FINNOVATION EVENT AT RADISSON BLU ON 31 MAY 2018

The Finnovation Fintech series events organized by Ethico Live had a session in Nairobi last week at the Radisson Blu in Nairobi. The event meant to steer conversations around financial innovation in the banking sector brought together key players in the industry including banking leaders, policy makers, investors and most importantly the innovators driving the change for financial inclusion. As part of the discussion one idea became prominent; the need for collaboration between the old and new; the banks and fintechs respectively. This need takes me back to the article by Sunny Bindra’s article here where he tackles the importance of staying analogue as much as it is important to go digital for the sake of progress. Collaboration was seen as a key factor to drive the agenda of financial inclusion as the banks are endowed with resources among other advantages while the fintechs operate within little to no regulation which encourages innovation among other advantages.

This article shall discuss issues discussed that touched on regulation. As the end customer of these businesses, the aspect of consumer protection was explored with regards to the emerging fintech apps available in the Kenyan market and claims that some of them charge abnormal interest rates for lending. Additionally, the apps were faulted for giving out loans without scrutinizing whether the same person had borrowed a loan on another app calling for a review of lending policies. Consequently, people borrow loans to repay loans borrowed on other apps; not surprising that these money lending apps were among the most downloaded apps in Kenya according to BAKE. In this light, it was agreed that some due diligence ought to be exercised by the apps before lending to ensure that credit is obtained for purposeful reasons. In what has been dubbed ‘fintech fueled lending craze’ that has seen almost 2.7 million users negatively listed by the Credit Reference Bureau, the government of Kenya intends to bring sanity into this area. Currently, a draft Bill (Financial Markets Conduct Bill, 2018) to regulate the lending has been proposed which among other things will seek to cap the lending rates of the different lending apps. In matters of regulating the lending apps it was agreed that it is important to not add other levels of regulators which would consequently increase the cost of compliance.

The question of whether regulation would be an enabler or a threat to financial innovation was addressed. The good example of M-pesa and how it is has grown largely unregulated as a financial services provider was given; the challenge here remains whether it should be regulated as financial services provider or under telecommunications. Despite the fear of the stifling effect of regulation, it was well agreed that it is mandatory to regulate the multi-faceted fintech space due to the various ways it is affected; systems security, cybercrime, adherence to sector standards such as PCI-DSS where a company stores, transmits and processes card information and IFRS reporting. One of the self-regulation practices that financial institutions that carry out digital banking may be involved in is the Know Your Customer procedures (eKYC), this was highlighted as a way of lenders to shield themselves from risk. In Kenya, KYC regulations are legislated only for money laundering under the Proceeds of Crimes and Anti Money Laundering Regulations.

The State of the Internet report 2017 by BAKE indicated the importance of sound regulation as regulation can affect public perceptions; progressive regulations have the potential of bringing about good perceptions hence there may be more adoption of the technology.

 

Having discussed the importance of policy and regulation in the fintech world, it will be mandatory to ensure that these should be formulated to enable investments. The Nigerian market was used as a good example of how policy can be used as a propeller of growth. One such regulation is the Venture Capital (Incentives) Act that gives companies engaging in venture projects incentives to operate in the country.

The issue of regulation lagging behind due to rapid technological advancements was raised. This was met by a suggestion of real time regulation in these times where lending is done in a faster way than before and as more products continue to infiltrate the market. In practical terms, the regulations should ensure that such innovations come with transparency in terms of how it works and reveal the interest rates that are charged on a monthly basis this will curtail enterprises that charge exorbitant rates to unknowing customers.

The aspect of cloud computing adoption by banks was explored. Several emerging cloud trends which legislation could have a bearing on were also highlighted such as data localization. Data localization laws are crucial because they would inform where customers’ data would be stored. Thus, informing certain business decisions such as whether to open data centres in the region. However, for now Kenya has no data protection laws and such decisions are the sole reserve for organisations.

Discussion around data analytics were held as this is as a key factor driving these fintech which use alternative credit scoring methods most of which are data driven as opposed to the brick and mortar banks which largely perform collateral based lending. Indeed, from a legal perspective, this raises data privacy issues, especially the contention around hideous terms and conditions which force users to give up data privacy to be able to use the apps.

Lastly, the issue of security of wallets (a software that facilitates the transaction of digital currencies by storing the private and public keys necessary to conduct a transaction) was addressed. It was stated that as more adoption of cryptocurrency continues it will be necessary to get a trusted wallet provider for safe transactions.

 

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