The Licensing Regime for Switches and Mobile Money Operators

One of the major take-home points from Nigeria’s recent naira redesign is that mobile money operators and switches are at the core of the country’s financial economy. In the heat of the currency redesign pandemonium – January to February 2023 – the Nigeria Inter-Bank Settlement System (NIBSS) reported that the transaction volume of mobile money increased by 70% from 108.13 million to 183.69 million transactions valued at ?2.55 trillion.

In recent years, Nigeria has experienced a significant transformation in the financial services sector, driven by advancements in financial technology (FinTech). One of the key components of this transformation is the emergence of Mobile Money Operators (MMOs) and Switches. These entities play pivotal roles in the county’s quest for financial inclusion and innovation. By a wide margin, the Mobile Money Operators and Switches subsector is the largest subsector of the Nigerian tech ecosystem.

However, the operation of these two entities is not free-for-all. The Mobile Money Operators (MMOs) and Switching and Processing Companies (Switches) operate within the Nigerian payment ecosystem and are, primarily, regulated by the Central Bank of Nigeria (CBN). This article provides an overview of MMOs and Switches, identifies the financial activities that are permissible or prohibited, and highlights the licensing requirements for interested applicants.

What are Mobile Money Operators (MMOs) and Switches?

Mobile Money Operators (MMOs) are companies that provide financial services through mobile technology (phones or similar portable devices). These services include transferring funds, paying bills, airtime top-ups, and savings. Opay, Moniepoint, Firstmonie, Momo, Paga, Konga Pay, and Palm Pay are some of the popular MMOs.

Switches, on the other hand, are intermediaries that facilitate electronic transactions between different financial institutions. They act as the bridge/’router’ between financial service providers, MMOs, payment service providers, and other stakeholders within the financial ecosystem. Switches are essential for the seamless operation of electronic payment systems and perform payment authentication, risk management, payment authorization, payment clearing and settlement, and payment dispute and refund. Some of the well-known ‘switchers’ are Chamsswitch, Interswitch, Flutterwave, eTranzact, and Unified Payments.

Permissible and Non-Permissible Activities

The MMOs and switches are not banks. As such, the activities they can engage in are limited to the items specified by the CBN in its 2021 New Licence Categorizations for the Nigerian Payment System which include:

Permissible activities for MMOs:

• Issuance of E-money.
• Wallet creation and management.
• Pool account management.
• Agent recruitment and management.
• Non-bank acquiring, as stipulated in the regulatory requirements for non-bank merchant acquiring in Nigeria.
• Card Acquiring.
• And any other activities that the CBN may permit.

Permissible activities for Switching and Processing Services:

• Switching.
• Transaction clearing and settlement agent services.
• Non-bank acquiring services.
• Activities or services of a super-agent, PTSP (payment terminal service providers), and PSSP (payment system service providers).

However, MMOs and Switches are not permitted to carry out the following activities:

• Grant any form of loans, advances, and guarantees.
• Accept foreign currency deposits.
• Deal in the foreign exchange market of Payment Service Banks in Nigeria.
• Insurance underwriting.
• Accept any closed scheme electronic value (such as airtime) as a form of deposit or payment.
• Establish any subsidiary.
• Undertake any other transaction which is not prescribed by the Guidelines; and
• And any other activities that may be prohibited by the CBN.

The Licensing Requirements

The Central Bank of Nigeria (CBN) under the Circular on New License Categorizations for the Nigerian Payment Systems specifies the requirements that interested companies must meet to obtain a license to operate either MMO or Switch.

1. Eligibility

Any corporate entity registered by the Corporate Affairs Commission (CAC) with a Memorandum and Article of Association (MEMART) can apply for the grant of a license as a mobile money operator or switch operator.

       ii. Capital Requirement for The MMOs and Switch Operators

• ?2,000,000,000.00 (shareholders’ funds unimpaired by losses)
• Escrow of refundable ?2 billion into CBN Payment Service Providers Share Capital

        iii. Documentary Requirements for The MMOs and Switch Operators

Kindly refer to our article Licensing Regime for PSS, PTSP and Super-agent for the general documentary requirements for payment systems including MMOs and Switches.

In addition to the general requirements, Switches are required to submit the following:

1. Draft Service Level Agreements (SLAs) with sub-agents and Financial Institution (FI) Agent Banking Contract
2. Risk management, internal control, operational procedures and any other policy and procedures relevant to the management of an agent banking arrangement
3. Fraud detection plan and standard of care
4. Consumer Protection Policy and Procedure Board Approval

          iv. Fees

1. Non-refundable application fee of ?100,000.00 (One hundred thousand naira)
2. Licensing fee of ?1,000,000.00 to be paid before the issuance of the final licence, if successful

          v. License Validity

• Approval-in-Principle for six (6) Months

Commercial (or full operating) licence, which is valid for a period to be determined by the CBN and renewable upon satisfactory performance of the holder.

Post-Licensing Compliance Requirements

After the grant of the license, the CBN’s 2021 Guidelines on Mobile Money Services in Nigeria further require that operators shall file both statutory returns and annual reports. Statutory reports are to be provided not later than 14 days at the end of each month while annual reports are to be submitted at the end of each year.

Non-compliance with the Guidelines attracts remedial measures or ‘corrective actions’ against the MMO or its agent, its Board of Directors, or its officers. The CBN may impose further sanctions such as:

1. withholding corporate approvals,
2. financial penalties,
3. suspension from mobile money operation, and
4. revocation of the mobile money license.

Conclusion

The licensing regime for switches and Mobile Money Operators in Nigeria is a cornerstone of the nation’s FinTech evolution. It has not only facilitated financial inclusion but significantly promoted a more efficient and secure electronic payment ecosystem.