The Future of FinTech in Nigeria

1 EXECUTIVE SUMMARY

A Proactive Regulatory and Enabling FinTech Environment in Nigeria’s Capital Market

The Securities Exchange Commission (the Commission) at its 3rd quarter Capital Market Committee meeting of 2018, held on November 14, 2018, inaugurated a FinTech Roadmap Committee (the Committee) for the Nigerian Capital Market (NCM).
In furtherance of its terms of reference, the Committee examined the benefits, entry barriers and the regulatory hurdles faced by FinTechs as banking and securities regulators attempt to encourage and regulate financial innovation while protecting investors and consumers.

Fintech practices and developments in advanced FinTech jurisdictions indicate that FinTechs' participation has a deepening effect on capital markets with positive impact on those economies. Nonetheless, the growth pattern of FinTechs vis-à-vis the capital markets in those jurisdictions is the outcome of collaborative/cooperative efforts between regulators, traditional capital participants and FinTechs.

Despite its huge potentials and the convergence of pertinent growth indicators in Nigeria, the NCM is not perceived as attractive to FinTechs compared to China, Singapore, US, UK and other European FinTech hubs. Deliberate collaborative steps/strategy must therefore be targeted at propagating/harnessing the NCM FinTech landscape for a more robust NCM. In this wise, the NCM can borrow a leaf from advanced FinTech jurisdictions but the challenges preventing the full adoption of FinTech in the NCM ecosystem must be addressed first.

Regarding challenges in the way of Fintech adoption in the NCM, the unclear regulatory environment for FinTech in the Nigerian capital market has been highlighted by both industry and regulators. FinTechs are generally confused about which law or regulation is applicable to FinTech solutions. Whilst the current structure of the NCM is not supportive of venture capital and growth funding structure which are needed by FinTechs, the existing regulatory framework is also inimical to crowdfunding- another FinTech friendly funding model.

Relatedly, FinTech development in the NCM has generally been slowed by the lack of access to data or its non-availability in most cases, and in addition to frequent capital flight and low investor confidence, institutional knowledge gap and weak digital infrastructure have also dampened FinTechs' interest in the NCM.

Whilst, FinTech involvement in the NCM will increase the Commission's concern about market integrity, disclosure and compliance requirement, as seen from advanced FinTech jurisdictions, this concern can be largely addressed with RegTech platforms which provide advanced inspection and investigation processes.

In this wise, it is important for the Commission to engage with other regulators and agencies with respect to FinTech for information exchange, disclosure purposes and technology classifications. Such engagement is necessary to prevent regulation from standing in the way of innovation and competition as well as to ensure that regulation countenances technology-types and use cases for solutions bearing in mind that one size does not fit all FinTechs.

It is proposed that with the right developmental and regulatory framework, the underlying benefits of FinTech could be better harnessed in fostering financial inclusion and generally improving capital markets operations, and in this regard, FinTech awareness/education is highly recommended. Whilst FinTech activities will doubtlessly occasion a disruption of capital market activities, a proper structure of the NCM ecosystem and regulatory collaboration will deepen market penetration, propagate new products and services as well as address the problem of unavailability of funds. Additionally, a strategic engagement of FinTechs in the NCM will safeguard investors' interest, improve data collection, enhance data privacy and consumer protection, eradicate regulatory uncertainty, set defined markets for each regulator, encourage innovation, develop existing talents, robust communication channel and policy promotion.

Finally, the Commission must be FinTech proactive by facilitating responsible policy that balances financial innovation and investor protection, with a view to optimizing the value offerings of FinTech in the NCM and the Nigerian financial ecosystem whilst keeping abreast of FinTech developments globally.

2 INTRODUCTION

The advent of technology in our daily activities has provided varying adoption models and peculiarities in its engagement by various users. Laudably, technology has been ushered into the Financial Service (FS) sector commonly known as Financial Technology (FinTech), and it is here to stay. The FinTech buzz is ringing, and various jurisdictions have adopted or are adopting and testing multiple regulatory and adaptive business models in ensuring a sustainable environment for their FinTech boom and the ultimate growth of the financial services industry, and wider economy and job creation.

