In the financial world, technological disruption is nothing new, having triggered far-reaching change over the centuries. The banking world of today is poles apart from that of ancient Babylon where merchants offered grain to farmers to transport goods.
The latest disruption is Financial Technology (Fintech), considered the future of finance and being embraced the world over. But like all new developments, it raises regulatory concerns that have not yet been addressed.
Fintech’s many forms
At its most basic level, Fintech aims to make financial products more efficient and more widely distributed, with lower overhead costs so as to compete with traditional financial institutions.
Fintech today has many variations, one of the most widespread being payments in the form of mobile payments, mobile wallets and payment apps. In Uganda, “mobile money” is the most ubiquitous of these.
Another category is investment management through the use of robo-advisors (machine learning and artificial intelligence) for wealth and retirement planning. We see Fintech in fundraising through equity and non-equity crowd funding platforms for access to private and alternative investment opportunities and online lending platforms. Fintech is also making its presence felt in deposits and lending, especially peer-to-peer or marketplace lending. Digital currencies such as Bitcoin have emerged and are growing in significance and popularity.
Uganda on the Fintech curve
Fintech in Uganda is still in its early stages – but like most things related to technology, it is coming and cannot be stopped. There is no doubt that it will have a huge impact on the banking industry, bringing both challenges and new opportunities.
One of the biggest challenges is regulation. Regulation is a crucial factor for the growth of any industry, and finance has always been highly regulated. Developing an appropriate regulatory framework for Fintech is proving a tough ask so far, primarily because the existing methods of regulation are insufficient to cater for this new model of business. The Fintech players are dynamic, rapidly changing and innovative, making it hard for regulation to keep up.
Regulatory approaches: from passive to active
Currently, there are three approaches to regulation of Fintechs the world over.
Some regulators favour the active approach where they work closely with Fintech companies to understand them and address any challenges. Although this would foster Fintech development, it also raises the risk of conflicting priorities, with the regulator focusing more on the Fintech companies than on the wider public interest.
Then there is the passive approach. As its name suggests, the regulator does not play an active role in trying to make Fintech succeed but does not stand in its way either. This approach is not recommended for such a nascent and high-risk sector.
The third approach is the restrictive approach which, again as its name suggests, is loaded with bureaucracy and restrictions and is highly risk averse. This approach may make compliance difficult, however, and also stifle innovation.
So the overall challenge is to find the appropriate form of regulation that will encourage innovation while offering much-needed regulatory oversight and control to prevent abuse.
Unanswered questions abound
Fintech regulation raises a host of questions. Who is the regulator in the first place? Fintech is an intersection of finance and technology and, in Uganda’s case, there is lack of clarity as to the main regulator. Should Fintech be regulated as Finance or as Technology? Should the regulator be the Uganda Communications Commission or Bank of Uganda? Alternatively, should a new regulator be created for Fintech, bearing in mind the nation’s financial constraints?
Fintech raises data concerns. Data is essential to the Fintech model through online storage of customer data. This in turn raises cyber security and privacy concerns. For example, where customer data is available to third-party Fintech providers for use on their apps, who is liable in cases of data breach? These issues need to be addressed to create comfort in an industry that depends on the free flow of data.
There are also consumer protection issues. Fintech is, by definition, reliant on technology and this opens it up to fraudsters seeking to extract money from consumers and Fintech companies themselves. It is well known that Uganda has no active consumer protection regime. Are Fintech consumers going to be left to look after themselves? What interventions are required to prevent abuse?
Intellectual property rights concerns also arise. Since Fintech thrives on innovation, how is such innovation to be afforded legal protection? Can a business method be patented, trademarked or copyrighted? If yes, where is the line to be drawn so as not to stifle innovation? Since the Fintech market is highly integrated, with so many intermediaries, how are trade secrets to be protected?
Money laundering and capital controls warrant attention too. How does Fintech fit into the current Anti-Money Laundering framework? International money transfers and foreign exchange have been greatly disrupted by Fintech companies like Money Remit. How do our regulators keep track of these transactions, conducted mostly by startups in different parts of the world? Our regulators, who are usually challenged capacity wise and by bureaucracy in law reform, are unlikely to keep up with the speed at which Fintech transactions evolve.
There are also competition issues. Largely, Fintech has been driven by startups whose technology is later adopted by the big players. How are these small players to be protected from the competition? Some large institutions have reacted to Fintech companies by gobbling them up in a spate of mergers and acquisitions and making them part of their businesses. Other Fintech companies have decided to merge with one another to stay competitive. This raises competition law issues. How are these to be addressed? What restrictions are needed?
Realistic, effective regulation required
Fintech will be an integral part of the Ugandan financial sector in the near future and therefore requires a well-thought-out regulatory scheme that will cater for its idiosyncratic nature while at the same time ensuring the required control. Any realistic and effective regulatory framework should cater for the issues raised above.
By Brian Kalule