CBN regulations require fintechs to pay $5m into escrow account

Yesterday, the Central Bank of Nigeria, by an announcement via its official twitter handle made public the “new license requirements for the payments system”. The regulations were first proposed in 2018 and had proposed a categorization of Fintech startups into three levels of Payment Service Providers; Super, Standard and Basic License holders.

Now, the Fintech startups have been streamlined into groups, with respective licenses allowing them to provide or not to provide certain services. They are grouped as "payment services" companies.

The new regulations provide for sweeping changes, the most notable of which is an Escrow Fund. Under this, Fintech companies have to deposit certain stipulated amounts in one lump sum, as high as N2bn or $5m.

These payments services companies are now grouped into five categories for purposes of capitalization requirements and licensing fees. They are

1. Switching Companies

2. Mobile money operators

3. Payment solution services

4. Payment terminal service providers, and

5. Super-Agent License

What Are the Various Cap requirements and Licensing Fees?

· Switching Companies

These companies facilitate transactions and the exchange of money between merchants, their customers and the various financial institutions. Examples include NIBBS, Etranzact, Interswitch and Visa. By the new regulations, they are eligible once they “are registered with the Corporate Affairs Commission with their Memorandum and Articles of Association”. Their Cap requirements stipulate a N2bn shareholder capital fund, unimpaired by losses and an escrow of a refundable sum of N2bn into the CBN PSP share capital fund, which must be paid in one lump sum.

The new regulation further stipulates a non-refundable application fee of N100, 000 and a license fee of N1,000,000 if the application is successful. Finally, the license is renewable by the CBN “upon satisfactory performance of operations”.

· Mobile Money Operators

This is a company that provides financial and payments services through mobile phones and mobile telephone networks. It may be a network operator, Fintech, a payment service, financial institutions, banks and so on. Examples include MTN’s Momo, Paga, Kudi Mobile, Polaris Sure Padi and FirstMonie by FirstBank.

The Cap requirements for this group is the same as switching companies; N2bn shareholder capital fund, unimpaired by losses and an escrow of a refundable sum of N2bn into the CBN PSP share capital fund, which must also be paid in one lump sum. They must also pay a non-refundable application fee of N100, 000 and N1,000,000 if the application is successful.

· Payment Terminal Service Providers

These are companies that deploy, support and maintain point-of-sale (POS) terminals on behalf of acquiring banks. Sometimes, the service providers may even be the banks themselves. They essentially provide devices that interface with payment cards to make electronic funds transfers possible. Examples of companies providing these services in Nigeria include CitiServe, NetPlus, Geepay, Wipay and Opay.

The cap requirements for these operators is significantly lower than MMOs and Switching Companies, capped at N100m in shareholder capital fund, unimpaired by losses and an escrow of a refundable sum of N100m into the CBN PSP share capital fund, which must also be paid in one lump sum. An additional requirement is the preceding three years audited financial statements of the company, where applicable.

They will also pay a non-refundable application fee of N100, 000 and a license fee of N1,000,000 if the application is successful.

· Payment Solution Service

A payment solution service is a company, often a Fintech startup that facilitates electronic payments, settlements and transactions for merchants and customers. It may through an app, the web or through API configurations. They provide both a merchant account and a payment gateway, ensuring that businesses can collect and manage their payments in a simple and efficient way. Notable examples of payment solutions service providers in Nigeria include Paystack, Flutterwave, Remita, Interswitch, WebPay and eTranzact.

The cap requirements for these operators is at N250m in shareholder capital fund, unimpaired by losses and an escrow of a refundable sum of N250m into the CBN PSP share capital fund, which must also be paid in one lump sum. They will also pay a non-refundable application fee of N100, 000 and a license fee of N1,000,000 if the application is successful. Any Fintech with this license can be a Super Agent, payment service terminal provider and payments services solutions provider. So, it is a 3-in-1 package for the startups that can acquire the funds to obtain the license, or they will have to choose one of the licenses.

· Super-Agent License

Going through the license requirements for this category of payments service, this group appears to be a mix of mobile money and money agent operators. It requires they must have a minimum of fifty agents, and must also outline the strategy of their shared agent network including geographical spread. A super-agent may include a financial provider's retail arm, supporting transactions as well as person-to-person transfers and bill payments across a vast network of agents operating under it.

The cap requirements for these operators is at N50m in shareholder capital fund, unimpaired by losses and an escrow of a refundable sum of N50m into the CBN PSP share capital fund, which must also be paid in one lump sum. They will also pay a non-refundable application fee of N100, 000 and a license fee of N1,000,000 if the application is successful.

How do these new Regulations affect Fintechs?

First, the one license fits all model has been abandoned by the CBN. Now, all fintech services have been streamlined into specific groups, with respective licensed acts, cap requirements and licensing fees.

A fintech startup that wants to be a switching company or mobile money service provider must now have at least N2bn or $5m in shareholder investment funds before applying for the license to operate within that space. This is outside the standard N1.1m in application and license fees.

A startup can decide to apply for the grant of a Payment Solution Service License (PSSL), provided their shareholders have invested at least N250m and they have the sum of N250m to be put into the CBN escrow account, in addition to N1.1m in application and license fees. The unique feature of this license is that it is a 3-in-1 package that allows the licensee to be a Super Agent, payment service terminal provider and payments services solutions provider.

If the fintech company cannot raise the funds to obtain the PSSL license, then it has to restrict its operations to either a payment service terminal provider or a super-agent.

Regarding the application process, the license fees might pose a big problem for smaller startups seeking to enter the payments space. If the essence of these new regulations is to encourage entry into the Fintech space, it would be counterproductive for license fees to be capped at one million naira if their application is successful. When certain services are streamlined with strict requirements, then there may be barriers to entry.

It is pertinent to note that Nigerian fintech startups have worked mostly with microfinance licenses (MFB) licences. These MFB licences are a low-cost, quick go to market avenue for startups, with the capital requirements of the license going for as low as N20 million for a unit license.

A bigger problem is the so-called Escrow Fund. The regulations do not provide much detail on it, only that it is a refundable amount of money that must be paid, in one lump sum into the CBN escrow account for the purposes of “investing in treasury bills”. This is a very vague and problematic requirement. Startups now do not only need to raise funds from investors to meet shareholder requirements, they must also pay millions for licenses and still have enough liquidity to pay a lump sum into this escrow account.

If a startup wants to raise operating within the mobile money space for example, they may have to raise at least $10m to cover cap requirements and the escrow fund deposit. This is besides the standard licensing fees and other certifications. There does not appear to be any basis nor rationale behind this rule other than forcing the Fintechs to come up with funds for the CBN to invest in treasury bills and bonds. There is no indication of a revenue sharing formula from the proceeds of the investments in the escrow account, other than the escrow funds will be “refundable”.

Obtaining this license is not enough apparently, as the new regulations indicate that each category would still need to obtain further certifications before being allowed to operate. The better approach would have been to consolidate these certifications for every group under a single approval scheme once their application is successful, instead of being made to undertake other certifications, even after successfully applying for a CBN license.

The Cap requirements will also be very daunting for smaller players. At two billion naira, startups will be forced to raise huge amounts of money before being allowed to even operate payment solutions services, if their applications are successful.

A lot of the cap requirements would mean that only a handful of cash rich startups would be able to stay in the payments space in the coming years, as most startups will be forced to raise huge sums of money before even being allowed to operate with it. As a result, these CBN requirements, though with stated lofty ambitions, will put further strain on startups to fulfill the minimum requirements needed to operate, and this will stifle innovation and development in the ecosystem.