If you’re looking at the addressable market for wallets in Nigeria, Zap by Paystack is arguably the most significant development from the company since its initial launch potentially even more consequential than its acquisition by Stripe. Given the product’s significance and the broader implications of the CBN’s ₦250 million fine (the “Fine”), it’s important to reflect on the legal and regulatory issues raised, particularly under banking and payments law in Nigeria.
This article focuses on one key issue: the “holding funds” rule as it applies to Payment Solution Service Providers (PSSPs), and what this means for the design and structure of fintech products going forward.
1. Was There a Clear Infraction?
At first glance, it appears so because the CBN clearly prohibits PSSPs from “holding funds.” That said, whether or not a particular PSSP is actually holding funds can also depend on factual and structural realities, some of which are discussed in question 4 below.
2. What Is the Rationale for the “Holding Funds” Rule in Banking Law?
The rule is grounded in regulatory classification. In legal and supervisory terms, once a service provider stores value on behalf of a user over time such that the user can hold a balance, use the balance for multiple future payments, or receive payments into that balance, then the provider is no longer merely transmitting money. Ordinarily, this would require a different license with distinct capital requirements, and heightened consumer protections. PSSPs, by contrast, are meant to facilitate routing only without control, custody, or beneficial ownership of the funds involved in a transaction.
There are also serious legal implications for customers if a PSSP begins to hold funds. For instance, if a PSSP opens a pooled account in its own name with a deposit money bank to provide wallet functionality, and the PSSP later becomes insolvent, those customer funds might be treated as corporate assets in liquidation even if contractually they belong to users. Also, PSSPs are not expressly required to structure customer funds with nominee protections or insolvency safeguards. This puts customer deposits at higher risk of loss in the event of a PSSP failure.
3. Managing Broader Insolvency Risk
There are at least two distinct protections available to users of licensed e-money operators, which are not generally available to PSSP customers:
a. Settlement Bank Failure
Under NDIC guidelines, if the settlement bank for an e-money licensee fails, a special pass-through deposit insurance ensures that each user is protected individually up to the insured maximum. Thus, wallet accounts benefit from NDIC cover through the pooled account because of how e-money licensees are required to structure their funds with beneficial owner transparency.
b. PSSP Failure
If an electronic-money fintech becomes insolvent or loses its license, customer funds have some level of protection based on the requirement for electronic-money companies to open settlement accounts with banks under a nominee structure. Also, to ensure continuity of service and access to funds, CBN may step in and arrange for another electronic money business or financial institution to take over the any user balances. In such a case, the customer funds held in the pool account may be transferred to the new w-money company or institution taking over the responsibility.
4. Will a PSSP Be Automatically Considered as Holding Funds If It Launches a Wallet-like Product?
The answer appears obvious but may also depend on an analysis of the material facts and structure of a wallet service. There are a number of possible scenarios:
| Structure | Holding Fund Risk |
| PSSP uses same dedicated account in a Deposit Money Bank for routing and storing balances | High: likely commingling and holding funds |
| PSSP holds customer funds in a dedicated bank account in a Deposit Money Bank, its own name | High: likely a holding funds infraction |
| Settlement bank opens and controls a settlement account in its own name, with PSSP having no legal title | Lower: may be compliant if properly structured. However, a PSSP may still be cited for providing a regulated service outside the scope of its license |
Strategic Implications for PSSPs and Fintech Product Teams
- You do not need a Microfinance or banking license to issue a wallet.
- Fintechs powering wallet services with deposit-money banking licenses would need to give greater consideration to the management of deposit liability.
- In Banking Law, “Accepting Deposits” is a different principle from “Holding Funds”
- It may be prudent for fintech founders ( and at the board level) to consider an independent review of products, new features and verticals to ensure that product design aligns with regulatory expectations.
- Intention is not relevant in determining whether a failure to comply with a regulation can be excused. Directors can also be made personally liable despite their best intentions and in the absence of fraud.
- Fintechs may bear the shorter end of the stick. In this case, no fines were imposed on the relevant Deposit Money Bank for co-issuing the product.
You make speak with our Banking & Finance lawyers here: bhlegalsupport@balogunharold.com
