NIGERIA: An Introduction to FinTech Legal

Background 

Fintech, short for financial technology, denotes the integration of technology to revolutionise and automate conventional financial services and operations. This category covers a diverse range of offerings, including:

• online banking;

• mobile payments;

• lending;

• digital wallets;

• savings/investment; and

• financial management tools.

Fintech companies leverage cutting-edge technologies such as artificial intelligence (AI), blockchain and big data to craft innovative financial products and services. These alternatives aim to surpass traditional financial institutions in terms of efficiency, accessibility and user-friendliness. The fintech market encompasses start-ups, established financial entities and other technology-driven companies seeking to disrupt and transform the landscape of financial services.

Nigerian Fintech Market and Economic Overview 

The Nigerian economy is currently navigating a period of pronounced uncertainty characterised by rising inflation, increasing interest rates and a deceleration in economic growth. The years 2000 to 2014 witnessed robust and sustained growth, averaging over 7% annually, propelled by favourable global conditions and strategic macroeconomic reforms. However, from 2015 to 2022, there was a notable shift marked by a slowdown in growth rates and a plateau in GDP per capita.

This transition was caused by challenges such as:

• distortions in monetary and exchange rate policies;

• fiscal deficits aggravated by reduced oil production;

• a burdensome fuel subsidy programme;

• trade protectionism; and

• the repercussions of the global COVID-19 pandemic.

The World Bank reports a peak in inflation at 25.8% in August 2023, rising to 27.33% in October 2023 according to the Central Bank of Nigeria (CBN).

Despite these economic challenges, the Nigerian fintech market has demonstrated resilience. As Africa’s largest economy and most populous country, Nigeria presents significant opportunities for fintech innovation and investment. Factors such as a youthful population, increasing smartphone penetration and a regulatory focus on enhancing financial inclusion and cashless payments contribute to a thriving fintech sector.

Notably, Nigeria has emerged as a market leader in fintech investment, securing 41.6% of the USD3.64 billion funding received by African fintech ventures in the past eight-and-a-half years. Furthermore, Nigeria accounts for 32% of Africa’s 678 fintech start-ups (followed by South Africa and Kenya with 20.6% and 15%, respectively), reinforcing Nigeria’s dominant position in the African fintech landscape.  

Political Considerations 

Nigeria witnessed a change of administration in May 2023, leaving the country at a crossroads. Since assuming office, the new administration has undertaken key reforms to restore macroeconomic stability by removing the petrol subsidy and unifying/significantly liberalising the exchange rate. These reforms, together with global oil prices remaining above their historical averages, are expected to reduce fiscal pressures, and to unwind the critical macroeconomic distortions that held back growth in the past.

The economy is expected to grow at an average of 3.4% between 2023 and 2025, benefitting from the reforms undertaken, a recovery in the agriculture and services sectors, and, over time, increased scope for government development spending. If the reform momentum is maintained, concerted efforts to achieve fiscal and monetary policy consolidation, reduce insecurity, strengthen public services and improve the business environment and openness to trade could boost investments and productivity, allowing Nigeria to return to a high growth path. Yet, downside risks to the outlook are considerable, and include fading or reversing of the reform drive, domestic and regional instability, and climate change effects.

Providing Legal Services to the Fintech Market 

The dynamic expansion of Nigeria’s fintech industry has spurred demand for legal services, propelled by the following key factors.

Regulatory compliance 

The fintech landscape in Nigeria is undergoing notable regulatory and legal developments. Primary regulatory bodies, including the CBN, the Securities and Exchange Commission (SEC) and the National Information Technology Development Agency (NITDA), have issued comprehensive circulars, guidelines and regulations, shaping the regulatory framework for fintech entities. This development underscores an increased demand for legal services to ensure compliance with these intricate regulations.

Investment and funding 

Fintech entities in Nigeria have successfully attracted over USD1 billion in foreign direct investments over the last six years, evidencing a surge in investment and funding activities. Consequently, there is an amplified need for legal services to navigate the complexities of investment and funding agreements, ensuring legal frameworks align with the industry’s rapid growth.

