INTRODUCTION
Recently, the World Bank Group and McKinsey & Company have released two leading reports on “the Future of Finance” highlighting the current state, opportunities, risks, and/or challenges of the Financial Technology (Fintech) revolution, disruption, or eruption happening across the world and Africa.
These two reports – “Fintech and the Future of Finance” by the World Bank Group and “Fintech in Africa: The End of the Beginning” by McKinsey & Company provide critical insights for identifiable industry stakeholders such as Regulators, Investors, Fintech Companies/Innovators, and Consumers. While these reports are inconclusive on the trends and impacts of Fintech innovations on traditional financial services offerings, they offer useful predictions of the future of financial services particularly in developing economies like Ghana.
This article, the first in the series for industry stakeholders, focuses on signposts that should inform regulatory interventions to ensure the balancing of financial sector objectives which according to the World Bank Group, include safeguarding competition, financial stability and integrity, consumer protection, and data privacy in regulating Fintech innovations.
FINTECH AND REGULATION
Financial Technology (Fintech) is defined by the World Bank Group as “the technology-enabled innovation in financial services”. This broad view taken by the Bank towards defining Fintech is true of its nature – as there is an inexhaustive list of innovations being developed, under testing, and/or deployment on the account of the Fintech revolution.
The disruptive effects of Fintech innovations on traditional financial services have become obvious – on personal and business levels. Fintech has enabled new business models that permit wallets, remittances, payments, and account management services, among others, from mobile and other computing devices. It has also re-engineered the way financial services are delivered through new systems, infrastructure, and processes. The result is a structural shift in the way traditional financial services have been offered for decades.
On an aggressive note, Fintech innovations are not only aiming to disrupt services provided by traditional financial service providers like banks, stock exchanges, and remittance companies but are also challenging the sovereign mandate of Central Banks to regulate the issuance of currencies (money) as legal tenders either as a store of value or as the mode for the exchange of goods and services.
However, the initial resistance by Central Banks to this goal of democratizing their sovereign function is fading and we are witnessing a gradual licensing of cryptocurrencies and the adoption of Central Bank Digital Currency (CBDC) enabled by Fintech innovations – and being piloted in Ghana as eCedi.
The rise in the deployment and adoption of Fintech innovations according to the World Bank Group and McKinsey & Company has been accelerated by the Covid-19 pandemic on the back of expansions in internet access and smartphone usage. Further, lower-cost computing, data storage, push for financial inclusion, young, fast-growing, and urbanizing population, increased availability of funding for innovations, etc. are also accounting for the high Fintech penetration rates.
Remarkably, between 2020 and 2021, the number of tech startups in Africa tripled to around 5,200 companies with Fintech accounting for almost half of that number according to McKinsey & Company. This means that Fintech innovations are being delivered through the vehicle of business forms – companies especially new ones.
Generally, or specifically, companies are regulated entities. Regulations make prescription of permitted or prohibited business activity and business forms - registration, operation, and winding up thereby impacting every aspect of a company.
Despite the advantages of Fintech innovations – convenience and speed, low-cost financial service delivery, driving financial inclusion, etc., they are not exempted from regulations. Fintech innovations are regulated in ways consistent with general or specialized regulation of businesses.
In force, are regulations for a Fintech company’s incorporation, registration with other statutory institutions in compliance with payment of employee pensions and tax, data protection, business operating permits, etc. Also, there are laws that regulate the specific deployment of Fintech innovations assigning the duties of licensing, supervision, and monitoring to specified statutory institutions.
However, due to the rapid nature of the development of innovations and uncertainties that characterized the Fintech sector, policymakers and regulators have been slow in responding to its effective and complete regulations – regulations are unable to effectively predict and provide for Fintech innovations. In most instances, the result has been the declaration of new Fintech innovations as unregulated or prohibited due to the lack of existing regulations to support their licensing, regulation, and supervision.
An example of a response to these regulatory shortfalls is the launch of the Regulatory and Innovation Sandbox program by the Bank of Ghana. This program seeks to provide the platform for the testing of unregulated Fintech innovations under its supervision as a way of building insights for regulatory changes and permitted deployments.
The deployment of a Fintech innovation like any other form of business activity must be regulated. Despite any superior advantage, Fintech innovations are/will not be exempted from regulations.
REGULATORS OF FINTECH INNOVATIONS IN GHANA
There are several regulatory institutions with independent and related responsibilities for the conduct of permissible business in Ghana. In looking at the regulation of Fintech innovations, I have classified these institutions into Primary and Secondary Regulators.
I consider regulators with direct licensing, supervisory, and monitoring responsibilities for product lines of Fintech companies as “Primary Regulators” whilst those with general responsibilities for the conduct of permissible business activity in Ghana I term as “Secondary Regulators”.
