Nigerian electronic payments company, TeamApt at a media briefing last week announced its acquisition of a switching license from banking regulator, the Central Bank of Nigeria (CBN).
The license allows recipients to work as a payment switch in Nigeria. And TeamApt plans to use it to enable its payment infrastructure product called AptPay.
Under the CBN payment framework, the switching license is the highest awarded to any fintech by the CBN. Hence, switch licensed companies are able to offer electronic fund transfers, transaction switching and processing service to customers and end-users alike.
For instance, when gateway service providers need to make instant payments to merchants, they are required to use (hold down) their funds to credit the merchant.
This might not come off as a big deal until they have to hold down funds running into hundreds of millions of naira.
A switching license on the other hand allows gateway service providers to use existing money in circulation (demand deposit) to credit their merchants, without necessarily holding down their own funds.
Basically, one should think about the CBN switching license as a pipeline that gives all the capabilities of banking and financial services in Nigeria.
This says a lot as to why only a handful of companies have been granted the license to operate switching services.
But now that TeamApt has acquired the license, it puts them on the same level as other Tier-1 financial technology companies like Cards Technology Limited (CTL) and private switching companies like Interswitch, eTranzact, 3Line and Unified Payments (UPSL).
A burning question though is whether TeamApt will be capable of handling the challenges of switching. TeamApt CEO, Tosin Eniolorunda dispels any doubts.
“TeamApt has evolved into having solid regulatory compliance and enterprise risk management processes that encompass disaster recovery, fraud management, business continuity processes and policies. Such systems are needed to handle the level of systemic responsibility that a switching license gives. We have done this without losing our startup and remain agile still.”
It is pertinent to state that the CBN itself has a detailed regulatory framework (PDF) for switching activities and the provisions generally require switch licensed companies to be at their A-game.
Security-wise, it is a telling fact that running switch operations requires heavy financial setup and maintenance.
This is evident in CBN’s request of maximum systems security, minimum of two network/link service providers (each acting as primary and secondary backup link to one another) and not to mention 24 hours a day and 7 days a week functionality from switch companies.
Even though TeamApt’s recent $5.5 million Series A raise somewhat makes up for the associated switching operation cost, there are a couple other challenges to negotiate.
Having recognised the operational risks that fintechs represent, the apex bank went ahead to publish a draft (PDF) around October last year detailing new CBN license regulatory measures for fintechs to follow.
The draft, titled: “Circular on the exposure draft of new CBN licensing regime for payment system providers” highlights three categories of PSP (Payment Service Providers) licensing.
Switching, which is categorised under the ‘PSP Super License’, requires holders to maintain a hefty ₦5 billion ($13.9m) shareholder fund (SHF), a license fee of ₦2 million ($5,560) and a renewal fee of ₦1 million ($2,780) after every three years.
In quick defence, Tosin notes that CBN instituted the SHF requirement to ensure that companies are adequately funded to handle the level of responsibility that such a license brings.
However, for every transaction processed, switching companies only earn a standard switching fee of ₦0.75 (0.2¢). In effect, they have to do trillions of naira worth of transactions to be able to get anywhere near those numbers. This would ordinarily come as a lot for any switching company. But Tosin goes on to highlight that there are many opportunities that come with having the license.
“The switching ability opens up many opportunities, mainly from being able to guarantee and handle funds across member institutions in a more efficient manner.”
It perhaps explains why, beyond just banks, most license holders extend their switching operations to include telcos as well into international transactions just to remain cash flow positive.
For a company that is barely three years into operations, TeamApt’s milestones are really impressive. Just that one can’t help but harbour certain doubts in that regard.
“Essentially, we have processes, policies, procedures, people and tools in place to manage the risks that come with a switching license,” remarks Tosin.
Another thing to consider is the nature of sanctions that apply to switching companies over regulatory infractions. As a matter of fact, switching companies are more open to a lot of sanctions from CBN.
A source confirms to Techpoint that eTranzact still has a pending case in court since 2017 over regulatory infractions which attracted an over ₦5 million fine imposition by CBN. The incident allegedly led to the removal of former eTranzact CEO, Valentine Obi.
One thing is for sure, the payment landscape in Nigeria is heavily regulated and this could mean many things for a company that has newly acquired a switching license.
But despite fears that regulation would be bad for innovation, the CBN has come out severally to say it will not push regulatory measures that would harm fintechs.