Oversight, Licensing Fees – What Do They Mean for Fintechs?

The National Bank of Ethiopia (NBE) is readying to impose licensing and oversight fees on fintechs. The fees, which are much higher than the current ones, are said to be implemented to strengthen NBE's regulatory capabilities. It is widely agreed that by increasing its capacity, the central bank will be better positioned to act as an enabler rather than a gatekeeper. The fees are expected to be applied to both domestic and foreign fintechs.

In a move that could potentially have a palpable impact on the financial sector and the nascent fintech industry, the National Bank of Ethiopia (NBE) is preparing to introduce fees for the various services it provides.

The charges include licensing and oversight fees for payment instrument issuers (PII) and payment system operators (PSO), penalty fees, and EATS administrative and transaction fees imposed on banks. 

Though not yet official, the directives outlining the new payment regime were tabled to the leaders of financial institutions during a consultative meeting held a week ago. The documents cited the need to provide more efficient services as the basis for revising existing fees and introducing new ones. 

Licensing & Oversight 

The proposed charges primarily apply to PIIs and PSOs, introducing fees for oversight, licensing and authorization services. 

When it moved to allow non-bank institutions to join the financial sector a couple of years ago, the central bank opted for a two-category licensing method. Fintechs could obtain a license as a payment instrument issuer (typically referred to as a mobile money service provider) or as a payment system operator, which is  further broken down into national switch, switch, payment gateway, POS, and ATM operator.

Companies applying for licenses as mobile money or switch operators are to pay a 100,000 Birr investigation fee and another 300,000 Birr as a licensing fee. It is nearly 50 times more than the prevailing rates. 

Similarly, both PIIs and national switch operators will have to shell out 200,000 Birr annually for license renewal. 

Banks and microfinance institutions who are allowed to provide PII services covered by their respective business licenses have to seek authorization which will cost them 50,000 Birr. 

The central bank requires a minimum of 50 million Birr in capital to establish a mobile money service provider. The threshold is six times more for a national switch operator. 

There are currently only two licensed PIIs ( Telebirr and Kacha) and EthSwitch is the only national switch operator, as designated by law. 

The directive proposes that PSOs pay 20,000 Birr and 30,000 Birr investigation and licensing fees, respectively. The current rates are 3,000 Birr and 2,000 Birr. PSOs will also face a 30,000 Birr charge for license renewal every year.

Although minimum capital requirements vary depending on the category of PSO, they generally stand much lower than thresholds for mobile money service providers. The requirements range between three and 40 million Birr, excluding national switch operators.  

The central bank proposes to charge oversight fees of PIIs based on the size of the fintech in question. Licensees are to be classified into three categories according to the number of customers they serve. Those with less than half a million clients will fall into the “small” category. Those serving between half a million and one million customers are classified as “medium”. Anything greater falls under “large”.

Large PIIs will be subject to one million Birr in annual oversight fees, while medium and small ones are subject to 750,000 Birr and half a million Birr, respectively. 

The range for PSOs similarly spans between 100,000 Birr and 200,000 Birr. However, classification for PSOs depends on the kind of license issued. National switch operators and fintechs operating more than one line of service will automatically be classified as large. 

Regulators say higher fees are imposed on PIIs due to the greater complexity of regulating them. 

The NBE has also recently amended the National Payment System proclamation to accommodate the entry of foreign players in digital financial services. Approved by the Council of Ministers, the bill is to be tabled to Parliament for ratification.

If approved, the new fees are expected to apply to both foreign and domestic operators. 

Regional Benchmarks 

Regulatory fees are a common feature among central banks all over the globe, though there are marked differences in the way they are (or aren’t) applied.

While several, more advanced, financial markets opt for fixed fees, some countries charge fintechs according to predetermined categories. For instance, regulators in Belgium levy supervision fees on mobile money operators in proportion to the funds they administer.

In contrast, Spain remains among the few that does not require any authorization fees despite its burgeoning fintech scene placing it near the top in the number of licensed operators in Europe. 

Fintech hubs in Africa are implementing licensing and supervision fees as well.

In Kenya, digital lenders are required to pay 20,000 Kenyan Shillings (9,000 Birr) for a license.

In Ghana, electronic money issuers (the equivalent of PIIs) face 100,000 Ghanian Cedi (500,000 Birr) in licensing fees, while charges for PSOs can reach close to half a million Birr. PIIs are subject to a license renewal fee equivalent to 50,000 Birr, while the rates go as high as 40,000 Birr for PSOs. Licenses are valid for five years. 

In Nigeria, the largest fintech market on the continent, a payment service provider license, which includes switch companies and mobile money operators, goes for one million Naira (122,000 Birr). There are more licensing categories but a similar fee applies to all. 

What Do the New Fees Mean for the Ethiopian Fintech Scene? 

Pros 

Enhanced Regulatory Capacity

“As fintech adoption increases, so does the need for sound policy frameworks and supervision.” – WB, Regulation and Supervision of Fintech: Considerations for EMDE Policymakers 2022

Experiences in other countries show that regulating fintech poses a more daunting challenge than with other, more traditional financial institutions. 

The NBE says enhancing regulatory capacity and service quality are the primary reasons behind the new and adjusted fees. It is a new wing of operation for the central bank, which has thus far had little reason to step outside the realm of traditional financial institutions supervision. 

The NBE’s Payment & Settlement System Directorate supervises fintechs – itself overseen by the central bank’s financial institutions cluster. 

Experts agree that the expansion of fintech calls for strengthened supervisory capacity. Although the building blocks are in place as a result of the growth of bank-led mobile money and digital banking services, regulatory policies need to be updated and tightened. 

Given the infancy of digital financial services, the steps are critical to fostering an enabling environment that allows startups to effectively develop products, test and scale-up. 

By improving its capacity, the central bank will be better positioned to serve as an enabler rather than a gatekeeper.

The NBE has thus far issued eight licenses to fintechs. Even if no others are handed out, the central bank stands to generate at least three million Birr from oversight and license renewal fees alone annually. 

Eased Bureaucracy, Quicker Rollout

Those who have applied for licenses from the NBE have previously asserted that the procedures preceding approval are cumbersome and long-winded. Instituting a hefty fee could potentially curb this issue, allowing applicants to determine a prompt investigation be conducted in the lead up to approval.

Regulators, on the other hand, aspire to see the fees improve the quality of the applications that come across their desks. They report that incomplete or inadequate licensing requests are frequent. 

Cons 

Entry Barrier, Consumer Burden

Compared to the previous fee regime, the new rates appear rather hefty for startups. A PII stands to pay at least 700,000 Birr a year for license renewal and oversight. The payments would add up to 15% of the minimum capital threshold over the first decade alone.

It is a challenge that becomes more pronounced by the scarcity of funding opportunities in the country. Startups especially might struggle to raise the financing to cover the fees in addition to the expenditures associated with product development and rollout. 

The increased costs will most likely be factored into the product market price, affecting consumers and marketability in the long run. Still, fintech executives say the timing of the changes to the fee structure is, at least, inconvenient as many of them are just getting started and have yet to mass market their products.

One Response

Leave a Reply

Your email address will not be published. Required fields are marked *