The specific or incidental functions of a Primary or Secondary Regulator are prescribed by enactments establishing these institutions with mandates to regulate permissible business activities. The established institutions have become the structure through which policymakers respond to the changing business landscape through revisions or amendments of mandating legislation or enactment of new ones.
A.Primary Regulators
Currently, the two Primary Regulators of Fintech Innovations in Ghana are:
i.Bank of Ghana (BoG)
The broad constitutional duty of the Central Bank to regulate the financial sector in Ghana has been reinforced in several other enactments mandating it, among others to promote, regulate, and supervise payment and settlement systems, credit systems, banking, and non-banking financial institutions, and perform other incidental or conducive functions. Based on these prescriptions, BoG has been regulating the activities of traditional financial service providers before the emergence of Fintech innovations.
In response to the rise in Fintech innovations, the FinTech and Innovation Office has been established by BoG to drive its cash-lite, e-payments, and digitization agenda. This office has responsibility for the licensing and oversight of the specified payment service providers, closed-loop payment products, payment support solutions, and other emerging forms of payment delivered by non-bank entities.
Additionally, the FinTech and Innovation Office drives the development of policies to promote FinTech, innovation, and interoperability in Ghana.
Although relatively new, the office has established a licensing guideline that has facilitated the licensing of some 46 Fintech companies so far and the rollout of the Regulatory and Innovation Sandbox program for the testing of innovative unregulated Fintech innovations of licensed and unlicensed institutions.
Fintech innovations that enable wallet and mobile money, payments, remittances, account management, investment, savings, credit, insurance, pension, and crowdfunding for reward and donation, provide underlying IT infrastructure and services among others must procure the appropriate Fintech license from BoG before the commencement of operation in Ghana.
ii.Securities and Exchange Commission (SEC)
Equally, SEC is established by an enactment with the object to regulate and promote the growth and development of an efficient, fair, and transparent securities market in which investors and the integrity of the market are protected. To achieve it, SEC registers, licenses, and authorizes or regulates the establishment of securities exchanges, commodities and futures exchanges, securities depositories, clearing and settlement institutions, credit rating agencies, fund managers, investment advisers, unit trusts, mutual funds, hedge funds, private equity funds, and other related activities.
The activities of the traditional institutions regulated by the SEC and under its supervision are not spared by the disruptive effects of Fintech innovations. Innovations exist and are being developed to provide the regulated activities by SEC and such innovation will require licenses from the SEC.
Today, the opportunities for leveraging Fintech innovations to drive investments - equity and debt are enormous and the SEC must proactively promote the utilization of these advantages through policy directives and guidelines.
B.Secondary Regulators
By the nature of the business activities of Fintech companies, registration, and strict compliance with the regulatory demands of the following secondary regulatory institutions are mandatory. Instructively, these institutions have been powered to impose varied sanctions for non-compliance with their regulatory obligations and Fintech companies are not exceptions. Sanctions for non-compliance have the potential to affect the existence and license of Fintech companies.
I.The Office of the Registrar of Companies (ORC)
The registration, operation, and winding up of a business form either as a sole proprietor, partnership, or a company limited or unlimited by shares is regulated by law. The ORC has assumed responsibility for these functions previously performed by the Registrar-General Department. The registration of a business entity is the first mandatory task every new enterprise must perform to secure its legal personality and identity.
Under the various laws enabling business forms, particularly Companies under the Companies Act, 2019 (Act 992), various operational compliance demands must be met by companies to facilitate their continued existence. Recent sanctions, including the deletion of companies from the register of companies for non-compliance, is a clear indication of the extent of punitive sanctions that can be imposed by the Registrar of Companies.
II.The Ghana Revenue Authority (GRA)
The Ghana Revenue Authority (GRA) is responsible for the registration of business entities for the purpose of payment of tax obligations as defined in law. Registration with GRA and compliance with tax payment obligations are mandatory. Tax obligations may cover employee and operational activities of the business entity and are payable at a frequency determined by law.
Exemptions from the payment of tax obligations must be granted in accordance with incentive schemes permitted by law. Punitive sanctions are prescribed for non-compliance with tax laws and are capable of imposition by the tax authorities or the courts.
III.The Social Security and National Insurance Trust (SSNIT)
Business entity registration with SSNIT and compliance with payment obligations relative to pension and its incidental provisions for employees are mandatory – and Fintech companies are not exempted.
IV.The Data Protection Commission (DPC)
It is established as an independent statutory body charged with the mandate to protect the privacy of the individual and personal data by regulating the processing of personal information. All companies or institutions that keep data are required by law to register with the Data Protection Commission and comply with the provisions of the Data Protection Act regarding the collection, storage, use, and transfer of data among others.
