The success of mobile money in Africa has paved the way for fintechs to bring financial services to new markets. JUMO’s Group Head of Regulatory, Victoria Mojuto looks at the impact of this evolution on current regulatory frameworks.
‘In 2021 fintechs raised close to $5 billion in funding, and according to the GSMA, it’s estimated that this has doubled nine times over the past five years. This is a substantial economic opportunity for Africa. Despite the progress made up to this point, some challenges remain and one of the biggest is identifying the kind of regulation needed to ensure fintechs reach their full potential.
Tricky trade-offs
One of the main objectives of regulation is to improve social welfare. Regulators achieve this by setting specific goals that address economic efficiency, financial stability, market integrity and consumer protection. Promoting competition is another objective, as this encourages the efficient allocation of resources and innovation. However, no policy or regulation can achieve all of these things at the same time. There are always trade-offs to consider.
While it’s important for fintechs to be regulated and to ensure the safety of consumers, regulation also needs to be practical. With the fintech market still in its nascent stages, regulation should allow for growth and scalability.
Understanding the fintech business model
On the whole, there has been slow progress in formulating regulatory frameworks that can adequately address the business models and activities of fintechs. A few exceptions include the introduction of digital banks in some jurisdictions and regulations on crowdfunding platforms (Ehrentraud, et al 2020).
Fintechs are in a peculiar position in that they are required to apply for a licence which, in most cases, places them under the same regulatory frameworks as mobile money operators or banks. Consequently, they are expected to comply with the same obligations that are not necessarily fit for purpose.
Licence approvals for fintechs often take time, delaying investment decisions and creating regulatory uncertainty. The cost structure and business model of fintechs is unique and vastly different from other market participants. While this might not always be fully understood by regulators, fintechs are treated the same way as mobile money operators and are expected to comply with the same speed and precision.
Exceptions to the rule
Some regulators have created a specialised licence category for fintechs, in an attempt to accommodate them and bring them under adequate regulatory control. It remains to be seen whether these categories are aimed at risk reduction or promoting competition. Much of the current regulation in place was not built around technology and the changing landscape. This can sometimes place onerous and impractical obligations on fintechs, exposing them to undue penalties at best or the revoking of a licence at worst. However, with central banks now recognising the value of fintechs and taking a keen interest, the scene is set for positive change for the entire ecosystem. Promoting regional and international cooperation between a variety of regulators and policy makers will help legal and regulatory decision makers to create an enabling environment, where fintechs and financial inclusion can flourish.
“A challenging but promising future lies ahead.
Fintechs are transforming the traditional banking model and there is clear growth potential in Africa. Overcoming regulatory hurdles remains a challenge, but the proven benefits of new technologies make fintech an essential part of all our futures. Governments, regulators, investors and entrepreneurs now need to work together to ensure that Africa can continue to be a continent where fintechs thrive.