Interestingly, Investors continue to demonstrate confidence in Nigerian startups as the total Nigeria Startup Funding in 2018 amounts to $178,440,980, which was a 56% increase compared to investments in 2017 which stood at $115,000,000. Records show that 58% of those funds were received by FinTech start-ups in 2018 amounting to $103,410,795. Despite these laudable feats, the margin of local investment in FinTech remains conspicuously deficient to the foreign capital input and there are imminent risk of capital importation in the future to the detriment of our Capital Market and economy. Technology is now serving as a value proposition in the Financial Systems Industry. Currently active mobile network countrywide is about 162 million lines with Internet Penetration in Nigeria estimated at 47.9% leading to increased rates of banking with over 40 million bank accounts compared to the 3 million CSCS investment accounts. FinTech companies are using automation, digitization and simplification to reduce costs, increase efficiencies, build client relationships and facilitate regulatory compliance. The solutions are helping all – Front, Middle and Back Office Operations and the Capital Market stands to benefit from all of these.

Capital formation means increasing the stock of real capital in a country. For making additions to the stock of Capital, savings and investments are essential, however due to lack of awareness, majority of retail clients have kept their investable capital as bank deposits or land/property, which leaves other investment assets to suffer thereby stunting economic growth by depleting the amount of capital in circulation. Furthermore, the existing Capital Market Regulation has stifled the Crowdfunding industry and introduction of innovative trading platforms and solutions that drive market inclusion which is a major contribution in recent times from the FinTech industry and a few players have started operating on their own but run the risk of sanctions and lack transparency. The Capital Market Industry is now aware of the threats and opportunities brought by the era of digital transformation that has been underway for over a decade now.

There are countless opportunities for collaboration between the capital market and the FinTech community. The interests of the capital market are best served when clear areas of innovation, intervention and improvement are clearly outlined and articulated. In this report, we highlight various new technologies that are currently driving innovative businesses for FinTechs and other industries, and how these technologies can birth new products and services that will deepen the Capital Market, increase market participation and penetration. Invariably, FinTechs would play a major role in the capital market as they continue building capacities that enhance client relationships, trading options, financial inclusion, user experience, reduction of structural costs, facilitation of regulatory compliance, and tackling existing industry challenges such as investments and trading operations.

The Nigerian FinTech space is developing very fast. Traditional financial institutions particularly the banking sector, are redefining their financial offerings by 'finnovating' and blurring the lines that the average Financial technology (FinTech) start-ups had initially created through their disruptive technology. The emergence of these FinTechs’ is profoundly changing the way individuals and businesses within the financial community interact albeit certain concerns remain unattended between the various market participants. Currently, the Nigerian Banking sector and the Central Bank of Nigeria (CBN) have taken enthusiastic steps towards this emerging Financial Service (FS) market through creation of piecemeal regulations and adoption of products to service consumer demands to the exclusion of other Non-Banking Financial Institution (NBFI), other Financial Institutions or the Capital Market.

Internet penetration in Nigeria at 47.9% is higher than the global average and with increased mobile network, the Banking sector has experienced increased participation. However, it is apparent that the disruption in the banking sector vis-a-vis low investment inclusion in the Capital Market does not translate to increased banking and investment in the capital market. Particularly the cause of these markets disparities is clearly due to the lack of industry stakeholder collaboration, innovative and technologically driven solutions, lack of a coordinated framework by multiple regulators, unawareness of service offerings and less capital requirement for Non-Banking Financial Institution (NBFI) leading to less access to customers, poor investment offerings and low market penetration for NBFI as compared to their banking counterpart. Conversely, the Capital Market Industry is now aware of the threats and opportunities brought by the era of digital transformation that has been underway for over a decade now. Technology is now serving as a value proposition in the Capital Market Industry and there are countless opportunities for collaboration between the capital market and the FinTech community.

SEC as the major policy-maker in the Capital Market in attempting to develop a regulatory framework for FinTech has the onerous task of designing policies that prioritise the foundational constraints, drive financial inclusion, encourage growth, sustainable long term capital formation, innovation efficiency and an enabling environment, while balancing the need for addressing systemic risk and safeguarding consumers. The applicability of current regulations, and the language of those forthcoming, need to be clear and transparent so FinTech firms can appropriately navigate the industry’s ever-changing environment. Failure to do so will have a dramatic impact on the potential of FinTechs to participate in and drive the Capital Market growth and the Nigerian economy. Furthermore, the regulatory architecture must remain dynamic to handle the innovation coming from FinTechs and the fast pace at which they move and evolve.