V.Metropolitan/Municipal/District Assemblies (MMDAs)
Based on a local government area demarcation, an MMDA is established and charged with responsibility for local government administration of that area. As part of their duties, MMDAs register business entities and issue them with business operating permits – technically permitting them to commence and operate their respective business activities lawfully within the local government area where the business operates from. The operational activity of a business entity may inform the payment of processing fees, and Fintech companies are mandatorily required to procure business operating permits before the commencement of their operations.
THE REGULATORY INSIGHTS
As policymakers across the world are embracing Fintech, regulatory interventions in Ghana must be intentional to promote innovations and the growth of the digital economy. To achieve this, there is a need to forge closer working relationships among the primary and secondary regulators. Any regulatory response must be holistic in nature, addressing the challenges and prompting a strong alliance to promote business-like service delivery by regulators.
From this standpoint, the following are some insights that must guide regulatory interventions going forward:
A.Fintech Companies are not Companies of the Future
Although the narrative is about the future of finance, Fintech companies are not companies of the future. They are companies making real impacts today. With a 15% growth per annum, McKinsey & Company estimated the revenue potential of Ghanaian Fintech companies to reach $18.6 billion by 2025 if penetration levels reach those of market leaders. The year 2025 is 3 years from now and companies with such revenue potential cannot be considered as companies of the future. These growth estimates have implications for job creation, tax revenues, and incidental benefits to the economy. Therefore, regulatory responses must reflect support programs to these companies as today’s companies to help achieve these estimates and growth.
B.New Market Outcomes
According to the World Bank Group, “while the digital transformation of the financial sector remains a work in progress, it is already changing financial infrastructure, products, and business models, bringing new entrants and reshaping incumbents and market structures”. The implication is that there is a real chance of endless innovations within the financial sector enabled by new technologies such as blockchain and regulators, which must brace themselves for the long impact. However, it is not a call to embrace every Fintech innovation. It is a signal of expectation and a call for preparation for what lies ahead. As noted by McKinsey and Company, “it is likely to be in the interest of all – consumes, policymakers, and the industry – to work with fintechs and financial service incumbents to promote predictability and keep pace with the fast-changing flow of information on emerging technologies…”. Thus, where new innovations promote financial objectives, regulators must respond swiftly to maximize their advantages.
C.Building Capacity of Regulators
There are too many unknowns in the Fintech world. Each day, new forms of exchanges, storage of value, and payments among others are being privately developed and challenging the sovereign authority of Central Banks. This implies that regulators cannot use capacities built on traditional financial sector regulation to regulate these new innovations. There must be a deliberate plan to build the capacity of regulators through strategic staffing, partnerships, industry collaborations, and the acquisition of relevant skill sets. As acknowledged by the World Bank Group, “the expansion of the regulatory perimeter will have a knock-on effect on supervisory approaches and stretch supervisory capacities” therefore investments into building capacities of regulators must be prioritized.
D.Regulating Market Entry and Exit
Existing licensing guidelines must constantly be reviewed, and new ones provided to permit the deployment of new innovations based on market needs and innovation functionality. To ensure the sustainable operation of licensed companies, regulators must collaborate to promote and strengthen good corporate governance standards, compliance with guidelines, and best business practices. Nonetheless, regulators must also ensure the orderly exit of unviable licensed companies through transparent guidelines and structured winding-up processes to deliver protection for customer funds, data, and financial sector safeguards. The high number of licensed Fintech companies should not be a deterrence on the part of the regulators to license new ones – an open, fair, and transparent access must be created to allow new entrants a fair chance to compete with incumbents as noted by the World Bank Group.
E.Managing Associated Risks
The privacy of consumer data controlled by private parties remains a key challenge for regulating Fintech companies. More must be done to strictly enforce compliance with data protection laws that provide for the collection, processing, storage, use, and transfer of data. Additionally, systems and processes must be strengthened to deal with emerging issues of money laundering, fraud, data breaches, fund thefts, etc. Regulators must expand the data-sharing and collaborative framework among domestic authorities and international organizations to reduce the incidence of related risks. Investments into compliance, monitoring, and supervisory infrastructures by regulators must be superior to those deployed by Fintech companies to ensure effective controls and protection against breaches.
CONCLUSION
Regulations and the ability of regulators to use the same to drive the growth of Fintech innovations for full benefits can only be leveraged appropriately with a clear understanding of the sector. Therefore, action plans must be developed based on the insights from the two leading Fintech reports to guide regulatory interventions in Ghana.
Let us remember always; regulations have the potential to stifle or suppress any innovation including Fintech.
ABOUT THE AUTHOR
RICHARD NUNEKPEKU is the Managing Partner of SUSTINERI ATTORNEYS PRUC (www.sustineriattorneys.com) a client-centric law firm specializing in transactions, corporate legal services, dispute resolutions, and tax. He also heads the firm’s Start-ups, Fintech, and Innovations Practice division. He is reachable at richard@sustineriattorneys.com