As financial services have become more ubiquitous in Nigeria, and progressively more stable and profitable due to the CBN’s cashless policy, increasingly we see customers relying on the services of alternative financial service providers who are different from traditional banks and financial institutions. Trust in financial institutions remains of key importance and this is the fuel that leads to the continued reliance on the use of cash as a payment instrument. Innovative and ambitious private sector entrants, coupled with an increasing willingness of regulators to focus policy towards enabling, rather than stifling, innovation and development, present new opportunities for growth in digital financial services use throughout Nigeria.
To help limit risk and engender consumer confidence in digital financial services, the Central Bank of Nigeria (CBN) has introduced several regulatory measures to guide and regulate the use of such digital platforms. One such measure is the requirement that digital platforms which provide electronic money services must utilise a settlement account. Notably, the use of funds in the settlement account is specifically restricted and such funds may not be used in any manner whatsoever as collateral for loans or other obligations, and the balance on the settlement account must always be equal to the total outstanding balance of all holders of the e-money.
Further requirements in relation to these settlement accounts include that they must: (x) be non-interest bearing; (y) have no right of set-off; and (z) only accept debit transactions for settlement related transactions. Upon their creation, settlement generally occurs on two levels:
- Inter-Scheme Settlement which will be provided by the NIBSS using the scheme code; and
- Final Settlement which will be done through the CBN Inter-Bank Funds Transfer System (CIFTS).
Settlement accounts for mobile money operators, who provide stored value ‘wallets’ to their customers were initially hampered by the lack of deposit protection, as they were limited to the same level of protection as any regular bank account, but had to provide protection for multiple users of digital platforms. To combat this issue, the Nigeria Deposit Insurance Corporation (NDIC) established the Pass-Through Deposit Insurance Scheme (PTDIS), whereby the NDIC insures funds that are deposited into the settlement account.
Under PTDIS, the mobile money operator acts as a custodian on behalf of the one or more subscribers who are actual owners of the funds as if those actual owners have deposits in the deposit money banks. Each customer on the mobile money platform shall be insured up to the maximum coverage level of N500,000.00 per subscriber per deposit money bank or the applicable coverage level for depositors in line with the NDIC Act.
These arrangements raise the spectre of some interesting legal issues. For example, who is liable to the customer when a third party takes out a court order freezing the funds in a settlement account? The mobile money operator is still, presumably, required to complete transactions conducted through its platform and may remain liable to its customers for any failure in this regard (even where such failure relates to the effects of the freezing order). This, of course, raises the question as to whether the mobile money operator has any recourse to recoup funds lost as a result of compliance with the order. In this situation, the mobile money operator may be able to take action against the third party and claim damages. However, this may be complicated where the third party has a legitimate basis for obtaining the freezing order in the first instance.
Further interesting questions relate to what happens when multiple transactions are erroneously transferred out of the settlement account. For instance, it is unclear whether an affected party (likely to be the mobile money operator) would be required to commence separate actions in respect of each erroneous transaction. This would, of course be at would be impractical, particularly where each transaction involves only small amounts. In addition, the ultimate recipients of the erroneously transferred funds may also be able to deploy good faith arguments against any claim, particularly in circumstances where the payments were received as consideration for services already rendered. The foregoing said, where the mobile money operator is able to prove that certain transactions were indeed fraudulent, bringing an action for recovery of monies expended and, subsequently, seeking to freeze or place a lien on such recipients’ accounts may be amongst the best available options for seeking recovery.
It also perhaps worth considering how the liquidation regime for mobile money operators might be impacted in the light of PTDIS. Can the mobile money operator be regarded as falling within the definition of an “insured institution” under the NDIC Act, or is the PTDIS only, as its name implies, intended as a pass-through scheme? What happens where the mobile money operator goes insolvent at about the same time as the bank – who will be entitled to take in the funds in the settlement account for distribution, NDIC (as bank liquidator) or the mobile money operator’s liquidator? One wonders whether it might be more efficient to bring mobile money operators within the NDIC Act liquidation regime, given their customers, just like bank customers, benefit from NDIC’s insurance.
And, speaking of customers, it is clear from the PTDIS regulations that the mobile money operator is supposed to hold the funds in the settlement account on a bare trust for its customers. But what exactly is the relationship between the mobile money operator’s customers and the bank? From a jurisdictional perspective, would a dispute between such a customer and the settlement account bank qualify as a banker-customer dispute or would the matter fall within the exclusive jurisdiction of the Federal High Court?
As the digital payments ecosystem continues to evolve and the market matures, it seems that there are a number of issues worth considering and, while principles of law abound to provide guidance and definitive answers to some of these questions, a number of issues remain unclear. What is clear (particularly in view of recent developments and the knotty issues we come across in the course of our fintech practice), however, is that the courts will have their work cut out, as the operation of such mobile money systems, settlement accounts and related mechanics will, given their uniqueness and novelty in this market, still be subject to much litigation to develop the jurisprudence around these issues and more.