To fully dimension how to maximize the benefits that FinTechs contribute to an economy and provide an enabling regulatory framework to propel this. The Securities and Exchange Commission set up this Committee with the following terms of reference –

• Develop a FinTech roadmap for the Nigerian Capital Market;
• Inform the SEC on approaches to innovation within the financial services sector;
• Promote access to capital in the financial services sector;
• Enhance Financial Inclusion in our economy;
• Foster greater transparency within the financial services sector;
• Enable more efficient compliance in regulatory regime;
• Serve as a think tank which will provide guidance on independent research for examining the role and value of FinTech in the financial ecosystem;
• Seek efficient and responsible policy regulatory regimes that balance financial innovation and consumer protection.

The work of the Committee culminated in this report and we hope the Commission and other policy-makers will work together to create a standardized and accommodative framework for the growth and innovation of FinTech in the Nigerian Capital Market based on the recommendations in this report.

3 FINTECHS AND THEIR IMPORTANCE TO THE NIGERIAN CAPITAL MARKET

3.1. Current Structure of FinTechs in the Nigerian Capital Market

Innovation and technology have brought about a radical change in traditional financial services. The world has seen the emergence of more than 1 million tech startups and massive global investment of USD111.8 billion in 2018 alone in the FinTech space. These innovators are leveraging technology to bring in seamless and innovative financial services for the banked and unbanked population. The global FinTech software and services sector is expected to boom as a USD45 billion opportunity by 2020, growing at a compounded annual growth rate of 7.1 percent.

Nigeria is transitioning into a dynamic ecosystem offering FinTech start-ups a platform to succeed and potentially grow into multimillion-dollar businesses. The Nigerian economy, which is predominantly cash driven, has been responding well to the FinTech opportunity, partly demonstrated by the exponential growth in mobile money operations from an average monthly transaction value of US$5 million in 2011 to US$142.8 million in 2016. The growing FinTech penetration can be attributed to a surge in e-commerce, and smartphone penetration. Nigeria’s growth wave is still far behind global counterparts, but it is stacked well, largely due to a strong talent pipeline of easy-to-hire and inexpensive tech workforce that is growing in experience and skills depth.

There are pertinent indicators of the FinTech Opportunity as noted by the KPMG FinTech in Nigeria Report and some of these are:

i. The fast- growing young population (115 million people below the age of 35)
ii. Exponential growth of mobile phone lines (estimated at 150 million as at July 2016)
iii. Huge financial inclusion potential (less than 50 million people with bank accounts in a population of 170 million people based on Bank Verification Number- BVN data)
iv. Relatively strong talent pool base that can be trained to develop digital solutions (buoyed by Nigerians in diaspora)

From Payment Solutions Service Providers (PSSPs) to Payment Terminal Service Providers (PTSPs), Payment Gateway Providers, Savings/Investment platforms, Remittance platforms, Bill Payment Platforms, E-wallets, Agency Banking, Mobile Money Operators, the Nigerian FinTech ecosystem continues to grow.

The FinTech opportunities in Nigeria has the potential to redefine the financial services and regulatory landscape in the next five years, giving Nigeria the opportunity to establish itself as one of the most successful FinTech hubs in the world.

However, with the current operational model in Nigeria, the economy lacks a few of the attributes of a successful FinTech Hub such as:

i. Government programs and incentives
ii. Infrastructure readiness and access cost
iii. Regulatory framework
iv. Business environment
v. Access to low cost, long term capital

Some other roadblocks in the widespread adoption in Nigeria are the lack of authentic consumer information on digital media and poor technology / digital infrastructure. As identified, regulatory mandates and a robust business environment will be some of the most impactful levers in catalyzing the Nigerian FinTech market to come up to speed and enable it address these roadblocks.

Notwithstanding the tremendous transformation caused by disruptive technologies in the financial services sector, the overall deployment and adoption of FinTechs in the Nigerian Capital Market (NCM) is far less than that of our counterparts in developed and emerging economies. Although the current activities in the NCM can be described as deeper than what was obtainable about a decade ago; few technology-based products and platforms that were unavailable years back are now operational such as the E-Dividends, Direct Cash Settlement and Dematerialization. However, to achieve increased financial inclusion in the NCM, FinTech solutions should be deployed in a number of areas in the NCM, such as in the registration of securities and operators, surveillance of market, rule-making, investigation and enforcement, governance and disclosure, and market development, reporting, access to market data, trading technologies, to name a few.

3.2. The Impact of FinTech in an Emerging Market - Nigeria

According to the Hong Kong Trade Development Council (HKTDC) Research, Nigeria is an emerging Market with the GDP of $376.28 Billion and GDP per capita of $1,994 while the service industry accounts for 55.80% of the GDP composition. Nigeria has made significant progress in socioeconomic terms over the last 15 years; however, the country continues to face massive developmental challenges, which include diversifying the economy, addressing significant infrastructure deficit, and building strong and effective institutions, as well as governance structures and public financial management systems.