Data protection and privacy 

Amid escalating concerns about data privacy, the demand has intensified for legal services to guarantee that fintech companies fully adhere to data protection laws and regulations. Legal experts play a crucial role in crafting and implementing robust frameworks that safeguard user data, addressing the evolving landscape of privacy expectations.

Dispute resolution 

As the fintech sector expands, the potential for disputes naturally follows suit. This growth has heightened the demand for legal services in the domain of dispute resolution. Legal professionals are increasingly needed to navigate the intricacies of disputes that may arise within the dynamic fintech environment.

The Level of Activity, Trends and Developments in Nigeria’s Fintech Sector in 2023

Over the years, the Nigerian fintech sector has undergone a series of transformations, marked by the emergence of effective fintech companies, making it one of the most vibrant and innovative fintech industries in Africa. By disrupting and transforming the traditional banking system through the introduction of lending alternatives, the facilitation of electronic payments, and restructuring the frameworks for savings, fintechs have played an important role in increasing access to financial services and promoting a cashless economy.

The fintech industry has witnessed significant growth both in its level of activity and in the introduction of innovative solutions, driven by a number of factors, including:

• the growing prevalence of smartphones;

• a tech-savvy younger population; and

• an increased demand for more advanced financial services.

The cash shortages and scarcity caused by the CBN’s redesign of the Naira notes also resulted in the adoption of various fintech solutions in 2023. Traditional banks and financial institutions faced severe technical issues and service downtime, leading to the widespread adoption of fintech services. Remarkably, fintech entities have been able to retain a considerable segment of these customers even after the easing of the cash shortages and scarcity later in the year.

However, funding in the Nigerian fintech sector took a hit in 2023, with an estimated USD94 million raised from Q1–Q3 2023, in contrast to the USD798 million recorded in 2022, as investors embraced a more cautious approach to investment amid the global economic slowdown, rising interest rates, inflationary pressures and tightened monetary policy. This manifested in the shutting down of several fintech entities, widespread layoffs in existing ones and lack of emergence of a unicorn, unlike previous years. Notably, 2023 also saw a decline in cryptocurrency, Web3 and blockchain activities, with focus shifting to AI and AI-related activities. Several fintechs have now adopted AI systems for fraud detection and prevention, biometric verification for customer KYC implementation, and customer service.

Regarding regulatory compliance, the CBN took decisive actions and clamped down on several non-compliant financial entities. The licences of 179 microfinance banks, four primary mortgage banks and three finance companies were revoked by the CBN due to non-compliance with regulatory requirements. The CBN was also very active, releasing several guidelines and regulations impacting on the fintech sector.

Conversations around data privacy/protection and cybersecurity in general were on the rise this year due to increase in online fraud and cyber-attack incidents. These incidents further emphasise the need for fintechs within the ecosystem to strengthen their cybersecurity protocols and measures to address the ever-present risks of fraud and cybercrimes, and to ensure compliance with extant laws and regulations on these issues.

Regulatory Developments Affecting the Fintech Sector in 2023

The Nigerian government and regulators have consistently responded to the evolution of financial services. In 2023, there were a number of laws and regulations with notable impacts and effects on the fintech sector.

Nigeria Data Protection Act, 2023 

In June 2023, the Nigeria Data Protection Act, 2023 (NDPA) was signed into law, heralding a new era of data protection in Nigeria. Prior to the NDPA, Nigeria relied primarily on the Nigeria Data Protection Regulation (NDPR), a subsidiary legislation enacted by NITDA in 2019.

The NDPA establishes the Nigeria Data Protection Commission (NDPC), which:

• serves as the primary regulatory body overseeing data protection compliance in Nigeria;

• outlines the lawful bases for data processing, and introduces legitimate interest as a basis for data processing;

• provides extensive safeguards for processing of personal data of children and persons lacking the legal capacity to give consent;

• provides comprehensive bases for transfer of personal data between Nigeria and other countries; and

• gives the NDPC wide powers to sanction violators of data protection laws and regulations, among others.

The NDPA contains transitional and savings provisions retaining the provisions of the NDPR and the NDPR Implementation Framework, all of which now apply to:

• data controllers and data processors domiciled, resident or operating in Nigeria;

• the processing of personal data within Nigeria; and

• the processing of personal data of data subjects within Nigeria, even where the data controller or processor is not domiciled in, resident in or operating in Nigeria.

