Contracting in the Digital Finance Ecosystem: How To Manage Legal Risks in Nigerian FinTech Partnerships

Introduction

The emergence and continued growth of Financial Technology (FinTech) companies in the Nigerian financial services sector has redefined how financial services are delivered, with technology driven solutions that enable faster payments, lending and wealth management. These innovations often lead to complex collaborations between FinTech startups, traditional banks and third-party service providers. These partnerships may inevitably expose the parties to legal and regulatory risks if not properly managed.

As FinTechs and banks increasingly depend on one another to provide innovative financial solutions, products and services to customers, poorly drafted agreements can expose the parties to regulatory breaches, penalties, data protection violations, commercial disputes, etc. To manage legal risks in FinTech contracts, the contracting parties must first conduct thorough legal and other due diligence on prospective partners, establish a robust compliance framework, and develop a robust partnership agreement that allocates roles and responsibilities and anticipates potential risks.

Nature of FinTech Partnerships

FinTechs do not operate in a vacuum. They depend on strategic partnerships/collaborations to launch and provide their products and services to customers. Partnerships and collaborations enable FinTechs that may not hold the necessary financial license from the Central Bank of Nigeria (CBN) to partner with licensed financial institutions so as to leverage its financial license to provide products and services to customers.

Through collaborations and partnerships, FinTechs are for example able to provide services to e-commerce platforms offering point-of-sale lending or payment processing for e-hailing providers or sharing infrastructure such as Application Programming Interface (API) with other technology service providers who require it.

Legal Risks in FinTech Partnerships

Partnerships and collaborations stimulate innovation in the FinTech industry but can also expose parties to unique legal, regulatory, reputational and operational risks. The success or failure of a FinTech partnership often depends on how well these risks are identified, allocated and addressed within a contract. Below are some of the most common legal risks that arise from such partnerships.

1. Regulatory Risk: FinTech product offerings in Nigeria such as payment processing, digital lending, crowdfunding, and wealth management are all regulated by specific regulatory agencies including the Central Bank of Nigeria (CBN) and the Securities and Exchange Commission (SEC) under specific license categories with terms and conditions attached to each license category. Regulatory approvals are usually required for most partnerships before a financial institution can legally enter into any such partnerships. Failure to obtain the appropriate regulatory approval for proposed partnerships may result in regulatory sanctions and penalties including fines, revocation of license, etc.

2. Data Protection and Cybersecurity: Fintech operations are heavily data driven, involving the collection and processing of sensitive personal and financial information. Under the Nigeria Data Protection Act 2023 (NDPA), both parties in a partnership may qualify as joint data controllers or processors, sharing equal responsibilities for compliance. A data breach affecting one party can expose both to liability, enforcement actions by the Nigeria Data Protection Commission (NDPC), and reputational damage.

3. Intellectual Property and Technology Ownership: Most FinTech solutions depend on proprietary software, mobile applications, and digital interfaces. Disputes may arise over ownership of intellectual property developed or used during a partnership, especially when one party customizes a platform or co-creates a product, if intellectual property is not properly protected and ownership defined.

4. Liability and Risk Allocation: When digital transactions fail due to systems failure or downtime, unauthorised transfers, or service interruptions, customers may suffer losses. The question then arises: who bears the liability? If not properly defined, both parties could be held jointly and severally responsible under consumer protection or other laws. There is therefore a need to include clear indemnity provisions, caps on liability, and mechanisms for loss allocation in any contract.

5. Consumer Protection and Dispute Resolution: Fintech partnerships often involve multiple parties receiving or processing customers’ transactions, making accountability complex when issues arise. Consumers protection regulations require that consumers know which entity is responsible for handling their complaints. Agreements should define the customer-facing entity, procedures for addressing complaints, refund obligations, and timelines for resolution. Establishing a clear dispute resolution process whether internal escalation, mediation, or arbitration helps preserve business relationships and avoid reputational damage.

6. Cross-Border and Jurisdictional Issues: Some partnerships involve cross-border data transfers or offshore service provision. In such cases, questions may arise regarding applicable laws, tax, jurisdiction, dispute resolution and enforcement of judgments. It is therefore advisable that the governing law, jurisdiction, mechanisms for settling disputes and enforcing foreign arbitral awards or judgments be clearly specified.