As part of the Economic Recovery and Growth Plan of the Federal Government (2017 -2020), the Federal Ministry of Finance and Central Bank of Nigeria have been mandated amongst other things to:

• Restructure, strengthen and rationalize the regulatory and supervisory framework.
• Address the low capitalization and poor governance practices of financial intermediaries that submit inaccurate information to the regulatory authorities and incur costs within the financial system.
• Collaborate with banks and financial institutions to develop a structured financing plan to offer less expensive and more accessible credit to the real sector.
• Direct Federal Government policy towards financial deepening (establish links between rural and urban, banking and non-banking, and formal and informal financial systems) and financial product diversification.
• Stimulate financial inclusion initiatives (e.g., provide access to banking services in remote locations)

Traditional financial institutions such as Banks and Insurance companies have existed in Nigeria for decades; however, the level of financial inclusion in Nigeria is still low. According to Enhancing Financial Innovation and Access in Nigeria, Nigeria has an adult population of 99.6 million Nigerians and 36.8% of them are financially excluded. Out of this, 68.9% have access to a smartphone and 63.3% live in rural areas. Transactions are largely cash based as 82% of Nigerians currently receive their main income in cash. If traditional financial institutions have existed for decades and have not been able to significantly close the financial inclusion gap, it indicates that we must leverage a scalable system or technology to drive financial inclusion. The Nigerian Financial Inclusion strategy aims at closing the financial inclusion gap by 20% in 2020.

The aforementioned poses a huge opportunity for FinTechs to provide value by creating technology driven solutions. This explains why the rise of FinTechs in Nigeria has undoubtedly caused an indelible disruption that has re-defined the delivery of financial products to customers. Waking from the traditional mode of delivering financial services to customers, there is some degree of awareness and usage of digitally powered products even though the usage is still generally low.

The rise of FinTechs has the potential to proffer answers to the challenges experienced in Nigeria’s Financial Services sector that has existed for decades. FinTechs are leveraging online and offline capabilities to drive financial inclusion. The use of Mobile Money, artificial intelligence, Unstructured Supplementary Service Data (USSD), Near Field Communication technology etc. are also gaining adoption in the Nigerian ecosystem. FinTechs that have dominated Nigeria’s space include Paga, Flutterwave, Remitta, Paystack, Piggybank, Onefi, etranzact, fetwallet, interswitch et al. They have provided simple solutions such as airtime purchase, P2P Lending, B2P lending, funds transfer and payment processing services to name a few.

According to the Nigerian Interbank Settlement System, mobile money operators had 8.5 Million customers as at December 31 2018. They processed N1.8 trillion worth of transaction in 87.1 Million deals. Total Number of Mobile Money agents were 38,416 and they are 21 licensed mobile money operators in Nigeria.

In a bid to further drive financial inclusion, the Central Bank of Nigeria has released a framework for the creation of Payment Service Banks. This enables FinTechs, Telcos and the likes to leverage their existing customer base and data to provide access to basic financial services while extending this to include payments, savings, credit, insurance, pension and capital market products.

Lastly, FinTechs have the capacity to drive scalability and convenience for a customer population like Nigeria where transactions are largely cash based and a sizeable portion of the population is financially excluded. Despite the economic headwinds, the level of innovation for financial services that Nigeria has achieved is commendable. However there is much more that can be achieved with appropriate economic conditions and appropriate framework from all stakeholders in the FinTech Ecosystem.

4 COMPARATIVE ANALYSIS OF FINTECH PRACTICES

4.1. The Role of FinTech Hubs – The Places Where FinTech Firms are Catalyzed and Growing

As a key driver of financial inclusion and economic development, FinTech innovation has become a major area of focus for many countries, financial institutions and investors. Traditional banking institutions are seeking increased collaborations with FinTechs through direct investments or revenue sharing models while governments are investing more in RegTech and innovation friendly regulations as well as facilitating regulation to enable FinTechs drive economic growth and employment opportunities.

Global investments in FinTechs more than doubled from $50.8 billion in 2017 to $111.8 billion in 2018 with FinTech hubs in The Americas, Europe and Asia all seeing significant growth in investments year-on-year, including, big ticket deals such as Vantiv’s acquisition of Worldpay for $12.86 billion, Ant Financial’s VC raise of $14 billion and PE firm Blackstone’s $17 billion investment in Refinitiv.

