Regulatory Challenges In Fintech: Breaking Down The Red Tape

The fintech industry has revolutionized financial services by harnessing technology to enhance customer experience, security, and convenience. Artificial Intelligence and digital innovation have fueled its rapid growth, enabling seamless self-service options, prompt support, and instant access to information. However, this exponential growth is threatened by a complex regulatory landscape, which hinders progress and poses significant challenges to the industry's continued success.

The lack of clear policies and regulations, fragmented legal frameworks, multiple regulators, and regulatory complexities have created uncertainty and obstacles for fintech companies in Nigeria. To address these challenges and pave the way forward, it is essential to identify and analyze the regulatory hurdles and propose potential solutions. This paper aims to do just that, providing an in-depth examination of the regulatory challenges facing the fintech industry in Nigeria and exploring possible solutions to break down the red tape and foster a more conducive environment for innovation and growth.

OVERVIEW OF THE REGULATORY LANDSCAPE FOR FINTECH

The regulatory approach towards the fintech sector in Nigeria is a multifarious one. This is evident from the fact that there is no single regulatory authority assigned to it. It is being regulated by several agencies in Nigeria which could be attributed to the fact that fintech activities most often cut across several transactions which often crisscross into several areas being regulated by several other government-established institutions. The main regulatory bodies in the fintech sector include The Corporate Affairs Commission, The Central Bank of Nigeria, The Securities and Exchange Commission, The Nigerian Communications Commission, The National Information Technology Development Agency, The National Insurance Commission, The Federal Competition and Consumer Protection Commission, The Federal Inland Revenue Service, The Nigerian Data Protection Commission and The National Office for Technology Acquisition and Promotion. As already pointed out, the extent to which any of the listed institutions/bodies will be involved with any fintech will be dependent on the kind of transactions or activities in which the fintech is involved.

1. The Central Bank of Nigeria (CBN): This is a primary regulatory body for fintech services in Nigeria. The Central Bank of Nigeria is saddled with the responsibility of issuing licenses to fintech companies desirous of offering financial services in Nigeria. Fintech operators licensed by the CBN include mobile money operators, switching companies, payment gateways and payment terminal service providers, and aggregators.¹ Operators of bill payment platforms are required to either obtain a license from CBN or be integrated into a licensed payment service provider. Mobile money operators and other fintech service providers which make use of telecommunications infrastructure, also require the approval of the Nigerian Communications Commission.²
2. The Securities and Exchange Commission (SEC): This institution comes to the fore when fintech companies are desirous of raising capital/funds from the capital market. Thus, they must register with the Securities and Exchange Commission and further comply with the provisions of the Investment and Securities Act and the rules made thereunder. Over the years, the SEC has made several rules regulating the issuance of digital assets, capital markets, etc. FinTech Companies that provide services in the Nigerian Capital Market such as E-Dividends, Direct Cash Settlement and Dematerialization, registration of securities, Capital Market surveillance, etc.³
3. The Corporate Affairs Commission (CAC): This is like the foundation institution for the regulation of the fintech sector since these companies must be registered with the CAC in order to acquire a legal personality. The CAC basically regulates the incorporation of a fintech company, ensuring that essential elements such as the minimum issued share capital, shareholding, directorship, etc are considered by the promoters of the fintech company in order to ensure compliance with existing laws and regulations.⁴
4. The Nigeria Deposit Insurance Corporation (NDIC): This statutory body is responsible for ensuring all deposit liabilities of licensed banks and other deposit-receiving financial institutions in Nigeria. It is necessary to point out that all fintech companies that provide mobile banking services including deposit accounts such as checking and savings accounts for Nigerian consumers, are required to be registered with the NDIC.⁵
5. The National Information Technology Development Agency & Nigeria Data Protection Commission (NITDA & NDPC): Whereas the NITDA was established pursuant to the Nigeria Data Protection Regulation, 2019, the NDPC was established under the Nigeria Data Protection Act, 2023. The NITDA and NDPC regulate fintech companies whose sphere of operation cuts into the handling, processing, storing, and transferring of data of data subjects in Nigeria.
6. The Federal Competition and Consumer Protection Commission: The Commission was established pursuant to the Federal Competition and Consumer Protection Act, 2018, and mainly prohibits anti-competitive practices that tend to endanger competition in the market amongst fintech companies.
7. The National Office for Technology Acquisition and Promotion: This is an agency under the Federal Ministry of Science and Technology in Nigeria and is primarily saddled with the responsibility of regulating and promoting the acquisition, transfer, and domestication of foreign technology in Nigeria. NOTAP regulates fintech companies that engage in technology acquisition activities and enter into technology transfer agreements in their business with foreign entities.⁶

