By Barkley Odhiambo
NAIROBI, Kenya, Dec 5 – Financial technology often referred to as FinTech, has become an integral part of the Kenyan financial ecosystem. Emerging FinTech, including mobile wallets, mobile money transfer platforms, digital lenders, and payment service providers, are redefining how financial institutions deliver services in an industry long defined by slow to innovation.
The swift evolution of FinTech is today more than a disruptor. The transformation has also allowed banks and the more mainstream and traditional financial players to rapidly reinvent their entire value chain of financial services, helping expand access to finance for underserved consumers.
Products, services and business models that have worked for decades are no longer an option in the digital world. Newer, more efficient technologies are augmenting legacy infrastructure. Consequently, this has made service delivery faster, more convenient and more cost-effective for customers.
However, this combination of fast growth and the increasing importance of FinTech services for the functioning of financial intermediation comes with system-wide risks that require updated supervision policy frameworks.
The innovation has brought unintended risk for financial firms and their customers. Concerns of loss of privacy, rising risks of fraud, compromised customer data security, harmful manipulation of consumer behaviour, a sudden collapse of some Fintechs, and borrower distress resulting from irresponsible digital microcredit lending practices illustrate such risks.
The risks primarily arise from the underlying technology enabling fintech but also from new business models, product features, and provider types. This poses two questions: Do we need regulations in this nascent FinTech ecosystem? And secondly, how can the financial sector keep up with current FinTech regulations and prepare for the future as technology evolves?
Analysis of the global financial system has demonstrated time and again that government regulations aren’t just necessary — they often yield great value for consumers and businesses alike. Beyond protecting consumers, as technology changes business and FinTech come into the market, regulations can help manage processes and pave the way for fair competition.
The policy and regulatory environment is a critical factor in the continued success of any economy. The sector needs regulations to foster strong growth of the FinTech ecosystem.
Policies targeting FinTech firms and banks with digital arms are proportionately needed. This way, the opportunities that FinTech offers are fostered while risks are contained. At the same time, we need regulations to remedy the trust deficits following high profile tech start-ups that have collapsed in the recent past.
The regulation also establishes trust whilst creating a level playing field, especially for small and medium-sized enterprises, enabling them to scale faster.
Any institution involved in financial activities must comply with various regulations, which certainly apply to the FinTech industry. Without regulation, it would be difficult (if not impossible) for FinTechs to operate widely in the financial services sector, especially players in multiple jurisdictions and in an industry where trust is an operational tenet.
It’s worth noting that FinTechs are not entirely unregulated; like any other enterprise in the country, they are subject to Know-Your-Customer requirements, data protection regulations and anti-money laundering and countering terrorist financing requirements.
Developing an appropriate regulatory framework for FinTech is proving challenging, primarily because the existing regulation methods may not cater for newer business model. The Fintech players are dynamic, rapidly changing and innovative, making it hard for regulation to keep up.
In Kenya, the Central Bank of Kenya (Amendment) Act of 2021 that effectively brought the digital lending financial sector under the ambit of the Central Bank of Kenya, the National Payments Systems Act 2011, and the National Payments Strategy 2022 – 2025 remain some of the most formal attempt to regulate FinTech in the country.
But getting the balance right in a rapidly moving digital economy is harder than ever. Technology is developing much faster than new regulations can be written. Business models change rapidly. Regulations quickly become redundant, and the impacts of new technologies and business models can be complicated to forecast. On a positive note, this provides room for industry players to incorporate self-regulation and foster a culture of compliance.
Critics have long argued that regulation of this industry— which is still emerging— may hamper innovations as enterprises must spend more to meet the regulatory standards; subsequently they have to cut their investment budgets. Regulation, however, is a crucial factor for the growth of any industry, and FinTech regulation ensures integrity, stability and safety of the financial system remains.
The onus is on fintech stakeholders, including industry players, regulators, relevant government agencies, and policymakers, to pivot the current regulatory regime to the realities of rapid growth presented by technology. This means constant engagement between the industry and the regulators to develop regulations that brings stability and confidence in the sector. Any regulations, however, shouldn’t impede innovation.
Odhiambo is the Legal & Compliance Manager at Pesapal