The global regulatory environment continued to shift in 2018, with the degree of change not expected to drop off in the near future. The implementation of Payments Service Directive (PSD2), General Data Protection Regulation (GDPR), MiFID II, new IFRS standards and the EU Benchmark Regulation forced many organizations to adjust their operations in 2018.

These and more regulatory changes helped increase interest in RegTech during 2018, both from traditional corporates looking for ways to better manage their compliance obligations and from other investors.

These investment activities, collaborations with traditional financial institutions, innovation availability of skills, government policy and regulation define the relevance and growth of a city or country as a FinTech hub. According to the Global FinTech Hub report, cities in China, USA, UK and Singapore lead as top 10 FinTech Hubs in the world.

4.2. Environment and Regulatory Policies

Given the advancement of FinTech Hubs in China, UK and Singapore this report will review case studies in these countries to establish the most appropriate adaption to drive FinTech regulation and growth within the Nigerian context.

China

China is considered one of the most progressive countries in terms of FinTech & innovation with investments reaching a record high of $18.2 billion in 2018 compared to $4.4 billion dollars in 2017. Some of the biggest FinTechs in China include Ant Financial, JD Finance and Baidu.

China maintained a light touch of FinTech regulation between 2013 and 2015 which enabled an explosive growth of the FinTech landscape in the country. However, this led to increased fraud cases and risk events, specifically targeting internet lending.

Since 2015, China has managed to tighten up its regulation in lending, payments, insurance and internet finance. As at 2017, the country had about seventy equity crowdfunding platforms and a significant P2P lending market. In 2016, China announced a cap on the country’s peer-2-peer lending whereby individuals could only borrow a maximum of CNY 200,000 and companies could borrow CNY 5 million per borrower.

Some of China’s guidelines and regulatory initiatives include:

• The Guiding Opinions on Promoting the Healthy Development of Internet Finance 2015 (2015 Internet Finance Guidelines) - The guidelines explain how China’s financial and internet regulations would apply to the country’s growing internet finance industry.
• The Measures for the Administration of Payment Services of Non-Banking Institutions 2010 - Regulates 3rd party payment services. Non-financial companies must obtain a payment business license from the Peoples Bank of China (the “PBOC”) for 3rd party payment services.
• Interim Measures for Administration of the Business Activities of Peer-to-Peer Lending Information Intermediaries - Regulates the business activities for P2P lending.
• Plan to Implement Special Rectification Work on Internet Finance Risks - Plan seeks to standardize the regulation and supervision of internet finance by balancing the goals of protecting consumers and encouraging financial innovation.
• Plan to Implement Special Rectification Work on Equity Crowdfunding - Specifies activities that equity crowdfunding businesses are not allowed to engage in including:
  o Public offering of securities to unspecified investors or more than 200 specified investors without CSRC approval. o Illegal private equity fund management business, such as raising funds from individuals or organizations other than from qualified investors (capped at 200). o Misappropriating or occupying investors’ funds o Making false and misleading claims in publicizing or promoting finance products or businesses. o Conducting securities business (such as any brokerage or advisory service in relation to securities investment) without the CSRC’s approval.

United Kingdom

The United Kingdom is considered the most advanced in FinTech regulations and attracts the most significant FinTech investments in Europe such as Vantiv’s acquisition of Worldpay for $12.86 billion, which was one of the biggest deals in 2018.

In April 2016, The UK Government introduced the Innovative Finance ISA for loans arranged via P2P platforms in April 2016. In particular, crowdfunding platforms need to comply with Client Money regulations (CASS).

On 13 January 2018 the Open Banking (PSD2) directive came into force. The directive would require Banks to open up their banking information so that it can be shared more securely between organizations. This would allow third parties such as FinTechs to build innovative products.

FCA signed Co-operation Agreements with FinTech regulators in several countries including China, the USA, Singapore and Australia.

• The agreements allow parties to share information on financial services innovations as well as emerging trends and regulatory issues.
• Some of the agreements contain a referral mechanism for innovative businesses seeking to enter the other’s market.
• Regulators provide support to the FinTechs at each point in order to reduce regulatory uncertainty and time to market.
• Once referred by the regulator & before applying for authorization to operate in the new market, the business will be assigned a team to assist them understand the regulations in the new market.
• The business will be assisted during the authorization processes with access to expert staff and possible specialized authorization process.
• Following authorization, the business will have a dedicated contact to turn to for support for a year.

