The open banking ecosystem in Africa has certainly taken flight, with countries such as South Africa, Kenya, Nigeria and Ghana recording unprecedented rate of product development, innovation and adoption across the regions digital financial services market. That said, strengthening financial systems regulation, risk management and financial data governance remain critical to achieving continuous and sustainable growth in the sector. The introduction of Nigeria’s open banking regulations is bold, audacious and enviable. It is expected that its implementation will be strategic and impactful.
PARAMETERS AND KEY ASSUMPTIONS
The 2023 “Budget of Fiscal Consolidation and Transition’’ was signed into law on the 3rd of January 2023; at its core, it focuses on maintaining fiscal viability and ensuring a smooth transition for the incoming administration, come May 29, 2023.
President Muhammadu Buhari in his speech at the joint session of the National Assembly on the 7th of October 2022, noted that beyond ensuring fiscal sustainability, his administration will in the new year focus on improving the country’s business enabling environment, accelerate revenue-based fiscal consolidation efforts and strengthen expenditure and debt management.
The 2023 budget proposal was primarily influenced by the Federal Government’s medium-term fiscal outlook which takes into cognizance current fiscal and economic realities such as the continuing global and domestic challenges sparked by recurring COVID-19 spikes, climate change and the impact of Russia-Ukraine War on global economies. It is therefore anticipated that Nigerian State will grapple the headwinds of low revenue, high inflation, exchange rate depreciation and insecurity.
Key Elements of The Budget: Expenditure Summary
The expenditure policy of the Federal Government for 2023 is designed to achieve the strategic objectives of the National Development Plan (2021 – 2025), which include macroeconomic stability; human development; food security; improved business environment; energy sufficiency; improving transport infrastructure; and promoting industrialization through Small and Medium Scale Enterprises.
The aggregate expenditure (inclusive of GOEs and project-tied Loans) is projected to be NGN 21.83trillion – which is 20% higher than the total expenditure for 2022 (including supplemental appropriations).
- Recurrent (non-debt) spending is estimated at NGN8.33trillion, (including NGN200 Billion to fund the Federal Governments social investment programme). Total Recurrent (non-debt) spending therefore amounts to 38.2 % of total expenditure;
- Aggregate Capital Expenditure stands at NGN6.46trillion amounting to 30% of total expenditure which is 10% higher than the total Capital Expenditure spend for 2022;
- Total Debt Service spend stands at NGN6.31trillion amounting to 29% of total expenditure. This is 71. % higher than 2022 as it includes total interest payment of NGN1.2 trillion on Ways & Means Advances from the Central Bank.
Key Elements of The Budget: Revenue Summary
Total revenue available to fund the 2023 FGN Budget is estimated at NGN11.1 trillion. In aggregate, about 20% of projected revenue will come from oil-related sources, while circa 80% will come from non-oil sources primarily taxes and Government collections. The Federal Government has therefore developed a robust strategy to enhance collections and widen the tax revenue pool. This includes:
- Improving non-oil revenue receipts, tax administration and sustain the effort to expand the non-oil revenue base;
- Strengthening tax systems by improving collection efficiency, enhancing compliance, and reorganizing the business practices of revenue agencies by deploying appropriate technology;
- Widening the tax net to include businesses in the informal sector;
- Introduction of frameworks for recovering duties, taxes and appropriate fees from custom related transactions conducted over electronic networks;
- Enhancing port efficiency, strengthen anti-smuggling measures, review of tariffs and waivers and issue of licenses for the development of modern terminals in existing ports, especially outside Lagos:
- Enforcing extant laws limiting cost-to-revenue ratio of GOEs to a maximum of 50 percent;
- Deploy Technology and ICT solutions needed to enhance revenue collections and compliance;
- Improve the performance of GOEs through the effective implementation of the approved Performance Management Framework.
Key Elements of The Budget: Deficit and Deficit Financing
Overall budget deficit stands at NGN10.78trillion (circa 4.78% of GDP) which is to be finance financed mainly through government borrowings from local and foreign sources including multilateral/bilateral loan draw downs and privatization proceeds. Once more this exceeds the threshold set by the Fiscal Responsibility Act however considering the existential security and economic challenges plaguing the Federal Government is compelled to increase its overall fiscal expenditure.
SUMMARY OF THE FINANCE BILL 2022
The Nigerian Finance Bill 2023 has been passed by both legislative houses but is yet to be assented to by the President. At the presentation of the budget by the Minister of Finance on 4th of January 2023, the Honourable Minister stated that the delay in the passage of the bill was as a result of the ongoing vetting and approval process from key stakeholders. it is anticipated that the bill which has now completed its legislative approval cycle will get executive assent any time now.
The Finance Bill amongst other things amends the: Capital Gains Tax Act (CGTA), Companies Income Tax Act (CITA), Customs, Excise Tariff, Etc. (Consolidation) Act, Personal Income Tax Act (PITA), Petroleum Profits Tax Act (PPTA), Stamp Duties Act (SDA), Value Added Tax Act (VATA), Corrupt Practices and Other Related Offences Act and Public Procurement Act.
The table below details the key changes in law effected via the Bill.