CBN Operational Guidelines for Open Banking in Nigeria, 2023

In March 2023, the CBN issued the Operational Guidelines for Open Banking in Nigeria (the “Operational Guidelines”), setting out detailed provisions on the responsibilities and expectations for the participants in the open banking ecosystem, and on the framework for sharing information and customer experience standards, among others. The Operational Guidelines build on the Regulatory Framework for Open Banking in Nigeria, which was issued by the CBN in February 2021, with the objective of providing an enabling regulatory environment for provision of innovative and customer-centric financial services through the safe utilisation of shared data.

The Operational Guidelines restate that any organisation (including a licensed financial institution/service provider, fast-moving consumer goods (FMCG) company, retailer, payroll service bureau, etc) dealing with customer data, which may be shared with other entities to achieve the provision of innovative financial services within Nigeria, is eligible to participate in the open banking ecosystem, and streamline the participants into API provider, API consumer and customer. In addition, the Operational Guidelines set out detailed responsibilities of the participants and prescribe a procedure for resolving disputes emanating from open banking activities.

CBN Guidelines on Contactless Payments in Nigeria, 2023 and Circular on Transaction Limits for Contactless Payments, 2023

In June 2023, the CBN issued the Guidelines on Contactless Payments in Nigeria, establishing a robust framework for safeguarding financial transactions while fostering seamless payments experiences. The Guidelines are applicable to:

• acquirers;

• issuers;

• payment card administrators;

• switching companies;

• payment terminal service providers; and

• customers.

The Guidelines:

• stipulate minimum security standards to be maintained by entities;

• mandate issuers and acquirers to adhere to stringent security measures to protect customer data and prevent fraudulent activities;

• recognise the importance of customer control and empowerment; and

• require issuers to provide opt-out options for customers who prefer not to use contactless payment methods.

In order to foster interoperability within the Nigerian payments ecosystem, support the growth of domestic payment processing capabilities and promote domestic payment processing infrastructure, the Guidelines require that transactions be routed through the existing Nigeria Inter-Bank Settlement System. Furthermore, the Guidelines mandate the retention of transaction records, ensuring the availability of audit trails for investigations and dispute resolution, and establish a clear dispute resolution mechanism where disputes are to be resolved in accordance with the industry dispute resolution system.

In addition, the CBN also issued the Circular on Transaction Limits for Contactless Payments. The Circular increased transaction limits and total daily limits for contactless payments, expanding the scope of transactions that can be conducted using contactless payments. This move is expected to further stimulate contactless payment adoption and enhance customer satisfaction. The Guidelines and the Circular are expected to play a pivotal role in advancing the adoption of contactless payments in Nigeria, fostering a secure, convenient and inclusive digital payments ecosystem.

CBN Corporate Governance Guidelines for Commercial, Merchant, Non-interest, Payment Services Banks and Financial Holding Companies in Nigeria 2023

In July 2023, the CBN issued the Corporate Governance Guidelines for Commercial, Merchant, Non-interest, Payment Services Banks and Financial Holding Companies in Nigeria 2023 (the “Corporate Governance Guidelines”), to be effective on the 1 August 2023, and applicable to commercial, merchant and payment services banks and financial holding companies in Nigeria.

The Corporate Governance Guidelines seek to enhance the previously issued codes and guidelines, such as the 2014 CBN Code of Corporate Governance for Banks and Discount Houses, as well as to harmonise specific requirements in the Nigerian Code of Corporate Governance with practices unique to the banking industry. The changes introduced by the Corporate Governance Guidelines include (among others):

• delineation of roles;

• transparency;

• board composition;

• structure;

• appointment; and

• exit process.

CBN Customer Due Diligence Regulations, 2023 

In June 2023, the CBN issued the Customer Due Diligence Regulations, 2023 (the “CDD Regulations”). The CDD Regulations build on previously issued anti-money laundering and combating financing of terrorism regulations, including the CBN Anti-Money Laundering and Combating the Financing of Terrorism in Banks and Other Financial Institutions (Amendment) Regulations.