Essential Tips for Managing Legal and Regulatory Risks in FinTech Partnerships

Effectively managing legal and regulatory risks in FinTech partnerships/collaborations begin with having a contract that clearly sets out the rights and responsibilities of the parties. While regulations may provide the overall compliance framework, the contract is usually what sets out responsibilities, clarifies liabilities, and ensures both parties operate within legally acceptable limits. A clearly set out agreement not only protects the parties but also signals to regulators that the relationship is grounded in proper governance and accountability. Below are some essential tips for managing legal and regulatory risks that may arise from partnerships in the FinTech services sector:

A. Choose the Right Contract Type: FinTech projects and services may require different types of contracts and agreements to formalize relationships and transactions. Service Level Agreements (SLAs) set the quality and performance standards of any FinTech service, like availability, reliability, security, compliance, as well as the penalties and remedies for any breaches. Data Sharing Agreements (DSAs) detail the terms of how data is collected, stored, processed, and shared between the parties. Software Licensing Agreements (SLAs) grant the rights and obligations of using a FinTech software or platform, such as scope, duration, fees, and limitations. Lastly, Partnership Agreements (PAs) establish the roles, responsibilities, contributions, and benefits of each part to a FinTech collaboration or joint venture. Additionally, they define the governance, decision-making, dispute resolution, and termination mechanisms of the partnership. It is important to understand the nature of the FinTech project, the parties involved, and the regulatory environment, as these factors determine which agreements are necessary, their specific terms, and how they should be structured to protect all stakeholders and ensure legal and operational compliance.

B. Use Clear and Concise Language: Like in all contracts, one of the most important aspects of managing FinTech contracts and agreements is to use clear and concise language that leaves no room for ambiguity or misinterpretation. It is advised to consistently use accurate terminologies, definitions and references throughout the contract to ensure easy reading, understanding and interpretations.

C. Constant Review and Update of Agreements: FinTech agreements should be regularly reviewed and updated to ensure that they reflect current trends, future needs and expectations of parties and customers and that they also align with any regulatory or policy changes introduced from time to time by the regulators. There is also a need to keep abreast with technological developments and innovations in the FinTech ecosystem to ensure that contracts are updated to incorporate service provision with the use of advanced and innovative technology.

D. Seek Professional Advice and Support: Managing FinTech contracts can be challenging, especially if the parties do not have expertise or did not consult experts to deal with the legal, technical, or business aspects of the partnership arrangements. The best approach to avoiding potential pitfalls is to from the outset, seek assistance from professionals who can support and seamlessly guide through the process of negotiating, contracting, interpreting and enforcing these agreements.

In summary, a well-structured FinTech contract should amongst others specify which party bears regulatory responsibility for compliance; how customer data is stored, shared, managed and protected; how revenue, risk, and liability are allocated and shared; termination, jurisdiction, dispute resolution, etc. Without these, fintech relationships could easily breakdown and lead to regulatory breaches, contractual disputes, and reputational damage for parties. In essence, the contract is not merely a record of collaboration, it is the foundation that sustains trust, compliance, and operational success in FinTech partnerships.

Conclusion

As the FinTech industry in Nigeria continues to grow, strategic partnerships will continue to play increasingly pivotal role for FinTech companies seeking to scale their operations and penetrate new markets. This collaborative approach allows FinTechs to accelerate their growth while minimizing the risks and challenges typically associated with scaling and/or market entry.

FinTech partnerships are essential to driving innovation, inclusion, and competitiveness in Nigeria’s financial ecosystem. Without robust legal and contractual foundations, these partnerships can expose parties to significant regulatory, legal, operational, and reputational risks. Effective contracting in the digital finance ecosystem requires more than just template agreements. Well-structured contracts are not merely instruments of protection; they are robust tools for innovation and trust in the future of digital finance.

Please note that the contents of this article are for general guidance on the Subject Matter. It is NOT legal advice.

For further information or to see our other service offerings, please visit www.goldsmithsllp.com