The emergence of FinTech and e-commerce has been a welcome change to global commercial transactions. Whilst FinTech makes it easy for customers to pay bills, invest, save money, access loans/other financial products at little or no additional cost, e-commerce makes it easy for goods to be purchased online and delivered to customers.
E-Commerce companies typically integrate their platforms with FinTech to accept online payments. While this relationship has proved beneficial to both parties, they have also had to suffer the hurdles of running digital businesses in Nigeria.

Case Study

FinePay is a licensed FinTech startup based in Lagos, Nigeria. On Friday, 6th July 2018, a Post No Debit instruction (“PND”) was placed on its account with ABC Bank Ltd on the instruction of the Nigerian Police Force. The account had more than N500, 000, 000.00 (Five Hundred Million Naira).
The restriction from the Police was due to its investigation into an alleged fraudulent transfer of N500, 000.00 (Five Hundred Thousand Naira) from Mr. Charles Fred’s bank account through FinePay’s platform.
FinePay was neither notified by its bank of the PND on its account nor did the police seek any form of clarification from FinePay or any of its representatives about the alleged fraudulent transfer from Mr. Fred’s account. FinePay only became aware of the PND on Monday, 9th July 2018, when one of its merchants attempted to conduct a transaction through its platform.
When FinePay made an inquiry with its bank, the bank advised FinePay to call the number of the Police Officer handling the matter. FinePay called the Police Officer and was asked to send its representatives to come in for interrogation on Thursday, 12th July 2018 in Calabar, Cross River State. FinePay also received a formal invitation to attend the interrogation.
It was at the interrogation that FinePay was then informed of the alleged fraudulent transfer. The Police subsequently asked FinePay’s representative to write a Statement after which he was granted bail. This was not supposed to be any more than an inquiry. FinePay’s representative asked the Police to withdraw their PND instructions to the bank, but the Police refused, on the ground that the PND could not be removed until after their investigation.
The Police then asked FinePay’s representative to return for further interrogation on Thursday, 26th July 2018, and to present a chart showing how its platform works, as well as a copy of its certificate of incorporation, a copy of its Central Bank of Nigeria (CBN) licence and Proof of Registration with the Special Control Unit Against Money Laundering (SCUML).
In the course of providing financial solutions in a country trying to increase financial inclusion, FinTech companies like FinePay battle with numerous challenges such as the above scenario and their success is continuously undermined by factors that impede the growth of the space.

Key Challenges

FinTech has redefined financial services through technology, speed, and simplifying transactions. It has led to the emergence of new business models, products and solutions that are reshaping financial services in Nigeria. It has influenced the approach of banks to financial services. Nigerian banks now have internet/mobile banking platforms while some are also leveraging the social media to provide financial services to their customers.
Since the introduction of the cashless policy in 2012, the CBN has issued numerous guidelines that have bolstered the Nigerian FinTech ecosystem. The Federal Government also enacted the Cyber Crimes Act 2015 to combat cybercrime, while the Electronic Transaction Bill and the Data Protection Bill are currently before the National Assembly.
Notwithstanding the above, these regulations and laws do not adequately address the numerous challenges the ecosystem faces. We have provided details of some of the challenges the industry face below.

1. Chargebacks

A chargeback is a payment returned to a credit/debit card after a customer debates the validity of an online purchase. Although it may occur as a result of an error from an e-commerce merchant or the unauthorized use of debit/credit card information, there are instances where the customer that received the purchased product denies receiving it or claims to have returned the product without being refunded (friendly fraud). In the scenario described in the paragraph above, the CBN mandates the merchant to refund the payment to the customer even where the transaction was a friendly fraud. As such, no regulation currently exists that protects e-commerce merchants and or FinTech companies from friendly fraud. Depending on the amount involved, the merchant and the FinTech company have to reach a commercial decision on loss sharing.

2. Fraud

The CBN mandates financial institutions to put security mechanisms in place towards protecting their system against fraud. FinTech companies are prone to cyber fraud, and their systems are consistently under attack. It has been estimated that <a href="http://nationalmirroronline.net/new/experts-list-benefits-of-cyber-crime-law-to-nigerias-economy/" target="_blank">Nigerian financial institutions</a> lost approximately N159, 000, 000, 000.00 (One Hundred and Fifty-Nine Billion Naira) to cyber fraud between 2000 and 2013. Nigeria is ranked third globally in cybercrimes.

3. Barrier to Entry

Under the Guidelines for Mobile Money Services in Nigeria, anyone applying for a mobile money license from the CBN must provide evidence of having a minimum of N2, 000, 000, 000.00 (Two Billion Naira) as its shareholders’ funds, or roughly $7, 000, 000 (Seven Million Dollars) and serves as a huge discouragement to FinTech startups from applying for a mobile money licence.

4. Law Enforcement Agencies’ Ignorance of e-Commerce and FinTech

Law enforcement agencies rarely have the knowledge of how e-Commerce and or FinTech platforms work. Consequently, this tends to affect the course of their investigating cyber fraud committed on a payment platform. As you would have seen from the FinePay scenario, their first step typically is to instruct the merchant and or FinTech company’s bankers to place a lien on the company’s account, regardless of the amount involved in the alleged crime or in the respective merchant/Fintech company’s account with the bank.

5. Unclear Regulation

The CBN Guidelines for Mobile Money Services in Nigeria stipulate that mobile money services can either be Bank-Led or Non-Bank Led. The Bank-Led model refers to a Bank and or its consortium acting as lead initiator, while Non-Bank Led refers to a company licensed by the CBN acting as lead initiator. The Non-Bank Led model allows a CBN licensed company to deliver mobile money services to its customers. The licensed mobile money operators under the Non-Bank Led model often integrate their platforms with other financial solutions provider (as customers) to onboard merchants or use their respective platforms to process payments. Although, the guideline permits the integration, the CBN requires all financial solution providers to be licensed. The CBN often fines the licensed mobile money operators for integrating its platform with an unlicensed financial solutions provider.

6. Lack of Trust

Despite the innovative products offered by FinTech companies, customers prefer to conduct financial transactions with Nigerian banks. The brick and mortar banks are considered safer than FinTech platforms, despite being faster. In the same vein, some customers do not trust e-commerce companies. They are skeptical about the quality of goods, return policies and data security. Some e-Commerce companies have introduced Pay-On-Delivery (POD) to encourage customers to order online and pay when the goods are delivered. However, the POD has drawbacks: customers may refuse to pay/collect the goods, which could affect profit since time, human resources, and other expenses would have been incurred in the delivery of the goods.

Conclusion

The challenges described above as well as the FinePay scenario are typical of what e-commerce merchants and FinTech companies alike go through in doing business on a daily basis.
It goes without saying that the ecosystem provides a unique opportunity to promote financial inclusion in the country whilst enabling the CBN reach its goal of reducing the percentage of unbanked persons from 46 percent to 20 percent by year 2020.
To achieve this however, it is important for the CBN to realize that in its role regulating the space, it must continuously review it policies towards enabling the ecosystem blossom. Our law enforcement agencies, particularly the Police also need a thorough understanding of how FinTech and e-commerce work in order to enable them conduct investigations properly and not stifle business.

This article is for informational purposes only and does not constitute legal advice. For legal advice on FinTech and e-commerce in Nigeria, kindly send an email to: tnp@tnp.com.ng