The CDD Regulations:

• prohibit the creation of anonymous/fictitious accounts;

• seek to ensure that financial institut,,ions implement internal processes for conducting comprehensive customer due diligence; and

• prioritise customer identification and the conducting of risk assessments of classified customers, from time to time.

The CDD Regulations also expanded the scope of personal information that can be collected to include social media handles.

Challenges Facing the Fintech Sector 

Nigeria’s fintech sector faces several challenges, without which the sector should experience even more growth. Some of these challenges include the following. 

Infrastructure gaps 

The fintech growth trajectory faces hindrances due to existing infrastructure gaps. In certain regions, poor internet penetration and suboptimal network quality restrict the seamless operation of fintech services. Moreover, lower levels of digital literacy among the population contribute to the challenges faced by fintech entities.

Funding constraints 

Fintech companies encounter funding challenges on multiple fronts. The insufficient availability of venture capital and angel investment options restricts growth potential. Investors often adopt a cautious stance due to perceived risks, which in turn contributes to the funding constraints. Therefore, a notable funding gap exists, particularly concerning early-stage financing options.

Changing regulatory landscape 

Nigerian regulators have steadily improved over the years and are now very active. The effect of this is that the regulations applicable to fintech entities and their obligations thereunder are rapidly changing. Also, regulatory uncertainty is a significant hurdle, as the evolving nature of fintechs often outpaces existing regulations, creating ambiguity and hindering innovation. Fintech companies have a responsibility of being alert to the changes and adhering to the relevant provisions to avoid sanctions.

Consumer trust and security concerns 

Growing concerns regarding data security and misuse have contributed to a decline in consumer trust. The rising instances of online fraud and cyber-attacks amplify apprehensions among users. There is a general perception among consumers that the fintech space leaves users with limited avenues for addressing grievances, undermining overall confidence in fintech services.

Corporate governance 

The absence of robust corporate governance frameworks in fintech start-ups poses significant challenges, potentially exposing these innovative ventures to operational risks and ethical dilemmas. Without clear guidelines and oversight, there is an increased likelihood of mismanagement, regulatory non-compliance and inadequate risk mitigation. Such deficiencies may erode investor trust and hinder the sustainable growth of fintech enterprises, emphasising the critical need for well-defined governance structures to navigate the complex and rapidly evolving fintech landscape.

Competition dynamics 

The fintech landscape is marked by competitive challenges. Established banks and financial institutions pose formidable competition to emerging fintech players. The entry of international fintech giants, backed by significant resources, adds another layer of competition. Furthermore, the proliferation of fintech start-ups has led to saturation in certain market segments, intensifying the competitive landscape and requiring strategic differentiation for sustained growth.

Recommendations 

In addressing the challenges facing the fintech sector, a collaborative effort involving diverse stakeholders is imperative. Regulatory bodies, fintech entities and even customers must forge a collective alliance to surmount these obstacles successfully.

Regulatory authorities play a pivotal role by establishing unequivocal standards for the fintech sector, fostering an environment that encourages collaboration within the industry. Such collaboration is indispensable for enhancing foundational infrastructure, including internet connectivity, promoting financial literacy and facilitating broader access to banking services. In addition, fintech companies bear a responsibility to:

• proactively seek expert legal advice;

• adhere to changing laws and regulations; and

• institute robust cybersecurity measures encompassing audits, encryption and personnel training. 

Concurrently, client education initiatives on cybersecurity best practices become instrumental in fortifying data protection and ensuring seamless service delivery.

Fintech entities, along with regulatory bodies, must champion transparency in their operations, a critical factor in cultivating confidence and trust within the system. The establishment of trust among key industry players has the potential to smoothen transactions and facilitate a more fluid operational landscape.

Conclusion 

Fintech has ushered in transformative changes within the African financial landscape, revolutionising financial inclusion and operational efficiency. In Nigeria, the narrative extends beyond mere growth, showcasing a landscape marked by widespread adoption, heightened international interest and diversified applications, and extending well beyond conventional banking and payments services.

Despite commendable strides, there is a pressing need for a proactive and collaborative approach to tackle existing challenges. This necessitates concerted efforts from all stakeholders towards the creation of a balanced regulatory environment that propels positive sectoral growth, dismantles market barriers and ensures robust consumer protection.