Fintech are booming but regulators struggle to follow the pace. The right balance between encouraging business and maintaining stability seems like a thin ridge line.
Policy changes, licence delays and escalating costs are regular frustrations for Africa’s fast-moving fintechs. With much existing regulation tailored to more conventional bricks-and-mortar banking, many fintechs find regulators are out of step with the burgeoning fintech landscape.
Out-of-sync regulation is also failing to address more serious issues like data protection, digital rights and protecting customers from loan sharks and Ponzi schemes.
But in Kenya and Nigeria, fintechs have flourished without the stranglehold of thorough regulation, fuelling fears that overzealous regulators might kill the sector.
How can regulators strike the right balance between maintaining financial stability and encouraging entrepreneurship?
Mary Mwangi set up Data Integrated, an aggregator platform offering digital payments for SMEs, in 2012. Nairobi’s mataus buses, fitted with GPS tracking, mobile-ticketing machines and cameras thanks to Data Integrated, zip across the city, while SMEs use the platform’s technology to pay employees.
Like many fintechs, it operates across several sectors. But because of this, Ms Mwangi’s regulatory journey has been colossal. In all, she has had to apply for over 10 separate licences from multiple bodies, ranging from the Kenya Revenue Authority to the Central Bank of Kenya (CBK).
Chasing after absent officials and experiencing licence delays held back the launch of Data Integrated by almost two years. “One of the licences we needed is only issued during set periods of the year, and we missed the window, so for two years we couldn’t put our product on the market and that allowed competition to grow,” she says.
However, Mwangi says the situation is improving. Many licencing processes have gone online. But standardisation across the various requirements and regulatory bodies would make her life a lot easier.
She is hopeful that a more tailored legal and regulatory framework, like the one proposed by the CBK in its National Payments System Vision Strategy 2021-25, is not far off.
“I’m excited that the CBK is developing a fintech-specific licence versus the one they were issuing to other companies. It may be less expensive and small businesses will be able to compete with big corporations,” she says.
Kenya has a sophisticated and developed fintech ecosystem dominated by lending and blockchain firms.
Digital lenders are not yet regulated by the CBK, except those backed by banks, which has allowed the market to grow rapidly – improving access to credit for many Kenyans.
New draft rules on payments providers could help firms like Data Integrated benefit from faster authorisation for new business activities and streamline approval for products and services, open banking and compatible key payment technologies like QR codes.
But many are concerned that overregulation of the space could kill innovation.
In a recent survey by Tellimer, fintech firms named regulation regarding data protection and KYC/AML [know your customer and anti-money laundering] as key growth constraints for the sector.
Tedd George, founder of Kleos Advisory, a UK-based firm specialising in Africa’s fintech market, says the problem arises from the fact that, more often than not, banks, regulators and fintechs do not understand each other.
“Innovators are always ahead of regulation by definition,” he says. “If you’re not ahead of regulation, you’re not innovating. Because of this, there’s no way regulators can keep up the pace with innovators and there’s no place where existing laws can cover them.”
One way to overcome this is to encourage more dialogue between key stakeholders.
Nyale Yanga, a manager responsible for corporate approvals at the Capital Markets Authority (CMA) of Kenya, says the best way to avoid legislation getting out of step with the market is to engage.
“We need to do more talking so that we come to an understanding of each other,” he says. “There’s nothing that a regulator won’t understand if it has a business case and adds value to the capital markets value chain.”
The CMA is leading the way when it comes to fostering beneficial relationships with fintechs. With help from international regulators like the UK’s Financial Conduct Authority (FCA), it launched a regulatory sandbox in 2019.
For recent graduate Pezesha, the sandbox offered a controlled environment in which to test its product and receive guidance from the CMA before it rolls it out on the mass market.
For the CMA, the sandbox is an opportunity to nurture businesses which have the potential to deepen Kenya’s capital markets and to craft new regulations through engagement with innovators and their products.
The CMA is now developing new guidance for how crowdfunding platforms will be regulated in Kenya based on what it has learnt with Pezesha and the other crowdfunding platforms it works with.
Mr Yanga says the CMA also works closely with its sister regulators, i.e., the CBK and those covering pensions, insurance, savings and credit, to ensure their experience with fintechs is fed into upcoming regulations.
As Africa’s largest economy and with a population of 200 million – 40% of which is financially excluded – Nigeria offers significant opportunities for fintechs.
High-profile deals like Stripe’s acquisition of Paystack for a rumoured $200m have made investors pay more attention to Nigeria’s start-up scene.
FairMoney founder Laurin Hainy is in the process of securing a full microfinance banking licence which would allow his company, a challenger bank serving 750,000 customers in Nigeria, to take deposits.
Recognising that access to credit is one of the biggest challenges facing African consumers and businesses, Mr Hainy launched FairMoney, a credit-led neobank in the style of Brazil’s Nubank and Russia’s Tinkoff Bank, in 2017. In 2019, FairMoney raised $11m in a Series A funding round.