Regulatory Challenges in Fintech

Having successfully discussed some pertinent regulatory bodies guiding the fintech sector in Nigeria, it is incumbent that I further traverse the challenges of regulation constantly being faced by the fintech sector in Nigeria. Ranging from multiple institutions, the absence of unified legislation, and the complexity of compliance, fintech companies most often encounter red tape in their quest to deliver timely and innovative services to clients. Some of these challenges encountered include:

1. Lack of a unified and comprehensive legislation: This is chief amongst the regulatory challenges plaguing the fintech sector in Nigeria. Currently, there is no unified and comprehensive legislation in Nigeria regulating the fintech industry, hence the several complexities and ambiguities that often occur with respect to compliance-related issues. This stifles innovation and further forestalls growth and development within the industry.
2. Presence of multiple regulators: The presence of multiple government institutions and agencies regulating the fintech sector in Nigeria has led to cumbersome regulatory requirements, making it challenging for fintech providers to operate.⁷
3. Cross-border operations of Fintech providers: Most fintech activities cut across several borders, and as such they are tasked with the responsibility of compliance with a myriad of legal and regulatory frameworks.
4. Cybersecurity concerns: With the increase in hacking and cyber-attacks, it has become paramount for fintech companies to ensure compliance with cybersecurity regulations, thereby adding an extra layer of complexity to fintech operations.⁸

Impact on Fintech Companies

As a result of the above-analyzed regulatory challenges plaguing the operation of fintech companies in Nigeria, the growth and development of fintech companies is constantly being stifled and nipped in the bud. This has further adversely impacted innovation as many young entrepreneurs are being discouraged from expressing their innovative ideas.

Furthermore, it has adversely impacted the sustainable growth and development of the economy. One of the major backdrops upon which any nation thrives is innovation. Thus, where innovation is being stifled, economic growth and development will be further than ever.

The panacea to the regulatory challenges faced by the Fintech Industry

1. Engaging the services of a Legal Professional: This is key to successfully navigating the complexities inherent in the fintech space. This is because a lawyer skilled in fintech regulations will carefully and skilfully guide a fintech start-up or company on regulatory compliance and other related issues, thereby helping the company remain competitive.
2. Establishing a Regulatory Compliance Department: Another very good step towards breaking down the red tape associated with the regulatory landscape of the fintech sector in Nigeria is to establish a team dedicated to monitoring, identifying, interpreting, and ensuring the implementation of regulatory requirements effectively.
3. Maintaining effective collaboration with Regulators: To efficiently navigate through the regulatory hurdles in the fintech sector, the fintech companies must aim to constantly collaborate and engage with the regulators within the sector. This will enable them to stay on top of their game.
4. Periodic compliance review/audit: Periodically conducting internal reviews and audits will enable a fintech company to ensure ongoing compliance with existing and novelle regulations and as well identify areas for improvement.⁹

Conclusion

In conclusion, the fintech industry has indeed heralded a revolution in the delivery of financial services in Nigeria by harnessing technology, but regulatory challenges in the space actually pose a serious obstruction to its development and growth. Navigating the regulatory challenges and complexities in this sector can actually be overwhelming and daunting, hence, I have undertaken this study whereby I have clearly analysed the regulatory landscape of the fintech industry and further provided plausible and pragmatic approaches which can be leveraged in order to navigate the intricacies inherent in the fintech space. This would further bring about growth, development, and innovation.

Footnotes

1. Marcus-Okoko & Co. "An Examination of the Regulatory Framework of Financial Technology in Nigeria" (https://www.mondaq.com/nigeria/fin-tech/1175728/an-examination-of-the-regulatory-framework-of-financial-technology-in-nigeria) accessed on May 15, 2024 at 12:20 pm

2. Ibid.

3. C. Egemonye, "Before you set up that Fintech Company: Regulatory Requirements to be aware of in Nigeria" (https://goldsmithsllp.com/regulatory-requirements-for-fintech/) accessed on May 15, 2024 at 3:02 pm

4. Ibid.

5. Section 15 of the Nigeria Deposit Insurance Corporation Act, 2006

6. C. Egboh et al, "Fintech Laws and Regulations 2023" (https://www.globallegalinsights.com/practice-areas/fintech-laws-and-regulations/nigeria/) accessed on May 20, 2024 at 8:52 am

7. C. Okeke & A. Adebanjo, "Resolving the Legal and Regulatory Challenges of Fintech in Nigeria" (https://www.mondaq.com/nigeria/fin-tech/1132836/resolving-the-legal-and-regulatory-challenges-of-fintech-in-nigeria) accessed on May 16, 2024 at 4:15 pm

8. O. Ezeoke, "Navigating Fintech Regulation in Nigeria: Challenges and Opportunities" (https://medium.com/@o.bezeoke/deciphering-fintech-regulation-in-nigeria-navigating-complexities-and-challenges-7cbd266cfac9) accessed on May 17, 2024 at 11:44 am

9. Ibid.

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