A Beginner’s Guide to Fintech and Payments in Nigeria

What is the term “Fintech”?

Financial technology (Fintech) refers to the use of technology to support financial services. Payments in Fintech facilitate the exchange and movement of financial value from one person, entity, or location to another.

Both are used interchangeably because they both offer value that is related to finances. However, payment is among the myriad of services a fintech company can provide its users and has other stakeholders that facilitate this solution. Other fintech services include investment, lending, insurance, trade, etc.

The aggressive growth year on year has given prominence to the number of players, the funding, and the career opportunities in the fintech space.

Today, we see companies like Paystack, Accelerex, Okra, Interswitch, Flutterwave,Teamapt, and 200+ others providing varied solutions across the value chain. This article gives a basic guide to what payments as a Fintech service are all about: payment methods and systems, payment operations, regulations, and stakeholders.

What exactly are payments in fintech?

Payments, amongst other services that a Fintech might provide, involve operations that allow money to move from one place to another. It involves the following:

1. Tokens: where money is stored (e.g., cards, bank accounts)
2. Channels: are touch points where you can use or move the money, e.g., POS, USSD, apps.
3. Systems: Facilitate the movement of money
4. Dispute measures: issues from movements of money
5. Settlements: disbursement of value to relevant stakeholders involved in the movement of money
6. Regulations guide stakeholder operations involved in payment.
7. Security: Methods of Securing Money

A payment has two parts. Authorization and settlement. Authorization allows an individual to give access to their stored value (money) for a transaction, while settlement covers the disbursement of funds to stakeholders involved in or who are part of the payment process. There will be more explanations on settlement when we talk about payment operations later on in this article.

Payments also involve moving value by collecting or sending it out on behalf of customers. They both have essential operational requirements to ensure seamless execution. To put this simply, a fintech may either collect money on behalf of their customers (merchants) or send money out and keep money (customers) on their behalf.

To be able to carry out either of these functions, a fintech company must have a license or partnership with a bank. This is a result of regulations put in place by regulators. There would be more details on why a fintech needs these partnerships or licenses in the payments stakeholders sections of this article.

What are payment methods, payment systems, and payment gateways?

A payment method is a way a customer pays for goods and services, or the payment options available for customers to pay merchants (businesses or companies) to complete a transaction. A payment method is the combination of a payment token, a payment channel, and the financial institution providing that payment option. A token is where you store money so it is usable, e.g., in a bank account, wallet, or card. The channel or terminal is where a customer or merchant moves or accepts payments in the digital space, e.g., mobile, ATMs, the Web, etc.

The different payment methods:

1. Pay by Account: This payment method involves a bank verifying your transfer details and then transferring the payments. This is the case with most mobile app payments.
2. Pay by card, which involves a customer using their card details to complete a transaction,
3. Payment by USSD: This payment method would normally involve a string of numbers with a unique reference that is dialed by the customer on their mobile to complete the transaction.
4. Payment by Link: This is suited for merchants who need to collect payments using payment system service providers like Paystack and Flutterwave. The merchant is signed on to the PSSP service, generates a link with payment information to collect payments, and then shares it with the customer to complete the payments.
5. Pay by bank transfer: online gateways use third parties like banks to collect money from customers. A dedicated account number is used to collect the payments from the customer.

Payments Gateways

A payment gateway is the user interface a customer would interact with when trying to make payments to merchants for goods and services sold. The payment gateways help merchants initiate payments, collect the customer’s card information securely, and send this information to a payment processor or the merchant’s acquiring bank for processing. A payment gateway can be virtual or physical. An example of a virtual payment gateway is the Interswitch Web Pay or Paystack portal, and a physical gateway is the handheld POS terminal used at supermarkets or convenience stores.

Payment Systems

Payment systems are mechanisms put in place to facilitate the settlement of transactions through the transfer of monetary value. This mechanism is made possible by different stakeholders like payment processors, gateways, card networks, core banking systems, and payment instruments such as protocols, standards, rules, etc.

How do fintechs handle payment operations?

Payment operations refers to the entire end-to-end process of moving money for a company. It starts with payment initiation, approval processes, tracking the inward and outward flow of money, tracking issues and resolving them in a timely manner, and reconciling transactions.