As is typical of this administration, the Federal Government kept to its commitment to pass and commence implementation of the Appropriation Act in a timely fashion even though the complementary Finance Bill suffered a delay snag. Generally due to the change of administration anticipated at around mid-year 2023, it is expected that supplementary appropriation laws will be passed to align the Appropriation Act with the Economic and Fiscal Policy of the incoming administration. Furthermore, gleaning from the posture of the Federal Government and the spirit and letter of the budget it is expected (at least for the first half of the year) that:
- More incentives and tax holidays for players in the renewable energy sector will be implemented in line with the Federal Government’s intention to encourage domestic and industrial adoption of renewable energy alternatives.
- More repeals and cancellation of tax benefits and incentives;
- More effort to promote, incentivize and adopt technology and innovation;
- Fiscal instability, slow growth, food crisis, and high interest rates are likely to continue into 2023 as the underlying causes such as Russia-Ukraine war and the Covid-19 crises are yet to abate;
- Likely removal of fuel subsidy after the expiration of the extension will potentially increase the cost of living and doing business in Nigeria;
- Federal Government will drive revenue generation and tax collection aggressively;
- Increased government borrowing may provide short-term relief but lead to negative impacts such as higher interest rates, inflation, and shrinking disposable income in the long term;
- Federal Government will pass and effect the enforcement of the Finance Bill.
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The Covid-19 pandemic and the resultant lockdown triggered significant changes in the payment industry. Specifically, it amplified the need for contactless payment and ushered in a wave of unprecedented innovation and product development in the payment industry globally.
Given the record traction in the Nigerian payment market; the Central Bank of Nigeria (CBN), recognizing the need for a tailored regulatory framework to support the burgeoning sector growth, in January 2021, issued the Framework for Quick Response (QR) Code Payment; and more recently, in October 2022, released the Exposure Draft of the CBN Guidelines for Contactless Payment in Nigeria.
The Guideline defines contactless payment as: “the consummation of financial transaction without physical contact between payer and the acquiring device(s)”. This means that secure payments can be made with tags, debit/credit cards, smart cards, mobile and other devices that use Near-Field Communication (NFC), Radio Frequency or QR Codes.
In a bid to preserve the integrity, safety and stability of the Nigerian financial system and to facilitate the safe and secure use of Contactless payment, the Guideline amongst other things provides for:
i. the roles and responsibilities of various stakeholders within the contactless payment eco- system;
ii. the minimum standard/specification for all contactless payment terminals, applications, and processing systems;
iii. guidelines for the provision of Value-Added Services; and
iv. the power of the CBN to prescribe and enforce sanctions and penalties for breach of the Guideline.
KEY STAKEHOLDERS IN THE CONTACTLESS PAYMENT ECOSYSTEM
The Guideline clearly articulates the role and responsibilities of the various stakeholders in the contactless payment eco-system, prescribing standards and specification for all forms of market technology and systems whilst also prescribing processes and principles that will govern their relationship with each other.
An Acquirer is a CBN-licensed institution that facilitates the acceptance of payments from customers to merchants through contactless payment devices such as Point of Sale Terminals (POS), Mobile Applications, and QR Codes amongst others. An Acquirer will typically be the account bank of a merchant who is utilizing the contactless payment system for fee collection from its customers.
The guideline requires all Acquirers to:
i. ensure that all deployed contactless payment devices deployed are certified by CBN and meet prescribed specifications/standards.
ii. operate an agnostic acceptance policy such that all cards, capable of contactless payment, issued in Nigeria shall be accepted irrespective of the issuer.
iii. conduct customer KYC (Know Your Customer) and train Customers compliance with applicable Regulations.
iv. take measures to prevent the use of their networks and devices in violation of Anti-Money Laundering Laws.
v. execute a Contactless Payment Agreement with all Customers prior to granting access to the Acquirer’s contactless payment platform.
In a bid to protect unwary or naive customers from the perpetuation of fraud, the guideline restricts Acquirers from admitting or profiling agent banking terminals operators to its Platform or facilitating contactless transactions on their behalf.
Like the Acquirers, only CBN-licensed institutions are permitted to act as Issuers for contactless payments. An Issuer is responsible for issuing contactless payment enabled cards, tags, or mobile applications to consumers (consumers being people who procure cards, tags, tokens or contactless payment enabled mobile apps to facilitate payments to merchants or other service providers. Examples of CBN-licenced institutions in Nigeria that already issue contactless payment enabled cards and devices include the First Bank of Nigeria, United Bank for Africa, and Providus bank. These cards have embedded Radio Frequency Identification (RFID) technology which communicates with card readers to enable payment transfers. Issuers are required to ensure, that all tokens and devices issued by them for payment by Customers meet prescribed standards and specifications. Furthermore, Issuers are required to obtain and properly document Customer’s consent prior to enabling Customer’s device for contactless payment. Specifically, the guideline prohibits unsolicited activation of contactless payment service on any payment enabled device owned by any Customer. Relatedly, prior to activating contactless payment service for any Customer, an Issuer is required to verify and identify such Customers by his/her Bank Verification Number (BVN).
