate Affairs Commission (CAC) are required to have the following:-

– a board size of 5-10 directors as determined by the CBN;

– not more than 2 hierarchies with a subsidiary which is a parent to another subsidiary (an intermediate company);

– the presence of at least 2 subsidiaries which must include a Mobile Money Operator (MMO) & Switching company for a PSHC structure to be created;

– the ability to acquire a controlling interest in any permissible financial and/or technological company subject to the prior approval of the CBN,a controlling interest in this case meaning a  minimum ownership of 51% of the subsidiary entity’s share capital.

Does a PSHC still need the approval of the CBN to transform to a single service company?

Yes it does. A PSHC desirous of changing to a mono-line/single service provider shall seek the prior approval of the CBN through an application which shall include or come with the following:-

– A divestment plan from the PSHC’s subsidiaries.

– Annual audited financial statements of the immediate past 3 years under the arrangement the PSHC seems to discontinue.

– Any other requirements as may be determined by the CBN.

Can the CBN compel a PSHC to divest from its subsidiary?

Yes it can . The CBN can do this by a directive which will mandate a PSHC to divest from its subsidiary where in its(the CBN’s) opinion, the PSHC is run in a manner detrimental to the subsidiary and/or the Nigerian Financial system.

What are the Licensing requirements for a PSHC?

The licensing of a PSHC is in 2 stages namely:-

– The Approval-In-Principle (AIP) stage.

– The Final Licensing Stage.

The AIP stage

To start, the promoters of a proposed PSHC are to send a formal application through their lawyer for the grant of a PSHC Licence addressed to the Director, Payments System Management Department. This application is required to have the following additions :-

– a non-refundable application fee of 1 Million Naira or any other amount that may be determined by the CBN from time to time, payable to the CBN via electronic transfer;

-evidence of meeting the prescribed minimum paid-up capital of more than the total equity of all its subsidiaries;

– a detailed Business plan or Feasibility report(consult your lawyer on what the compulsory contents of a business plan are under the CBN Guidelines);

– a written and duly signed undertaking by the promoters that the PSHC shall be adequately capitalized for the volume and character of its business at all times & that the PSHC shall be under the supervisory authority of the CBN as an Other Financial Institution(OFI);

– for regulated foreign Institutional investors that are promoting a proposed PSHC, the CBN will require a “no-objection” letter from the regulatory body in its home country;

– a shareholder’s agreement;

– s statement of intent to invest in the PSHC to be made by each investor;

– a Technical Services Agreement where applicable;

– a draft copy of the PSHC’s MEMART ( Memorandum &  Articles of Association);

– where the promoters/investors of the PSHC are corporate entities, the CBN will require the following:-

a). A Certificate of Incorporation.

b). A Board Resolution supporting the company’s decision to invest in the Equity of the proposed PSHC.

c). The names, biometrics, Bank Verification Numbers (BVNs) & addresses (business and residential) of owners, directors and their related companies if any.

d). Audited Financial statements and reports and Tax Clearance Certificates of the company for the past 3 years.

e). Certified True Copies (CTCs) of the company’s statutory forms showing returns on share allotment and the particulars of directors.

f). Any other document the CBN may require periodically.

The Final License Stage

A proposed PSHC should send an application through its lawyer to the CBN for the grant of a final license within 6 months after obtaining the AIP accompanied by the following:-

– a non-refundable licensing fee of 5 Million Naira, payable to the CBN via electronic transfer;

– evidence of promotion of or investment in a PSHC;

– evidence of payment of capital contributions by each shareholder;

– evidence of location of the PSHC’s Head office(rented or owned) for the takeoff of the PSHC;

– a schedule of changes, if any, in the board, management, IT infrastructure and significant shareholding of the PSHC since the grant of the AIP;

– evidence of ability to meet technical requirements and modern infrastructural facilities such as office equipment, computers, Telecommunications, etc. to perform PSHC operations and meet CBN & other Regulatory requirements;

– organizational structure , showing functional units, responsibilities, reporting relationship & grade of heads of department/units;

– board & staff training programme.

What is the permissible ownership and control structure for a PSHC?

– The acquisition of at least a 5% shareholding stake or any change in the ownership of a PSHC resulting in a change of control requires the prior approval of the CBN.

– Also, where such shares are acquired through the secondary market, the PSHC shall apply to the CBN for an approval within 7 days of the acquisition. Furthermore, subsidiaries of a PSHC are prohibited from acquiring shares in it (the PSHC) as well as acquiring shares of other subsidiaries of the parent PSHC including those of intermediate companies.

– Where a PSHC loses control of any of the 2 service subsidiaries- a switching & processing company or Mobile Money Operator for a period exceeding 6 months, the PSHC shall cease to be such & will be required to return its license to the CBN. The same situation will apply where the PSHC loses its controlling interest in either of the subsidiaries.

– Following the loss of a controlling interest in a subsidiary and the cancellation of its license, the PSHC shall divest completely from that subsidiary within 6 months.

– Where a PSHC loses a controlling interest in its subsidiary and the subsidiaries include a switching & processing company and Mobile Money Operator (MMO), the former and latter shall continue to operate independently of one another.

What are the permissible and non-permissible activities to be engaged in by PSHCs under the CBN Guidelines?

Permissible Activities

– The holding of equity stakes in financial and technological subsidiaries that facilitate and/or enhance innovative digital financial products.

– The provision of a broad policy direction, shared services and then entering into technical or management service contracts with any of its subsidiaries with the prior written approval of the CBN in respect of:-

1. Human Resource services.

2. Risk Management services.

3. Internal Control services.

4. Compliance services.

5. Legal services.

6. Information and Communication Technology.

7. Facilities ( office accommodation including electricity, security, cleaning services, etc.).

– Any other service as may be approved by the CBN from time to time.

Note that shared services shall be provided on an arm-length basis & transactions in respect of such services shall require the consent of the board of directors of the subsidiary company’s involved in such transactions.

Non-Permissible Activities.

– The establishment, divestment & closure of subsidiaries without the prior written approval of the CBN.

– The deriving or receiving of income from sources other than as listed therein:-

a). Dividend income from its subsidiaries/associates.

b). Income from shared services where applicable.

c). Patents, royalties & copyrights.

d). Profits on divestments from subsidiaries.

e). Income earned from idle funds invested in government securities or placement with Licensed Financial Institutions.

Conclusion:- It is hoped that a clearer basic understanding of PSHCs as a new special purpose vehicle for multiple participation in the licensed Fintech sector has been achieved by this article. An understanding of the Licensing requirements for switching & processing or Mobile Money Operations can be gotten from your lawyer on further consultations.