A key regulatory initiative by the UK is “Project Innovate” which was introduced by the FCA in 2014 to aid FinTechs introduce their innovative financial offerings. Its five core initiatives were:

1. A Regulatory Sandbox - for FinTechs to test their innovation in the market without regulatory involvement.
2. An Innovation Hub: for FinTechs to identify & understand applicable regulation, harness expertise of regulators, prepare applicable applications and inform the FCA of any constraints in existing approach
3. An Advice Unit: to provide feedback to firms developing automated advice and guidance models.
4. A Direct Support Team: to provide a dedicated contact for FinTech that are considering applying for authorization.
5. Regulatory Technology (RegTech) tools and services: This applies to new RegTechs and allows the FCA to help start-ups, FinTechs and academics to learn about the different types of RegTech.

Singapore

The FinTech sector is regarded as the fastest growing in Singapore with total investments in this sector totaling $347 million in 2018. The main regulator, the Monetary Authority of Singapore organizes one of the world's largest FinTech festivals, the Singapore FinTech Festival, drawing more than 30,000 participants comprised of FinTech players, technopreneurs, policy makers, financial industry leaders and investors.

In addition to the FinTech festival, other initiatives by the regulator include:

• The Regulatory Sandbox - for aspiring FinTechs to set up in Singapore within a specific range of operations in a well-defined space.
• FinTech Innovation Lab (‘Looking glass’) - a platform that allows stakeholders in FinTech sector to connect, collaborate, and co-create.
• FinTech Fast Track program by the Intellectual Property Office of Singapore: to accelerate patent applications. FinTech patents are issued within 6 (six) months as opposed to 2 (two) years.

Worthy Mention - Malta

Malta is considered a ‘Blockchain Island’ given its progress and effective regulation of blockchain related technologies. The following bills were unanimously passed by its parliament:

• Innovative Technological Arrangement and Services Act
• Malta Digital Innovation Authority Act
• Virtual Financial Asset Act

5 FINTECH CHALLENGES

Despite the potential benefit of FinTech to the Nigerian capital market, there is still lot of work to be done, as numerous challenges exist for industry experts and stakeholders to tackle. These challenges have restricted the adoption of FinTechs fully into the capital market ecosystem and prevented FinTechs from maximizing their full potential in our market.

FinTech Innovation, which is commonly referred to as “Disruptive Technology” is responsible for significantly altering traditional processes in the financial system with the use of innovative technology. This disruptive nature of FinTech solutions initially created challenges for the industry, as practitioners in the financial system regarded it as competition. Innovative technology triggered creative disruption and threatened the operations of various financial system operators and intermediaries. This challenge has however been addressed in certain jurisdictions with the acceptance of FinTechs as collaborators and enablers, rather than competition. Whilst considerable success has been achieved in addressing this challenge in some jurisdictions, there exist certain challenges, which still hinder the growth of the sector, particularly in the Nigerian capital market.

5.1 REGULATION

The existing regulatory framework of every capital market determines the emergence of new products or services in that market. Regulators must come up with the appropriate framework and policies that drive the adoption of innovative technology in solving problems in the financial services sector and ensure that adequate regulatory safeguards are put in place to ensure the protection of consumers.

The existing framework in the Nigerian capital market neither provides enough clarity on the role of FinTech companies nor clearly articulates what is expected of them in terms of registration requirements and compliance. In addition, the framework creates uncertainty of how regulators intend to treat certain FinTech products like crypto assets.

This situation is a major challenge and threatens the growth of the sector, as innovators not only remain uncertain about the future of their innovations, but the regulator is also perceived as being ambivalent to technological innovation.

5.2 ACCESS TO DATA

Simply put, data is the tool that drives engagement and innovation. The unavailability of access to data remains a huge challenge to FinTechs in the Nigerian capital market. This makes it difficult to identify potential customers, develop applications to meet the specific needs of investors and monitor competition.

The importance of data is underscored by its description as the “new oil” in this technological age. Commonly referred to as “Big Data”, its availability aids the creation of new products and services or facilitates improvements to existing processes in terms of either time or cost reduction. Closely related to access to data is data analytics, which involves examining data to draw conclusions about information and machine learning techniques for predictive insights.

The efficiency of every FinTech company is therefore dependent on access to data and its ability to transform it into products and services. The absence or insufficiency of data completely makes the generation of Big data impossible and constitutes a huge challenge to FinTech companies whose efficiency relies on data.