C. Payment System and Card System Administrators
Payment/Card System Administrators are operators of card and payment systems (such as Mastercard, Visa, Remita, and Flutterwave). Whilst Issuers are responsible for issuing cards and other enabled devices to Customers, the Payment/Card System Administrators oversees the administration and use of issued cards for payment. Payment System and Card System Administrators are required to comply with the Guideline generally and act in accordance with prescribed processing specifications whilst ensuring that their systems and schemes are interoperable.
D. Switching Companies
Switching Companies are CBN-licensed institutions that oversee the routing of transaction data, interbank payment clearing and settlement, payment authentication and authorisation and risk management. The Nigeria Interbank Settlement System (NIBSS) is the Central Switch for the Nigerian Financial Market. Other than the NIBSS; Interswitch, eTranzact, and Flutterwave are some of the other licensed Switching Companies. The Guideline mandates Switching Companies to ensure that contactless transactions via approved payment instruments issued in Nigeria are successfully switched and to undertake periodic risk assessment to mitigate against money laundering and financing terrorism within the system.
E. Payment Terminal Services Providers
Payment Terminal Service Providers are CBN-licenced institutions that deploy contactless payment enabled Payment Terminals (Point of Sale Terminals) for use within the financial ecosystem. Payment Terminal Services Providers are by the Guideline, required to assure the quality and functionality of all contactless payment enabled terminals issued by them through optimal maintenance, availability of a 24/7 support infrastructure. It is recommended that response time for repair or replacement should not exceed 48 hours from the time of escalation.
F. Payment Terminal Service Aggregator
A Payment Terminal Service Aggregator (“PTSA”) oversees the interconnectivity of all payment terminals deployed with the Nigerian Payment Ecosystem. The Nigeria Interbank Settlement Scheme is the sole PTSA in Nigeria. It ensures that all terminals used in the e-payment ecosystem and all devices deployed in Nigeria are brand-agnostic and would accept all cards issued by any bank or other licensed card schemes without discrimination. NIBSS ensures the standardization of technical and operational specifications of all devices deployed within the Nigerian financial system. The Guideline requires the PTSA to certify that all Point-of-Sale terminals used for contactless payment meet required standard for the payment industry. It is also required to implement a documented risk management process to identify threats before, during and after all payment transactions.
These include businesses (large institutions or SMEs), that employ contactless payment devices as a means of receiving payment from customers. Merchants are by the Guideline, required to ensure that devices deployed for contactless payments are of the required specification, they are also required to exercise due diligence in effecting all payment transactions as they remain liable for any fraud resulting from negligence or connivance during a contactless payment transaction.
The Guideline further, requires all merchants who accept contactless payments to display the contactless payment symbol visibly in their location. They are also required to undertake second level authentication for transactions of a value which is higher than the stipulated limit per day via the customer’s Personal Identification Number (PIN) OR token code.
A customer is anyone making payment through a Contactless payment method. The Guideline requires Customers to exercise due diligence during contactless payment transactions whilst leaving them in full control to opt-in or out of any contactless payment service.
BENEFITS AND CHALLENGES
Prior to the release of the Draft Guideline, the only existing regulation in the contactless payment ecosystem was the Framework for Quick Response (QR) Code Payment in Nigeria, January 2021 (“Framework”). The Exposure Guideline is therefore a solid improvement on the hitherto QR Code Framework as it specifically sets out market requirements for the use and operation of all forms of contactless payment technology.
Apart from the wider scope of the Guideline, the general adoption of contactless payment will have an overall far-reaching effect on the economy as it will create a smarter, faster, more efficient and easy-to-use mode of payment which requires less manpower. It will also promote health and safety and reduce potential disease transmission at points of sale.
It is also necessary to mention that the posture of the Guideline is generally User-Centric, as the CBN mandates that use of contactless payment service must be elective whilst holding all participants within the value chain to regulatory service levels.
Without doubt, the benefit of the Guideline is enormous, yet a big impediment remains the introduction of transaction limit for contactless transactions, the Exposure Draft specifically provides for a NGN5000 (five thousand naira) transaction limit for a single transaction and a cumulative daily transaction limit of NGN30,000 (thirty thousand naira) per User. Transactions that fall outside this limit require an additional layer of authentication. Whilst the intention of the limit is noble and driven by the need to protect Users from significant impact should fraud, theft, impersonation, funds misappropriation occur; the threshold seems too low considering commercial realities in present day Nigeria. To guarantee that the contactless payment system remains a viable alternative for users therefore, it is imperative for the CBN to consider an upward review of the prescribed limit.
Finally, the Guideline envisages growth and innovation in the contactless payment ecosystem and therefore provides a protocol for innovative use cases. Where any stakeholder intends to offer novel or value-added service falling within the contactless payment niche, it is required to procure and obtain the prior approval of the CBN.
Contactless payment is fast becoming a preferred mode of payment across the Globe. UK Finance magazine reports that contactless payments accounted for over a quarter of all payment transactions in the United Kingdom in 2021. It is therefore expected that the introduction and implementation of the Guideline, shall in days to come foster public trust, deepen the contactless payment eco-system and consequently accelerate the speed of its adoption in Nigeria.