For regulated fintech startups in Nigeria, there is a very quick way to kill oneself: fail to comply with the regulations of authorities. This is always seen in the barrage of revocation of licenses in recent times. Just before 2020 ended, Central Bank of Nigeria, the country’s apex bank, revoked the operating licenses of 7 fintech companies. This came immediately after it did a similar thing to 42 microfinance banks — a type of banking license usually, also, relied on by most fintech companies in Nigeria. Many reasons were given for that action by the CBN, but the most salient among them is that holders of the affected licenses failed to comply with the obligations imposed upon them by the apex bank according to the relevant laws.
One such obligation which has more recently been pronounced by the CBN is the requirement of obtaining the bank’s approval before any fintech company in Nigeria can partner with a traditional bank. According to CBN’s circular, PSM/CIR/GEN/CIR/01/22, dated 9th December, 2020, “collaborations between licensed payment companies and other financial institutions in respect of product and services are subject to CBN’s prior approval.”
The direct implication of the above rule is that all classes of fintech companies in Nigeria with payment service licenses are required to seek and obtain CBN’s license first before partnering on any products or services offered by either.
There aren’t many fintech-bank partnerships in Nigeria yet, however one such partership is that between Kuda, Nigeria’s only digital bank and GT Bank and Zenith Bank. Under the partnership arrangement with the two banks, Kuda users can make over-the-counter deposits in these traditional institutions to fund their app-based accounts. There is also an existing partnership between Kuda and Access Bank, which allows its customers withdraw cash from Access Bank’s ATMs for free. Another example is Nigeria’s Piggyvest, a savings and wealth management platform, which partners with Wema Bank to create direct deposit account numbers for the fintech’s users. Now, under the CBN partnership regime, a prior CBN’s regulatory approval would be needed before the fintech companies above and the respective traditional banks could partner on any projects.
The partnership rule particularly looks harmful for fintech startups used to innovation and agility. Thus, it could be argued that if the rule had applied to wealth management startups such as PiggyVest, it would have been harder for them to migrate their existing customers from Providus Bank to Wema Bank within 24 hours (like they did) following the recent Central Bank of Nigeria’s directive to all banks in Nigeria to block all cryptocurrency trading accounts resident in Nigerian banks.
This rule could not apply to PiggyVest because it specifically applies to all “payment companies”, unless PiggyVest had previously procured approval from Wema Bank and had to simply switch over. If the rule had applied (as it would have if it were Paystack, Flutterwave or Interswitch), the startup’s agility with the migration to Wema Bank would have been hard to come by.
Read also: Central Bank of Nigeria Toughens Rules For Fintech Startups Looking For Licenses
Although CBN’s rule on partnership may be of industry standards or may have been well intended, it substantially affects how fintech companies in Nigeria respond to new threats and opportunities. In Singapore, even though partnerships between banks and fintechs are subject to regulatory approval, if the arrangement relates to the provision of a banking business, or other business the conduct of which is regulated by the Monetary Authority of Singapore; or a business which is incidental to any of these; then there is no need for such approval.
Below is how bank-fintech partnerships are treated in other countries in Africa and in top global fintech destinations.
| S/N | COUNTRIES | HOW FINTECH-BANK PARTNERSHIPS ARE TREATED UNDER COUNTRY LAWS | CURRENT PRACTICE |
|---|---|---|---|
| 1 | South Africa | South Africa’s Banks Act requires approval to be sought from the South African Reserve Bank (SARB) for contractual arrangements between a bank and a non-bank entity, where the parties undertake an economic activity that is subject to their joint control. | Although approval is required by most banks, fintechs do not encounter most challenges, partnering with local banks. |
| 2 | Kenya | Guidelines on Incidental Business activities mandate banks to seek the approval of Central Bank of Kenya before partnerships with fintechs. | Partnerships moderately common. |
| 3 | Egypt | Article 96 of the Egyptian Banking Law, No. 194 of 2020 now requires outsourced service providers to be registered by licensed Egyptian banks. Generally, approval for partnership is required. | Fawry recently obtained approval to partner with an Egyptian bank. Partnerships moderately common. |
| 4 | Ethiopia | By Licensing & Authorization of Payment Instrument Issuers regulations, fintechs enter into agreements with banks in Ethiopia without National Bank of Ethiopia’s prior approval | Newly introduced regulations; not mostly tested. |
| 5 | The United States | Fintech-bank partnerships are established after fulfilling the requirements of local state laws. More specifically, under the Bank Service Company Act (BSCA), federal banking agencies have broadened their authority to control and investigate third-party service providers. In addition, the Federal Financial Institutions Examination Council’s (FFIEC) has released guidelines on financial regulators’ authority to investigate such technology service providers to banks. The Consumer Financial Protection Bureau (CFPB) has similar inspection and regulatory jurisdiction over financial institution service providers, including FinTech companies that offer services to those institutions. | Partnerships between FinTech entities and financial services providers have become common in the US |
| 5 | Singapore | Singapore’s apex bank, Monetary Authority of Singapore, generally requires approval for such partnerships, unless the arrangement is for the provision of a banking business, other business the conduct of which is regulated by the MAS, or a business which is incidental to any of these. | Partnerships or other arrangements with traditional financial services providers are common in Singapore |
Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based lawyer who has advised startups across Africa on issues such as startup funding (Venture Capital, Debt financing, private equity, angel investing etc), taxation, strategies, etc. He also has special focus on the protection of business or brands’ intellectual property rights ( such as trademark, patent or design) across Africa and other foreign jurisdictions.
He is well versed on issues of ESG (sustainability), media and entertainment law, corporate finance and governance.
He is also an award-winning writer