Structuring a Fintech Holding Company in Nigeria: Key Steps to Comply with CBN’s New Rules

The Central Bank of Nigeria has issued a series of new guidelines to govern how a holder of a fintech license in Nigeria may combine it with other types of fintech licenses in a holding company structure.

Under the new rules, termed “GUIDELINES FOR LICENSING AND REGULATION OF PAYMENTS SERVICE HOLDING COMPANIES IN NIGERIA”, companies that wish to operate under more than one license category must establish a Payments Service Holding Company (PSHC) with clearly defined subsidiaries.

The standards, according to the CBN, are important to avoid commingling of activities, simplify risk management, and allow the Central Bank of Nigeria to effectively regulate all of the Group’s companies.

Which Type Of Fintech Licenses Do The Guidelines Apply To?

According to the CBN, the guidelines apply to:

• Mobile Money Operations
• Switching and Processing
• Payment Solution Services
• Any other activity as may be approved by the CBN.

In other words, holders of a Super-agent, Payment Terminal Service Provider (PTSP) or Regulatory sandbox license cannot or need not form a Payments Service Holding Company.

In simple terms, where a fintech startup wants to combine a mobile money banking or Switching and Processing or Payment Solution Services license with any other type of licenses, it must set up a “non-operating” holding company.

What Nature Must The Payments Service Holding Company Assume?

• Anyone intending to run a group of fintech companies must do so through a non-operating Payments Service Holding Company, according to the CBN. The word is “non-operating”.

• To put it another way, the holding company that will be approved by the Central Bank of Nigeria to hold the combination of licenses cannot engage in any fintech operations or day-to-day activities, but must instead serve as a special utility vehicle for the investment of capital and other resources into its subsidiary fintech companies.

“A PSHC shall be a corporate body, registered with the Corporate Affairs Commission (CAC), and licensed, supervised and regulated by the Central Bank of Nigeria. It shall have a board size of between 5 and 10 or as determined by applicable CBN Corporate Governance Guidelines,” CBN states.

How Many Subsidiaries Must A Fintech Holdco Have To Be Approved By CBN?

• According to the central bank, any fintech holding company must have at least two subsidiaries, which comprise a Mobile Money Operator (MMO) and a Switching firm, before it can be regarded as a Payments Service Holding Company.

• Whatever activities conducted under this arrangement — whether the holdco desires to hold controlling interests, that is 51% or more of another fintech company or financial institution or simply to change back into a single license — requires the approval of the central bank.

What Are The Requirements For Obtaining A Fintech Holdco License?

CBN states that to obtain a license to operate a Payments Service Holding Company, the applicant shall, among other things, do the following:

• Pay a non-refundable application fee of NGN1,000,000 ($2.5K). Another non-refundable licensing fee of NGN 5,000,000 ($12k) must be paid before the expiration of six months after the holdco license has been granted.

• Must have a minimum paid-up capital that is more than the sum of the minimum regulatory capital/total equity of all its subsidiaries, in cases where the holdco owns 100% of the subsidiaries. However, when the holdco holds less than 100% of the subsidiaries, its minimum paid-up capital must be more than the total of the subsidiaries’ proportionate holdings. A subsidiary’s excess capital cannot be utilized to cover a deficiency in another subsidiary, states the rules.

• The holdco must also comply with any applicable corporate governance rules in place in Nigeria.

• For other application requirements, click here.

How Can The Holdco Be Owned And Controlled?

According to the central bank, the following are the way and manner any fintech holdco may be owned and controlled:

• Seek the approval of the central bank where any person holds 5% and above of the shares of the holdco.

• Subsidiaries under the holdco cannot acquire shares of the holdco.

• Subsidiaries under the holdco cannot acquire shares of other subsidiaries under the holdco.

• Return the holdco license to CBN for cancellation within six consecutive months, if the holdco loses control of any of the two payments services subsidiaries — switching and processing company or mobile money operator — in the group.

• However, if the holdco loses controlling interest in a subsidiary, and the subsidiaries include a Switching and Processing company, and Mobile Money operator, the subsidiaries shall continue to operate independent of one another.

What Activities Is The Holdco Prohibited From Participating In?

The holdco is prohibited from engaging in the following activities:

• Establishing, divesting, or closing subsidiaries without the CBN’s prior written approval.

• Earnings from sources other than: a. Dividend income from subsidiaries/associates; b) Income from shared services, where applicable; c. Interest earned from idle funds invested in government securities or placement with licensed financial institutions; d) Patents, royalties, and copyrights; e. Profit on divestment from subsidiaries/associates; and f) Any other source as the CBN may approve.

• Engaging in any transaction with any of its subsidiaries or maintain any business relationship with them unless the transaction or relationship is at arm’s length.

• Taking out a loan from the Nigerian banking system to fund itself or any of its subsidiaries.

• A holdco must not also pay dividends on its shares unless: a) all of its operating, preliminary, and organizational expenses, losses incurred, and other capitalised expenses not represented by tangible assets (except goodwill) have been fully written down. b) adequate provisions for actual and contingent losses have been made to the satisfaction of the CBN. c) any other capital requirements have been met.

What Happens To Fintech Holdcos Before The New Rules?

According to the CBN, a Financial Holding Company with a payment service provider subsidiary that was licensed before the introduction of the new rules does not need to apply for a PSHC license.

Which Department Of The CBN Is Responsible For The Grant Of The Holdco License?

CBN’s Payments System Management Department created in 2018 is responsible for the holdco license.

Additional Comments:

CBN’s latest move has already been taken care of in its previous guidelines, except that the latest rules provide more clarity as to how a holding company for a group of fintech companies in Nigeria may be run.