As part of a digital lending association, Hainy has met with the Central Bank of Nigeria (CBN) to discuss how the regulatory environment can evolve and the opportunities and challenges around digital financial services. On the whole, his experience has been very positive: “We like their framework and they have been very open towards the opportunity digital financial services can provide,” he says.
The CBN’s regulatory policies on cashless payments and financial inclusion have largely created an enabling environment for fintech in Nigeria. But the proliferation of regulatory bodies can make it hard to navigate. In addition to the CBN, there are eight other regulatory bodies with rules applicable to fintechs.
In response to the pandemic, the CBN collaborated with banks and payment companies to encourage digital payments, remove policies on cashless payments and make it easier for customers to open digital accounts.
But while the CBN has made moves to promote the growth of mobile money – updating its guidance on payment service banks (PSBs) in August 2020 and releasing new guidelines for QR codes – its policy-making can be unpredictable.
In December it hit mobile money operators and payment companies with a ban on international remittance payments while enforcing a rule that international money transfer operators (IMTOs) could only send remittances in dollars.
Mr Hainy hopes to encourage a more forward-looking regulatory environment like that in India, where FairMoney launched in August 2020. “I’d like to see proactivity. For instance, a working group thinking about Nigeria 2030,” he says.
Ighiwi Erhahon, director of compliance at Kuda, another Nigeria-based challenger bank, would also like to see more concrete pronouncements and actions from the regulator, particularly in areas like cryptocurrency and open banking. “A nimbler approach would be beneficial in this regard,” he says.
Kuda is a mobile-first challenger bank with a microfinance banking licence serving around 300,000 consumers and (soon) small businesses. It raised $10m in seed funding led by European venture capital firm Target Global in 2020.
Like in Kenya, the CBN’s Banks and Other Financial Institutions Act (BOFIA) is not specifically tailored to fintechs, as its rules on anti-money laundering and combating the financing of terrorism (AML/CFT), prudential requirements and risk management are suited to more traditional banking models.
For example, AML/CFT rules require financial institutions to keep a paper copy of onboarding documents, a practice that is out of joint with digital operations.
As such, flexibility from the regulator in the application of its rules and regulations would also help, Mr Erhahon says.
Thanks to the CBN’s new regulatory sandbox framework, released in January, fintech innovators will have an opportunity to test their products, services and solutions without the need to acquire a CBN licence.
Mr Erhahon welcomes the move: “The sandbox will be helpful in not only bridging any gaps that may exist between regulators and fintech players but would also enable both parties to work towards a mutually compatible and beneficial working relationship.”
Partnerships with more established firms and banks remain a key way to help emerging fintechs navigate regulatory environments.
Neobanks, mobile money and payments providers may provide an existential threat to the traditional banking system, but banks remain essential partners for fintechs.
“Fintechs need banks, they need their licences,” says Mr George. “In the short to medium term, the incumbent banks will remain incredibly strong.”
Ecobank has an active hand in supporting the development of fintechs across the continent. In January 2020, it launched its own pan-African regulatory sandbox, taking Senegal’s InTouch, Nigeria’s Flutterwave, Rwanda’s Esicia, and Africa’s Talking and Callme2Work from Kenya under its wing.
Djiba Diallo, Ecobank’s senior fintech advisor, sees the relationship between banks and fintechs as a mutual one. The company’s sandbox allows fintechs to directly integrate with Ecobank’s application performing interfaces (APIs), giving them access to the bank’s 33 markets, saving considerable time and resources many of them do not have.
“The strategy is very clear, we see them as partners instead of competition, an opportunity to extend our reach and grow our business.” Ms Diallo says more and more regulators are moving in the right direction, with the West African Economic and Monetary Union organising roundtables to meet all stakeholders to understand the issues fintechs and innovators are facing.
Ultimately, when a regulator lags too far behind the market, it can create precisely the systemic risks it is designed to prevent. This is evident in credit.
The boom in digital payments and mobile money has seen loan sharks go online; extortionate rates and aggressive enforcement tactics are rife from Lagos to Nairobi.
Mr George says regulators need to tackle issues like this head-on with a specific law that says, when it comes to mobile lending, you are not allowed to charge above a certain interest rate.
“The genuine problem is that there are no clear digital consumer rights in Africa, no one cares about them. It should be the number one priority,” he says.
Regulators have a critical part to play in building the right infrastructure to tackle such issues. Legally enforced data collection and reporting to credit bureaus would lower the overall risk in the market by improving lenders’ understanding of customer behaviour, such as how likely they are to pay back a loan.
“Credit is built on infrastructure and credit costs depend on the quality of that infrastructure,” says Mr Laurin. “The better the credit infrastructure, the lower the costs for the customer.”
What is happening in the digital lending segment is increasingly impacting the banking sector, meaning that greater regulatory integration between the two sectors is inevitable.