These operations also require that certain accounts be created to help track the flow of money. Some accounts used in payments to ensure efficient operations include till accounts, suspense accounts, receivable and payable accounts, settlement accounts, and virtual accounts. Their purpose ranges from accounts to record flow or money through different terminals, expected inflows and outflows, collect settlement at the end of each day, etc.

Efficient operations are critical for fintech companies, as merchants, for example, need to collect payments from customers and get their money quickly, which is essential to their own operations as well. To ensure a fintech operates efficiently, they must:

1. Take into consideration not just how they collect money from customers but also how to settle stakeholders the way they expect to be settled.
2. Automate some categories of payment that may be omitted as a result of human error or oversight.
3. Create reconciliation files to help address challenges if they happen.
4. Create workflows for different kinds of services or dispute resolutions that would save the business and customer time to get information or resolve issues.

What is a settlement?

Settlement is an interbank or interentity process where obligations are met and funds are ultimately discharged according to an agreed schedule and fees.

In settlement, parties are required to submit a breakdown of transactions that they did on behalf of another party (receivable) or on their behalf (payable).

At this point, the accounts are netted, which simply means successful transactions done on each other’s behalf are deducted from their respective sum totals. The remaining outstanding amount is what’s settled. This is done at the end of each day and is facilitated by a system called the Nigerian Settlement System, managed by the Nigerian Interbank Settlement System (NIBBS).

A settlement can be said to be primary if it involves stakeholders like deposit money banks, e.g., GTB, who have certain kinds of licenses to access primary settlement. Or secondary, which comprises most fintechs and microfinance, who get their settlement after the primary settlement has been done. And the final settlement is where fintechs settle their merchants for acquired transactions. Depending on the agreement or value proposition to the merchants, settlements to them can vary from a day to multiple days. The payment license and partnerships a fintech has determine how fast they get settlement after primary settlement is done.

Other things to note:

1. Fintechs need to partner with banks to get settlements.
2. Clearing happens before settlement. It is the exchange of information regarding monetary transfers, resulting in the transfer of funds between two or more parties. e.g banks

Fintech Regulations and Standards

Fintech regulations are a set of rules and guidelines that govern the operations of fintech companies that leverage technology to provide financial services and products. There are regulations guiding the operations of fintechs by different institutions. The CBN, being the main institution that regulates banks and fintechs in Nigeria, is mandated to also issue licenses. They offer guidelines in areas like fraud prevention, consumer protection, etc. Regulatory bodies in Nigeria include:

1. Nigeria’s Communication Commission regulates the telecommunications industry and has guidelines on payment services that use mobile phones.
2. Securities Exchange Commission: It regulates fintechs playing in the capital market space to help protect investors.
3. The Central Bank of Nigeria is the main institution that regulates financial institutions like banks, fintechs, etc. in Nigeria and issues licenses. These regulations can either be circulars, guidelines, frameworks, or standards. They all cater to different things.
4. Others include NAICOM and NITDA.

Standards governing payments

Standards in payment aim to standardize how financial institutions implement the infrastructure that facilitates interoperability and ensures security across the ecosystem. The standards are:

1. ISO is an international standard that aims to standardize how electronic data is exchanged between financial institutions.
2. EMV: technology that helps authenticate cards to increase the security of card transactions
3. PADSS: It guides and helps companies building payment applications ensure they are secure against threats.
4. PCIDSS: standards to protect cardholder data

Who are the stakeholders involved in payments?

Payment stakeholders are financial institutions, regulators, telecommunications companies, and infrastructure providers who contribute to the value chain of delivering technology-supported financial services to customers.

There are different stakeholders in the payment space with corresponding functions and licenses that allow them to carry out their intended activities. However, not all stakeholders are regulated. In the case of fintechs, not all must have a license for them to operate; they can partner with banks to carry out certain functions before they can afford to get a license and comply with its requirements.

Some of the licenses are for deposit money banks, switching and processing, payment service banks, mobile money operators, payment system service providers, super agents, and payment terminal service providers.

The licenses have varying functions, market segments, and settlement methods. Some of the functions are listed below:

1. Payment initiators:
2. Payment processors
3. Payment enablers
4. Payment regulators
5. Payment authorizers

Important to note is that payment regulators are responsible for oversight of financial institutions and fintech companies. Payment enablers do not necessarily need a license to operate.

The fintech payments industry has seen and will continue to see accelerated growth in payments innovation in the years to come. This is largely due to funding, regulator participation, and customer trends, especially in the African ecosystem.

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