…assessing the goals of regulators and innovators in promoting fintech innovations
A lot has been said and is still being discussed about the benefits and disadvantages of the disruptive Financial Technology (Fintech) innovations and era. Emerging at the center of these discussions is how new means of access to financial services can be enabled for both the banked and unbanked end users. And in this pursuit, new innovations for payments, credit and lending, insurance, investments and saving, transfer and remittance, etc are being deployed on scales demonstrating competitive challenges for traditional financial service providers.
In response to the demands of what the real goals are, two key players – the regulators and the innovators have been emphasizing differently worded objectives as their main preoccupations. In this article, I seek to distill the underlying commonalities of the differently worded goals and why the two stakeholders must work closely to harness the benefits and mitigate the risks of fintech innovations.
The regulators and innovators
Globally, the financial services sector is a heavily regulated sector. It traces its roots to constitutional and other legislative frameworks that permit institutional designs to license, supervise, and regulate the provision of financial services.
Ghana is no exception to the strong influence of regulatory response to how acceptable mediums of exchange, stores of value, and their related activities are designed, deployed, and developed. The Central Bank, the Bank of Ghana continues to play a primary role in the promotion of the varied goals of Ghana’s financial sector.
In the process, the Bank in the exercise of its legislative mandates has developed various guidelines for the licensing, operation, supervision, and regulation of commercial financial services and in recent times has responded in a similar manner to the emerging needs for licensed fintech innovations through the establishment of the Fintech and Innovation Office.
Similarly, other regulatory bodies such as the Securities and Exchanges Commission (SEC), and the National Insurance Commission (NIC), among others are responding to the changing means of delivering securities and insurance products/services and are working on guidelines that ensure a robust and technologically advanced financial sector in Ghana.
Over the years, these regulators have worked to ensure financial stability and certainty and promoted other financial sector goals largely to the benefit of the end user. This has facilitated the adoption of new financial service technologies such as ATMs, online banking, etc. predating the disruptive fintech era. On the opposite end of the regulatory effort are innovators – individuals and companies driving investments into the development of new ways of offering financial services.
The evolution of financial services has witnessed the use of cheques, ATMs, online banking, and other forms of digital banking services to the now dominant era of mobile money, remittances, merchant payment services, insurtech, neo banks, micro-lending, etc. due to the investments by innovators.
The cardinal interest of past and present innovators have been to drive profitability for their ventures which mostly, may be opposed to regulatory goals. And this interest has motivated innovators to either respond to the permissions of regulations or innovate to stay ahead of the curve – as we are currently experiencing with the fintech era.
Although regulators and innovators have forged and maintained collaborative relationships over the years, such relationships are not expected to create a convergence of all interests and goals. At best, the relationship offers the opportunity for the pursuit of some common goals despite the differences in approach and naming.
The differently worded goals
Despite the multiplicity of objectives on both ends, the following four (4) goals (two from each industry player), draw on common underlying outcomes notwithstanding their wordings.
- Financial inclusion vs innovation adoption
The ultimate goal of every financial service regulation is to ensure potential end users gain access to the permitted financial services. This is devised as a “financial inclusion” goal, aggressively pursued to increase access and participation, particularly for the unbanked population.
Inherent in this goal is the determination to facilitate innovations that create the opportunity to access and use financial tools in the most cost-effective and secure manner. And over the years, regulators have prioritized the pursuit of this goal through the licensing of financial services whose impacts are measurable by their reach and frequency of use.
Over the last decade in Africa, financial inclusion goals have dominated financial sector reforms and initiatives influencing the liberal development of guidelines for the licensing and deployment of new financial tools. The readiness of regulators to embrace new financial tools has accounted for the high rates of financial access recorded for the unbanked population.
For instance, according to the Ghana Demand Side Survey 2021 report, 87percent of the adult population have mobile money accounts aiding the reduction in the exclusion rates among the rural populace, females, and the youth. This is attributable largely to regulatory responses over the years fashioned as deliberate efforts aimed at promoting financial inclusion such as the National Financial Inclusion and Development Strategy.
