Regulating the growth of Fintech

For one to state that the advent of Financial Technology, now commonly referred to as Fintech, has changed how things are done in the financial sector lately is an understatement. It is a disrupter, which is challenging the long-held traditional banking methods of reaching and serving clientele to the extent of threatening to push them into oblivion. Rapid innovation has led to the proliferation of new products hitting the market challenging the status quo. Lately, the telecommunication sector and the financial sector appear to be working as conjoined twins - a situation necessitated by the advent of Fintech. Despite the advantages of this synergy, the pace of innovation in the traditional financial services sector as we know it appears to be slower than what is happening with their counterparts. The latter are leveraging on their well-established networks, well spread out infrastructure for convenience, and ease of access to larger numbers enabling them to rake in more business at lower costs. Lately, their wider reach offers them the advantage of riding on the economies of scale business model aiding them to post higher returns on capital. Banks, on the other hand, faced with the risk of losing a huge chunk of their business and customer numbers have opted to join hands with the fast-growing mobile money operators for convenience and retention of their clients. Internally they are now reorganizing by hiring techno-savvy staff and establishing technology-led business growth centres. New research and front office Information, Communication, and Technology departments are now in place to take advantage of the opportunities offered by Fintech. This looks set to take the sheen away from the traditional business presence that has for years been the brick and mortar.

Fintech has radically altered the Kenyan financial landscape while astronomically increasing financial inclusion, a key component of economic development. Results from a recent survey by the Central Bank of Kenya and the Kenya National Bureau of Statistics show that about 83% of the Kenyan adult population has access at least to one financial product. Since its inception, mobile money transactions in Kenya have grown to an annual turnover of Kshs 5.21 trillion in the year 2020 (equivalent to about USD 50B) with the biggest mobile phone operator, Safaricom, leading the way for non-banking institutions. This phenomenal growth has placed the country Kenya as a world leader in mobile money banking and payment systems, with associated services now being incorporated into other sectors of the economy. Fintech has become part of the everyday life of most citizens in the country.

Despite the success story behind Fintech in Kenya, it has not been devoid of challenges, notably from the regulatory and legal sides. At its inception in 2007, M-Pesa and other mobile service providers operated under the umbrella of the communications sector by dealing in financial transactions. This called for the review of the National Payments Systems Act to accommodate the unique nature of mobile money operations that overlap the finance and communication sectors. The law came into force in 2011 granting the Central Bank of Kenya the power to designate, regulate and supervise systems and payment services. Alongside posting huge volumes in the form of money transfers, which are almost equivalent to half of the country`s GDP, there has emerged a new upsurge of small volume lending that is growing rapidly. In the wake of such developments, there is a great need to introduce the relevant legislation to cushion parties involved, ensure all operate within the arm bit of law, ensure fair play, and protect the consumer in a fast-growing market. Lending to this segment by commercial banks alone with 3.6 million accounts amounted to Kshs 50.6 billion (USD 468.5 million) by April 2021. There have been previous efforts to have the sector brought under legislative control and guide the licensing of the already over 100 operators who specifically are engaged in issuing credit only. This new business model has consequently exposed the lacuna in the law which is not comprehensive in covering the new operations more so in digital finance. Several litigants have had their suits thrown out due to this and consumers have been exploited with exorbitant fees and interest rates that the operators charge.The authorities are still working on defining the real location of Fintech, a sector that straddles both the telecommunication and financial services industries, as new inventions keep coming up. The mobile money market spearheaded by telecommunication companies is a financial service product that was launched in 2007 and still carries this ambiguity highlighted in 2014 when the need to draft the oversight body arose.

The legislation in this area continues to face challenges while there is a continued reporting of the effects of its absence. We continue to witness unchecked fraud, tax evasion, money laundering, terrorism funding, a conduit of drug trafficking funds as well as the unjustifiable losing of suits.These are incidences that can only be curbed, harmony established and the consumer protected through an effective legislative mechanism. It calls upon the authorities who bear the heavy responsibility of ensuring there is law and order to lay down hard and fast rules for licensing, and regulating while also enabling the sector to grow without hindrance since this is the future of the financial services industry. A more aggressive approach rather than the current reactionary style would help develop this promising industry by weeding out rogue players, protecting the avid consumer, establishing a level playing field, and setting the acceptable parameters of operations. Probably, the solution may lie in the establishment of a specialized body in the form of an authority whose mandate will be to specifically handle matters Fintech in the economy.