Fintech Sand Box in Nigeria, A regulatory Necessity or Innovation Restriction

The Central Bank of Nigeria (CBN) has recently released an exposure draft of a Regulatory Framework for Sandbox Operations on the 23^rd of June, 2020. The CBN is committed to building a financial services sector that promotes innovation in financial services, effective service delivery, healthy competition and financial inclusion through the Fintech Sand Box in Nigeria.

REGULATORY SANDBOX IN NIGERIA

A regulatory sandbox is a framework set up by a regulatory authority (the Central Bank of Nigeria), that allows fintech firms and other innovators to carry out live experiments in a controlled environment under the supervision of a regulator. In the controlled space, incumbents and new startups can experiment with designs lying on the edge of or outside the existing regulatory framework.

FINTECH SANDBOX IN NIGERIA

The essence of the framework is to regulate the requirements for conducting live tests on innovative products, services and other solutions in a controlled environment. The Regulation is still a draft and is open to suggestions and inputs to be submitted to the Director, Payments System Management Department of through sandbox@cbn.gov.ng on or before the 15th of July, 2020.

OBJECTIVES OF THE REGULATORY SANDBOX OPERATION IN NIGERIA 

1. To increase the potential for innovative business models that advance financial inclusion; 
2. To reduce time-to-market for innovative products, services, and business models; 
3. To increase competition, widen consumers’ choice and lower costs; 
4. To ensure appropriate consumer protection safeguards in innovative products; 
5. To clearly define the roles and responsibilities of stakeholders and the operations of the Sandbox for the Nigerian Payments System industry; 
6. To ensure adequate provisions in regulations to create an enabling environment for innovation without compromising on safety for consumers and the overall payments system; and 
7. To provide an avenue for regulatory engagement with FinTech firms in the payment space, while contributing to economic growth. 

RESPONSIBILITIES OF THE CENTRAL BANK OF NIGERIA (CBN) IN THE SANDBOX OPERATION

The CBN shall be responsible for: 

1. Issuance of the Regulatory Framework for Sandbox Operations; 
2. Admitting all eligible participants into the Sandbox process; 
3. Issuance of a Letter of Approval (LoA) for entry into the sandbox; 
4. Issuance of an Approval-in-Principle (AIP) in order to deploy its digital solution to the market, subject to the Innovator being able to meet CBN’s licensing requirements; 
5. Ensuring that the objectives of the Sandbox are fully achieved; 
6. Conducting oversight on Sandbox participants’ operations and systems; vii. Monitoring other stakeholders to ensure compliance; 
7. Issuing circulars to regulated institutions on the operations of the Sandbox; 
8. Reviewing this framework for the operations of the Sandbox from time to time; 
9. Apply appropriate sanctions for non-compliance where needed; 
10. The Director, Payments System Management Department of the CBN shall review cases referred to it before issuance of an operating license or a formal clearance to an entity/participant for the purpose of delisting from the Sandbox.

ELIGIBILITY CRITERIA FOR FINTECH SANDBOX IN NIGERIA

1. The product, service or solution is innovative with clear potential(s) to:

1. Improve accessibility, customer choices, efficiency, security and quality in the provision of financial services; or 
2. Enhance the efficiency and effectiveness of Nigerian Financial Institutions management of risks; or 
3. Address gaps in or open up new opportunities for financial benefits or investments in the Nigerian economy;
4. Ensure that applicants will provide the proposed project within a limited transaction (value and volume) for better risk management and mitigation. The limits must not be exceeded during the testing period. 

2. The applicant has conducted an adequate and appropriate assessment to demonstrate the usefulness and functionality of the product, service or solution and identified the associated risks which should be devoid of adverse effect to existing structures and consumer experience.
3. The applicant has the necessary resources to support testing in the sandbox. This includes the required resources and expertise to mitigate and control potential risks and losses arising from offering of the product, service or solution.
4. The applicant should have a realistic business plan to deploy the product, service or solution on a commercial scale in Nigeria after exit from the sandbox.

PARTICIPANTS IN THE SANDBOX OPERATION

The Sandbox application process is open to both existing CBN licensees (financial institutions with FinTech initiatives) and other local companies. The later may include financial sector companies as well as technology and telecom companies intending to test an innovative payments product or service industry deemed acceptable by the CBN. 

Others that can also apply include: 

1. Those proposing non-regulated technology i.e. Innovators whose proposed solution involves technologies which are currently not covered under existing CBN regulations. A Letter of Approval (LoA) would be issued to the Innovator which would allow Sandbox participants to test their innovation upon entry into the sandbox.

RISK ASSESSMENT AND SAFEGUARDS

An applicant must identify the potential risks to financial institutions and financial consumers that may arise from the testing of the product, service or solution in the sandbox and propose appropriate safeguards to address the identified risks.

APPLICATION AND APPROVAL REQUIREMENTS

Applications to the sandbox process would involve an invitation placed on the CBN website, and local newspaper advertisement. The details of the advert would include the minimum eligibility criteria to shortlist applicants who qualify to be absorbed into the sandbox. Firms wishing to enter into the CBN’s Regulatory Sandbox must apply to the CBN through the Regulatory Sandbox online application platform accessed via the CBN’s official website [ITD/WebTeam to develop portal upon approval]. The application must be submitted with a cover letter signed by an authorized signatory of the entity and addressed to the Director, Payments System Management Department, Central Bank of Nigeria, Abuja.

DOCUMENTARY REQUIREMENTS FOR FINTECH SANDBOX IN NIGERIA

All application trials into the Sandbox shall be accompanied with the following: 

1. Board Approval (where applicable);
2. Incorporation documents;
3. The company profile and functional contact: e-mails, telephone numbers, office and postal addresses;
4. CVs of Board and Management of the Company and Organogram of the Company;
5. Project plan alongside a detailed business proposal;
6. Key outcomes that the testing is intended to achieve;
7. A document that shall outline the strategy of the sandbox trials including current and potential engagements, geographical spread and benefits to be derived;
8. AML/CFT KYC Policy.

OPERATIONAL REQUIREMENTS FOR FINTECH SANDBOX IN NIGERIA

The CBN operational requirements of the Sandbox would cover, at least, the following phases: 

1. Filing requirements. 
2. Reporting requirements while in the Sandbox. 
3. Exit conditions and approval for expiration, and/or
4. Evaluation and Review of an approval.

SANDBOX COHORTS IN NIGERIA

The term cohort refers to the group of innovators that share the characteristic of having been allowed to enter the Sandbox at the same time for the same period. There will be one cohort per year named after the year in which the cohort was accepted (for example: 2019 Cohort). Application windows for a given cohort as well as list of the firms included in that cohort would be published on the Bank’s website. The number of innovators to be accepted into a cohort is a function of the Bank’s resource capacity to support innovators. Typically, a cohort will be made up of a predetermined number of innovators, as the type of innovators to be accepted into a cohort is based on the sandbox eligibility criteria and on the sandbox strategic objectives.

CONTACT DETAILS FOR ALL ENQUIRIES ON THE SANDBOX OPERATION

Address all enquiries to: Director, Payments System Management Department, Central Bank of Nigeria, Corporate Headquarters Central Business District, Abuja. Tel. No: +234(0)946238346.