Innovators do not have the same worded goal. Their primary goal is to drive end-user acceptability and repeated use often themed as “user adoption and market penetration”. To the innovator, the measure of success and ultimate profitability is how his or her developed innovation can be scaled, promoted to attain a certain market reach and demonstrate traction through end-user repeated patronage.
The achievement of this innovator’s goal could be influenced by factors such as how the innovation addresses critical pain points for existing users, remove barriers for new users, aggressive marketing investments, and ecosystem partnerships among others. Where innovations succeed like the mobile money innovation, the result will be increased access and participation by end users in the financial sector, especially for the unbanked population; a goal equal to the financial inclusion goal of the regulator.
Therefore, the innovator’s drive for higher end-user adoption rates and market penetration, cannot be seen as different from the regulator’s goal of promoting financial inclusion. Invariably, both are seeking out increased access, participation, and use of financial tools by the end user. So, the difference in wording should not blur the lines for continuous engagements between the regulators and innovators with the view to facilitate the development of innovative financial access tools – as the two players currently have the same goal although worded differently.
- Consumer protection vs system security
The regulator’s primary goal of increasing access to financial tools is not without concern for the protection of the end user. Reflecting the need to protect the end user is the demand by regulators for innovators to institutionalize various consumer protection schemes and policy mandates, compliant procedures, systems that protect against fraud and cyber-attacks, data protection, and procure global certification for information communication technology (ICT) systems, and others.
These mandates constitute the core benchmarks for the operational supervision and review of deployed innovations and the failure to strictly comply is met with the imposition of sanctions and fines which at times, include the revocation of licenses.
The agenda for a strong consumer protection regime is justified especially in the current technological era where the consumer is exposed to various forms of risks and threats including the breach of personal data and privacy, fraud, Ponzi schemes, and the potential loss of funds due to the use of the emerging financial tools. The lessons of the recent financial sector crises and the collapse of FTX (a cryptocurrency company) in November last year are conclusive red flags for continued robust consumer protection demands as prerequisites for the commercial deployment of new innovations. And rightly, the pursuit of this goal cannot be discounted as it offers the opportunity to build a resilient financial sector that balances the interest of all.
Consumer Protection is important to innovators as well. Its action points are delivered by deploying technologies that ensure secure, safe, and transparent means of performing financial transactions. Technologies which ensure financial service platforms are protected against data breaches, identity thefts, online impersonation, etc have been made part of the building blocks of innovations championed by innovators.
To innovators, “system security” plays a great role in ensuring the safety and security of their digital users. And what has become the standard protocol for designing, piloting, and deploying of new fintech innovations is the integration of leading innovative security technologies, global IT certifications, ransomware protection, system recovery technologies, etc. from the beginning.
The upside of a secured security system for an innovator is the reduction in the rates of IT exposures, system failures, and the related negative effects on end users and their continued use of an innovator’s product or service. Therefore, a secured IT infrastructure is the innovator’s best bet for a sustained deployment of financial innovations – and this goal is aggressively pursued by innovators as a competitive proposition.
Juxtaposing this with the goal of consumer protection by regulators, innovators are invariably seeking the same outcomes of ensuring that, the end user is not exposed to risk without remedies and protections due to the use of new financial tools. Therefore, what underlines consumer protection mandates by regulators is the same driving innovators to ensure an enhanced security system for new innovations.
Conclusion
While there may be other overlapping goals between regulators and innovators, the pursuit of increased access to new financial service tools in a secured environment particularly for the unbanked population remains the same for the two stakeholders although these goals are differently named. With the same underlining commitments, regulators and innovators must explore new ways for the collaborative achievement of these primary goals and the promotion of innovative fintech products and services in Ghana.
>>>the writer is a Fintech Consultant and 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 divisions. He welcomes views on this article and is reachable at [email protected].
