Nigerian regulator clamps down on unlicensed deposit-taking fintechs as fraud concerns mount

The Nigeria Inter-Bank Settlement System (NIBSS) has raised concerns over unlicensed financial services companies posing as deposit-taking institutions, in a sign that the industry is looking to step up regulatory enforcement following outcry over fraud and lapses in customer verification processes by payment providers.

In a memo to banks, fintechs and other payment providers, the Nigeria Inter-Bank Settlement System (NIBSS) warned that companies holding switching, payments processing, and superagent licenses are non-deposit-taking institutions and should not be listed as beneficiary institutions when customers attempt to make bank transfers.

Superagents, payment solution service providers (PSSPs) and switches are three crucial players providing payment infrastructure and offline distribution that have accelerated financial inclusion over the last decade. The PSSP license category authorises companies such as Paystack, Flutterwave and eTranzact, to operate digital gateways for card payments and money transfers by everyday consumers and enterprise customers.

“Listing [these] institutions… as beneficiary institutions on your NIP funds transfer channels contravene the CBN Guidelines on Electronic Payments,” said Ngover Ihyembe-Nwankwo, executive director of business development at NIBSS, wrote in the memo sent Dec. 5.

NIBSS — which operates Nigeria’s ubiquitous instant payments system used by all financial services providers — ordered commercial banks, mobile money operators and microfinance institutions to disable outward fund transfers into wallets operated by these firms.

A switching license allows fintechs, such as Remita, HabariPay, TeamApt (also called Moniepoint) and Interswitch, to quickly settle transactions without relying on the real-time infrastructure provided by NIBSS. And the superagent license, used by Y Combinator-backed Nomba and Interswitch Financial Inclusion Services Limited (also called Quickteller Paypoint), has been a pivotal category driving financial inclusion, authorising companies to build a network of retail agents armed with a point-of-sales device to provide payments services across the country.

By regulation, superagent companies rely on banks to secure POS devices and digital wallets for consumers. According to the Central Bank of Nigeria (CBN), there are nearly 50 superagent companies in Nigeria, at least 75 PSSP license holders and a little over a dozen switching companies.

However, over the last few years, as fintechs expand, many of these companies now offer deposit-taking services. Excluding commercial banks, payments service banks and microfinance institutions, there are less than two dozen financial institutions, namely mobile money operators, licensed to accept and hold consumer deposits directly, according to the CBN. But on consumer payments apps, including bank apps, the list is much larger and includes dozens of unlicensed deposit-taking companies, such as superagents and switches.

“Switches, PSSPs and [superagents] may process outward transfers [from wallets] as inflows to Banks but are not to receive inflows as their licenses do not permit them to hold customers’ funds,” NIBSS wrote in the memo

The latest order could purge several fintechs away from consumer payments apps as banks and fintechs tighten scrutiny over illicit fund transfers and concerns over weak verification processes by other companies.

In October, TechCabal reported that Fidelity Bank, a major commercial bank, had temporarily restricted consumer fund transfers to neobanks, such as Moniepoint, Kuda, OPay, and PalmPay. While the bank declined to comment on the issue, industry insiders cited rising fraud and customer verification as precursors for the action. Financial services companies are also proposing other initiatives to strengthen security and anti-fraud measures in the industry.