Regulatory Dive: The New Buy Now, Pay Later Model

The Buy-Now-Pay-Later (BNPL) payment model is a short-term consumer financing option that allows buyers to purchase items by paying a part of the cost and the remaining payment in installments over an agreed period. It is a form of lending where customers have access to credit at the point of sale. Fintechs offering this product usually charge a transaction fee on the items bought or interest on the price. The payment model allows more people to have access to consumer lending and increases their ability to purchase. Thus, more people are financially included and economic activities grow. In this piece, we will shine our lights on the (BNPL) trend in the FinTech space. We examine regulations players in the new and booming sector should take note of.

The BNPL Payment Model

Although companies offering BNPL options have been around for quite a while with the global market worth billions of dollars, the increasing popularity of the sector in Nigeria is caused by a combination of factors such as the increase in online shopping since the pandemic, ease of purchase and the reduction in people's purchasing power due to inflation.

While companies such as PayPal, Affirm and Klarna are leading the global BNPL fintech scene and African startups like M-Kopa, CredPal, etc., are also offering credit facilities on the continent, more work still needs to be done to build a viable credit infrastructure that can fulfill the aim of financial inclusion. However, as more fintechs are braving the challenges of a market that is culturally opposed to lending, a regulatory regime is necessary to establish a credit infrastructure that will encourage more BNPL solutions.

Regulatory Environment for BNPL FinTechs

Since there are no specific laws or regulations directly addressing BNPL products, FinTechs rely on regulations covering their business model and product offering as the basis of their legal framework. There are three ways FinTechs can operate BNPL services:

• Digital banks offering BNPL as part of their product or already existing payment service providers obtaining a lending license - Here, FinTechs whose licenses do not allow for lending or offering credit facilities obtain a money lenders license under the appropriate regulation.
• Payment service providers partnering with licensed financial institutions - Here, banks which are licensed to provide lending services fund the purchase while fintechs facilitate the transaction processing.
• Companies playing vendor financing - In vendor financing, the vendor or seller provides the loan to the customer who then purchases the goods. The vendor may have an integrated payment service solution on its platform.

Guiding Regulations

Banking and Other Financial Institutions Act 2020

(“BOFI Act”)- This applies to fintechs offering BNPL whether as an already existing digital bank or a payment service provider with a banking license. Out of the three categories of bank licenses provided by the BOFI Act, FinTechs can register as digital microfinance banks or commercial banks. Both license categories allow FinTechs to provide lending and credit facility. Under the microfinance bank categorisation, FinTechs are licensed as national-grade banks to allow maximum geographical coverage. To be licensed, the Act requires a N5billion minimum share capital, a detailed feasibility report, documents of incorporation and a board of directors. The commercial banking license requirements include a minimum share capital of N25 Billion, a five-year business plan, an enterprise risk management plan, a dispute resolution framework, etc. As they are digital banks, these two types of FinTechs must also provide a comprehensive IT policy.

Guidelines for the Regulation and Supervision of Microfinance Banks 2020

The draft guidelines apply to BNPL companies with a microfinance bank (MFB) structure. It re-categorizes the microfinance bank license class defined by the BOFI Act into two tiers. FinTechs can register as a tier 1 unit MFB which is restricted to operating in banked areas or tier 2MFB allowed to operate in rural or unbanked areas. According to the guidelines, before a company can apply for a grant of license, it must first present the business case of the proposed bank to the Central Bank. All MFBs must also comply with the CBN Code of Corporate Governance, Guidelines for Whistle-blowing in the banking industry, cyber security policies and other stipulated regulations.

CBN Circular on New License Categorisation for the Nigerian Payments System

This circular categorizes the Nigerian payments system into four groups: mobile money operators, switching and processing, payment solutions services and regulatory sandbox. A payment service provider proposing to provide BNPL services independently or in partnership with a bank must first be licensed in line with the provisions of the Circular. The Circular stipulates the minimum share capital requirement and other criteria that must be met before the FinTech is granted a license to operate.

CBN Regulatory Framework for Open Banking in Nigeria, 2022

FinTechs partner with banks and other financial institutions to share and exchange information about their customers through an open banking system. This data sharing enables BNPL providers to assess the credit worthiness of the consumers and onboard new customers seamlessly. The Framework seeks to regulate how data is shared and protect the privacy of consumers. It classifies customer data into four types with different risk levels. For BNPL firms who are third-party users, personal data used to ascertain a customer's credit worthiness, outstanding loan tenors, and customer ratings or scores are categorized as the highest and most sensitive levels. Hence, access to this information is restricted to specified and qualified institutions. The Framework also specifies the responsibilities of each data-sharing party and provides a redress process in the case of a breach. It further stipulates principles guiding API specifications, data specifications, operational rules, and information security standards.

Operational Guidelines for Open Banking in Nigeria, 2021

The CBN created the guidelines to encourage and facilitate the regulated sharing of data by banks to data consumers (FinTechs). This is to protect lenders against customers' default or fraud and facilitate the synchronization of customer accounts across platforms. The Guidelines provide for an open banking registry which is to oversee all participants in the open banking system. The registry is responsible for stipulating the minimum standard for storing configuration items, defining ethics and principles of data usage, providing a regulatory framework for information sharing between API users and consumers, etc.