In this era of Big Data and data analytics, regulators also need to jettison conventional supervisory approach and adopt the use of supervisory technology for regulators (SupTech) in analyzing the vast amount of data at their disposal and automate the supervisory process to achieve effective supervision of regulated entities and increased transparency in the supervisory process.

5.3 CYBER SECURITY

The dependence on data by FinTechs speaks to the fact that a huge volume of personal and proprietary data is vulnerable to attack and possible improper use. This threat of data theft and compromise underscores the importance of cyber security and this threat is a real and present danger and is disproportionally magnified by interconnected financial systems.

Cyber-attacks are currently on the high and major FinTech companies from inception allocate huge budgetary votes for cyber security in order to protect their data integrity and confidentiality. Whilst one challenge relates to protecting the data itself, another challenge is the cost associated with protection of data.

5.4 CAPITAL MARKET LIQUIDITY

Nigeria’s capital market liquidity is over-dependent on foreign capital. Adverse changes in the macro-economic environment leads to capital flight and dearth of liquidity in the market. We need to grow the domestic contribution as a shock absorber. While institutional investments can be better, the retail investments present the more challenging but vital opportunity for the sustainable growth of the capital market.

5.5 LACK OF MARKET CONFIDENCE

Non-Banking Financial Institutions (NBFIs) are not perceived as strong institutions the way banks are. The top 5 banks employ over 36,000 staff with yearly revenues in excess of N2 Trillion whereas the top 5 NBFI’s are struggling to reach 10% of these figures. Moreover, banks are insured the by Nigeria Deposit Insurance Corporation (NDIC).

The low confidence is also as a result of no clear sense as to what the value proposition of the FinTech industry or firms bring to plats. Consumers are not sure what solutions are being offered by other financial classes and FinTechs have less access to these customers. The NBFIs also do not possess the quantum of trust that is backed by the brand awareness of the Banks as consumers find it harder to trust companies that are limited as information made available cannot be used to make investment decisions.

5.6 INSTITUTIONAL KNOWLEDGE GAP

The Pension industry’s holdings of FGN paper amounted to 69.7% of their AUM in February 2018, compared with 72.3% one year earlier. Most pension managers are largely risk managers and have a rather conservative approach to equity and non-conventional investments outside government securities and commercial paper.

5.7 LACK OF INNOVATION

The industry is not dynamic and innovative in providing solutions for retail investors and this would need to change for the market is to grow and thrive as with other jurisdictions. The government has to offer incentives to encourage investment in Fintech innovation, the regulators a more inventive approach and the operators more solutions to engage and encourage broad based retail participation.

5.8 WEAK DIGITAL INFRASTRUCTURE

For a viable FinTech ecosystem in the Nigerian Capital Market, it is imperative to have in place, a supportive digital infrastructural architecture. The country still has a rather low penetration of mobile, high-speed broadband and IoT infrastructure to facilitate smooth connectivity across all channels.

5.9 UNDERDEVELOPED VENTURE CAPITAL/GROWTH FUNDING STRUCTURE

The low level of participation by Venture Capital/Growth Funds in FinTech investment, coupled with the attractiveness of FinTech firms to angel investors have been a challenge in the ecosystem. The non-existence of numerous marketplace platforms where FinTech start-ups can demonstrate and provide briefs about their innovative offerings to potential investors has further exacerbated the problem. To the extent they exist, International funding partners have been the major funding source for FinTech start-ups to access capital at seed stage.

5.10 LACK OF INCUBATOR-ACCELERATOR ENTREPRENEURIAL SUPPORT SYSTEM

FinTech start-ups require support to thrive in an ecosystem, and Incubators-Accelarators provide this sustenance in form of access to office space, legal/marketing/regulatory/managerial guidance, accounting/tax advisory and capital. While there have been attempts by the innovation hubs to offer support to start-ups, the effect has not been felt across the FinTech start-ups community. Start-ups such as Paga, Paystack and Flutterwave have raised funds outside the shores of the country.

