Growth Through Regulation
How necessary is it to regulate the fintech space in Nigeria?
Quite similar to the internet, FinTech is currently one of the more notable innovations that has caught global attention, including that of the common man. From being able to borrow cash with your phone (mobile lending), raising capital for projects online and from total strangers (crowdfunding and ICOs), making payments for your fashion item by text (mobile payments) or even using and investing in decentralized currencies (cryptocurrency), it is clear that our lives and activities are being impacted by this space. The combination of higher consumer expectations and impressive technological innovations have spurred a change in how financial services are being offered which has made Fintech popular, and like every other economic activity, a candidate for regulation.
In my view, FinTech, as an umbrella term, refers to the offering and delivery of financial services with the use of technology. FinTech is sometimes used interchangeably with TechFin, which are firms that provide technology solutions for use by financial services firms. Financial Services as an area, is heavily regulated largely because money, either on a micro or macro level, are involved. As such, the business and provision of financial services is regulated to protect the common man, commercial enterprises and the economy. This explains why FinTech, an extension of conventional financial services, is a prime candidate for regulation.
Before delving into the merits of regulating FinTech, I feel compelled to address the idea that the space is entirely a ‘jungle’ and ‘no man’s land’. Every FinTech company is subject to the same rules and regulations that apply to companies under Nigerian law. In simple terms, if the service is being provided through a business name or a company, that firm or company is subject to our Companies Act. If it is a public company or it is looking to raise funds from members of the public, our Investments and Securities Act and the rules of the Securities and Exchange Commission and any relevant exchange (such as the Nigerian Stock Exchange) will apply. It goes without saying that FinTech businesses must comply with the applicable tax and labour laws in Nigeria.
Secondly where the FinTech’s business or product is already regulated, then that FinTech company is subject to existing regulation. For instance, accepting deposits is regulated regardless of the technology feature and so a FinTech must either obtain a banking licence in Nigeria or offer its technology value added service through an entity authorised to accept deposits. The same logic applies to payment processing, insurance business, asset management and lending in Nigeria. The point of this is to lay the background that there are existing regulations and rules that apply to most, if not all, FinTech businesses in Nigeria.
There have been calls for the regulation of FinTech companies in Nigeria or a FinTech specific regulation. The proponents for regulation believe that: (a) capital requirements for some businesses (such as banking) are too high for startups and therefore operate as a barrier to entry. A FinTech specific regulation could address this issue; (b) most of our laws and regulations were passed pre-digital era and therefore are inadequate in dealing with the tech-centric system we currently have and the resultant consequences; (c) regulations are needed to create a level playing field between regulated entities and start-ups. The argument for this is that some startups do not have reporting or capital requirements, and the regulatory burden which established entities are subject to, creates an unequal playing field in the industry. Another argument is that regulation is necessary for the protection of the public and that FinTechs should be closely regulated since they have a wide reach of customers, and anyone with a mobile phone can access their products.
Before addressing these issues, I believe that as a country, we need to review some of our laws and regulations that apply to financial services. Technology has changed a lot of our processes and contractual relationships. Conceptually, property now has a different meaning from its original meaning as it is likely to include assets such as virtual currencies. If cryptocurrencies are now being treated as assets from which you can earn income, does this mean that a bank can take security over those assets? How can the bank exercise control or take possession of those assets legally? Another example is the banker and customer relationship which is now slightly blurry given that banks now offer you services from third party providers, meanwhile the rules governing this relationship remains the same under our laws. Can an entity be truly limited to its physical location if that entity can offer financial services to its customers on a national basis with a mobile app? These are some of the real issues that our regulations need to address.
Having said this, I do not believe that regulations are the immediate solution because the space is still young and evolving. We do not have the full picture of the innovations coming to the financial services sector therefore, any sector specific regulations issued now may need to be revised soon. Secondly, regulations have been known to stifle innovation. Thus, imposing certain conditions may hamper the agility of these startups and their ability to innovate which is one reason they have been able to compete with incumbent service providers. Some countries such as the United Kingdom and Singapore have responded to this dilemma by setting up regulatory sandboxes. A sandbox is a program, usually operated by a regulator which allows new companies to test their idea without full compliance with applicable regulations. Our Securities and Exchange Commission, Central Bank of Nigeria and the Nigerian Inter Bank Settlement System are working on different sandboxes and hopefully, will launch a sandbox soon.
Without downplaying the importance of regulations, my opinion is that what is necessary at this stage is clarity. Regulations aren’t always the solution, but clarity of purpose, direction and intention would do a lot for the budding FinTech space. If a regulation is not applicable to certain businesses, the regulator should issue statements to that effect. If an activity is not regulated, regulators should make that clear in their public messages. Regulations have typically caught up with innovation and, while there is the risk that regulations may eventually be issued after some damage has occurred, having regulatory guidance and direction without formal regulations are certainly useful.
Fintechs have a unique opportunity to drive economic development as they are gradually improving access to finance and financial inclusion in Nigeria. We need the right regulatory environment to nurture that drive and regulations may not be the immediate response.
Tolulope Omoleye-Osindero is the Head, Legal and Compliance at Branch International. She was formerly a Senior Associate at Udo Udoma and Belo-Osagie’s Banking and Finance team with a focus on fintech, corporate finance, syndicated lending, secured transactions, trade finance, structured finance and project finance.