Notes on Banking & Fintech Licenses
Capitalist Greetings!
Welcome to another edition of “Notes On” where I document conversations, courses and self-learning initiatives to understand the fintech space better.
Today’s note is from a two-day conversation with L & J, two of my favourite people. L has worked with Nigeria’s biggest bank and Nigeria’s biggest and first fintech unicorn. She also graciously edited today’s post keeping an eye on the technicalities while I kept looking for good puns. Thank you, Leader!
J has had a storied career. He first worked as a doctor before transitioning into a BaaS product manager role in a bank and later a tech consultancy position.
Against my self-lit background in the middle of another national grid failure, we discuss banking and fintech licenses.
What’s a license?
A license in simple terms defines what you can do as a business. Every bank and fintech is guided by a set of licenses controlling their activities.
Banking Licenses- All Banks Are Not Born Equal
Almost every year, we witness the emergence of yet another bank promising something revolutionary in its messaging crafted by a grateful advertising agency in Ikeja. But are all banks equal? and what is the difference?
The answer is no! Commercial or Deposit Money Banks have three licensing tiers determining their operations' extent. These licensing tiers are:
Regional Banks- This means that the bank can only operate in a maximum of two regions of Nigeria. Examples are Parallex Bank and Globus Bank.
National Banks -This means the bank can operate in all the states of the Federation. Examples are Sterling Bank and Wema Bank. Banks in this category must have 25 billion minimum paid-up share capital
International Banks- This means they can operate in all the states of the country and can also apply to the Central Bank of Nigeria to have offshore branches in designated locations. Banks in this category must have 50 billion minimum paid-up share capital. A prominent example is Access Bank.
Non-Banking Licenses- The Abbreviations Festival.
These are licenses held by non-banks. They cover everything from international money transfers to agency banking. Let’s dive in.
International Money Transfer (IMTO) License.
An IMTO allows the company holding it to either:
1) Receive funds from a customer to send to their beneficiary. If you want to send $2,000 to Canada, you give the IMTO your naira at the rate they specify and they send the dollar equivalent to your beneficiary.
2) Send money to customers in Nigeria from overseas countries. Your distant uncle wants to send you 5,000 dollars. The IMTO collects it and sends it to you.
Some important notes
Companies that have the IMTO license are not allowed to perform corporate transactions.
Banks are not allowed to apply for or hold IMTO licenses.
Both foreign and local entities can apply for an IMTO license in Nigeria. For instance, Western Union holds an IMTO licence because they help Nigerians in the diaspora send money back home.
Examples of entities with IMTO include Flutterwave and LemFi
PTSP- Payment Terminal Service Provider
This license gives the power to deploy and maintain POS terminals/devices in their name. Any company involved in issuing POS devices must have this license.
Examples of companies that hold this license include Paga and Moniepoint.
PTSA- Payment Terminal Service Aggregator
The Nigeria Inter-Bank Settlement System Plc (NIBSS) is the only entity with this license. This license empowers them to aggregate all POS transactions- They also provide a reliable data channel for the interconnectivity of all payment (POS) terminals.
PSSP- Payment Solutions Service Provider.
This licence empowers the holder to provide a payment processing gateway. Let’s break it down- When an Instagram vendor sends a Flutterwave or Paystack link for you to pay for an item, or from a vendor’s website, you are ‘redirected’ to a page that instructs you to make payment for the items you are about to purchase- That’s the PSSP license at work!
The payment gateway allows them to collect payment from you and the vendor to receive the payment.
Examples of companies that hold this license include Flutterwave and Paystack.
MMO- Mobile Money Operators
The MMO license empowers the holder to enable their users to engage in financial activities using their mobile phones. This license exists because of a desire to reduce cash-related transactions and drive financial inclusion. This license can be held by a bank or a non-bank (a company licensed by the CBN).
There is a special appeal to this license. A company that holds this license is allowed to hold customer funds. This is easy to miss but most fintechs [non-MMOs], cannot hold your funds. Instead, they partner with banks to offer customers bank accounts that can hold funds and effectively act as their settlement institution.
That’s why to fund most of your wallets, you find account numbers issued by commercial banks. There is also a growing trend of fintechs acquiring microfinance banks because the microfinance bank license empowers them to hold customer funds.
Examples of companies that hold the MMO license include Opay and Paga.
Super Agency License
Agency banking is the provision of financial services by an agent to a customer on behalf of a principal entity. A principal [the company with the agency banking license], is granted the right to recruit agents who act on their behalf at different locations- providing financial services in their community.
This license was created by the Central Bank of Nigeria to drive financial inclusion, allowing non-commercial banks to offer a range of financial services — cash withdrawal, deposit, transfer, bill payment, and account opening, particularly in communities without access to banking infrastructure.
Companies that hold this license include Kippa, Moniepoint and Paga.
PSHC- Payment Service Holding Company
This is a non-operating license. It does not empower you to do anything but is issued in recognition of a certain status.
A company gets this license if it has at least 2 of the following; MMO license, Switching & Processing license or PSSP license.
The license means you need to create a holding company and put all your different licensed companies as subsidiaries
Interswitch is an example of a company that holds this license.
Switching and Processing License
When you insert your card into an ATM or POS device in Nigeria, a series of activities are triggered to ensure your transaction is successful. Central to this is a Switch and Processor.
For instance, if you use your GTB card to withdraw 10,000 naira from an Access bank ATM terminal, you will get a debit alert in seconds and cash in your hands.
However, for that to happen, there was a communication between your bank [GTB] and the bank that owns the ATM [Access] for you to receive cash from the ATM.
This communication is the switching activity that provides the network or system that ensures transactions between the issuer of a card [GTB ], and the acquirer of the transaction [where the card was used — Access] are successfully switched and processed.
The switch keeps a record of this transaction and both parties can reconcile (confirm that they both got value for the transaction) later.
That’s what the switching and processing license is — a channel that processes financial transactions between financial institutions. Ensuring that a transaction from party A to party B is successful, both parties get value, and a record of the transaction.
Companies that have this license include Flutterwave, Interswitch and Paystack.
Whew!
That’s all on today’s note. As always, please let me know if you have any questions and what you would want me to write next.