6 RECOMMENDATIONS FOR ADDRESSING FINTECH CHALLENGES

6.1. Deepening Market Penetrations

In order to improve penetration of investment products, the SEC should consider the following initiatives:

1. COLLABORATION:
   a) Collaborate with the Central Bank of Nigeria to:
   • Streamline customer onboarding. This can be done by revising regulations to make BVN sufficient for opening accounts in the capital market, insurance, pension and credit space.
   • Simplify the process of new product registration
   • SEC should take responsibility to collaborate with Self-Regulatory Operators to provide access to information for FinTech oriented public/startups.
     b) Collaborate with the National Pension Commission to:
   • Ease tensions between fund and pension managers as the pension managers should be natural clients of the fund managers, which in turn must be encouraged to seek and invest in viable FinTech initiatives for medium to long term wealth growth and creation
   • Share Knowledge: The Pension Commission need to have a long-term orientation towards asset allocation which fund managers have. Both parties should be able to leverage each other’s information/research and expertise in order to efficiently allocate available assets.
   • Revise Regulation: Some SEC rules need to be revised as it works against the efficient use of available pension assets. For example, there should be limitations on the total number of Pension assets invested in government securities in order to spur growth in other areas of the economy.
     c) Collaborate with the National Insurance Commission (NAICOM) to:
   • The insurance sector needs to evolve in order to be competitive. NAICOM should fast-track the implementation of the minimum paid-up share capital.

6.2. Consumer Protection, Security & Data Privacy

Since customers are at the core of innovation in financial services, the following recommendations should be considered to ensure consumer protection, security & data privacy:

1. GOVERNMENT AND REGULATORS: SEC should collaborate with other regulators and governments agencies to firm up FinTech oriented privacy and security policies. Existing policies should also be revised to reflect existing realities in an innovative environment that encourages data sharing in a secure manner.
2. FINTECHS:
   • Use customer data only while customers are using their services. Terms of use should not include indefinite amounts of time for data exploitation or background data collection
   • Data minimization; processing only necessary data should be practiced by FinTech companies
   • Consumers should be given the full right and control over the data they intend to share with FinTech organizations
   • Embrace best practices in information security and embed security into their product design and technology architecture to optimize experience and modularity

6.3. FinTech Friendly Regulation/Policies and Compliance

To address regulatory challenges that FinTechs encounter, the following are recommendations for SEC:

1. DRIVING A HARMONIZED REGULATORY AGENDA

   • SEC should work with other regulators to create a centralized committee of all impacted regulators charged with the responsibility to formulate and ratify policies and regulations for FinTechs.

2. CRYPTO-CURRENCIES, VIRTUAL FINANCIAL ASSETS AND ICOS

   • SEC needs to decide on its preferred classification of crypto-currencies (either as Commodities, Securities or Currency). The recommended classification is either as Commodities or Securities but NOT as Currency.
   • SEC should be responsible for the regulation of Virtual Financial Assets Exchanges and develop a framework around it.

7 OTHER RECOMMENDATIONS

Strategic Considerations for Setting up FinTech Developmental and Regulatory Frameworks in the Nigerian Capital Market (NCM).

1. FinTech Awareness & Education for NCM: By its very nature, FinTech, when developed in the NCM, will allow Capital Market products reach more people or consumers. Whilst this places a heavier market protection burden on SEC and other regulators, it places a much heavier burden of FinTech literacy on all participants of the NCM ecosystem.

2. Competition: Attracting/Retaining Nigerian-based FinTechs: Encouraging/attracting Nigeria-based FinTechs with the attendant wide variety of FinTech products and services therefore requires deliberate and targeted government policies, regulations and guidelines in that regard.

3. Business model/technology test regime: One Size Does Not Fit All: As such a developmental framework, to be functional must include a business model/technology test regime for the different uses and types of FinTech solutions.

4. Feedback Mechanism: From the foregoing, a feedback mechanism should, of a necessity, be designed into the developmental framework for the NCM, these feedbacks should then form the basis for FinTech policies in the NCM and directions which will, in turn, inform the laws, regulations and guidelines to be made in respect thereof.

8 TIMELINE FOR IMPLEMENTATION OF RECOMMENDATIONS

The committee provided a phased timeline starting Q4 2019 through Q4 2021, covering: harmonized regulatory agenda, framework for crypto-assets, accelerating investment via 'Speed Funds', creating directory services/RegTech platforms, capacity building for staff, and regular engagement with FinTechs.

SUMMARY

The FinTech Roadmap Committee proposes a collaborative regulatory framework to overcome significant barriers such as unclear licensing, lack of data access, and an underdeveloped funding structure within the Nigerian capital market. Key recommendations include establishing a centralized regulatory committee, implementing a sandbox environment for testing innovations, and creating a 'FinTech Office' to facilitate investor relations and regulatory compliance. By aligning with global standards for consumer protection and digitizing market processes through RegTech, the Commission aims to foster financial inclusion, attract local investment, and position Nigeria as a leading African FinTech hub.