Fintech Ecosystem: Much ado about regulation
As financial technology, otherwise known as fintech, evolves and reshapes the banking system in Nigeria, there has been a controversy among stakeholders on whether or not the emerging financial ecosystem should be regulated by the government. ABOLAJI ADEBAYO reports
With rapid advancements in technology, fintech has continued to grow in Nigeria with many new players venturing into the sector. Technological advances, changing demand for financial products and competition in financial services are driving a new wave of fintech startups and investments that have drawn attention to the industry in recent years. Startup companies create products and services to penetrate new areas of the financial system and change the competitive landscape. These new forces motivate traditional financial firms to invest in technology and to take into account changing trends among customers. Fintech has been a veritable platform for driving financial inclusion in Nigeria. In a nutshell, fintech companies make financial services more accessible to a larger audience. These services include traditional financial transactions such as savings, investment and loan processing. But it also includes revolutionary financial technologies such as blockchain and cryptocurrency.
Fintech categories
There are four areas of operation in the fintech ecosystem, which include digital lending, payments, blockchain and digital wealth management. These are of particular interest because of their rapid growth rate, technological disruption, and regulatory and other risks.
Problems
There are issues of misrepresentation, false accusations and fraud involved in the online loan. For example, there was a case of a woman, Lateefat Adeoye, who lost her phone, but a fraudster had used the phone to get several loans from various online loan apps before she could get it replaced. She was not aware of the fraud until the loan fintech companies started sending messages to everyone in her contact that she was a debtor and a fraud. – It was a really traumatic experience. My biggest regret was not blocking the line when my phone went missing,” she explained. Yetunde had never taken out a loan from an online loan app, but she was unable to block the SIM card when her phone went missing.
A month after, the online loan companies pursued her contacts and said her loan payments were due. She later reported the matter to the police authorities and received a police report and written statement. The police assured her of their intervention, and promised that the messages from the fintech creditors to people on her contact list would cease. Two weeks later, her friends were still sending screenshots of the threatening messages from the fintech loan companies.
Privacy breach
Another problem in the fintech ecosystem is the invasion of privacy and data sharing breaches by the fintech firms. On August 17, the National Information and Technology Development Agency (NITDA) fined Soko Lending Company, a Nigerian online lending platform, N10 million for privacy violations. This was after a number of complaints against the company for unauthorized disclosures, failure to protect customers’ personal data and defamation. A central basis for the fine was the company’s “privacy-intrusive messages” to defaulting customers’ contacts when they did not repay loans. This clearly violates Article 2.2 of Nigeria’s Data Protection Regulation (NDPR), which prohibits illegal data sharing with third parties without legal basis. The updated Google Play Store privacy policy requires apps that offer financial services on their platform to disclose to users what they intend to use their personal information for. “Your app must post a privacy policy that, along with any in-app disclosures, explains what user data your app collects and transfers, how it’s used, and what type of parties it’s shared with,” the guidelines state. Findings show that recovery agents in loan apps engage in brazen breaches of customer privacy by sending threatening messages to contacts of debtors when they default on their loan obligations. More than half of Africa’s 54 countries have no data protection or privacy laws, according to the London-based rights group Article 19. And while 14 countries do, nine have no regulators to enforce them, the group said.
Regulation
In fact, fintech startups in Nigeria are largely unregulated and otherwise, lending firms utilize unconventional techniques to hunt down defaulting borrowers to recover their loans. There is no single legislation governing fintech in Nigeria. However, there are several existing regulations and laws that apply in the fintech market. The Central Bank of Nigeria (CBN) is the main body responsible for maintaining financial stability and integrity in Nigeria. Nigerian laws governing lending include the Banks and Other Financial Institutions Act (BOFIA) and state lending laws. According to Section 58 of BOFIA, any person who wishes to carry on a financial business other than insurance and stockbroking in Nigeria shall apply in writing to the CBN for the grant of a licence.
Arguments
However, stakeholders in the fintech area are in a quandary when it comes to the regulation of the sub-sector. They complained about the lack of solid regulations. They said: “When there is a problem and we contact the CBN, what you hear is that the CBN does not issue digital banking licence, it issues normal banking licence.” Why some are agitating for a regulatory framework to be set up by the government, others reject it, arguing that the regulators will try to protect citizens at the expense of the firms. They argued that the government needs to understand the system to know the challenges facing the firm before it can properly regulate the technology ecosystem. “The government does not understand the issues in the innovations in digital finance. So allowing it to regulate it will not take the sector forward,” claimed an expert.
“We need to look at the ease of doing business, the sustainability of the business as well as the sustainable environment before the regulation,” said another stakeholder. Debating on the regulation of fintech ecosystem at the maiden edition of the Government and Tech (GAT) Summit organized by Technext recently in Lagos, stakeholders and the government argued on the need to regulate the sector. Technext CEO David Afolayan called on regulators to engage with members of the ecosystem and listen to their demands. “There is no gain when there is tension between the country’s leaders and its citizens,” he said.
He made the government aware of the young thriving tech ecosystem run by mostly young Nigerians. Olatubosun Alake, the Special Adviser on Innovation and Technology to Governor Babajide Sanwo-Olu in Lagos, said Lagos is at the forefront of the movement to encourage innovations in the country. But he warned that it would include some regulations. “One of the key factors in driving sustainable economic growth is regulation,” he said, adding that “there needs to be a balance” between citizens and regulators for progress to be made.
“Regulation should protect citizens and also promote technology because technology will also help the economy develop,” said Bukola Olutayo, Managing Director, Stellas Bank, during the heated session. The Director General of the National Information Technology Development Agency (NITDA), Inuwa Abdullahi, who delivered the second keynote lecture titled: “Regulating for the People – The Role of Governance in Innovation”, argued for policies that will both protect the country and industry, especially from foreign tech giants pouncing on developing industries like Nigeria’s. “We have realized that the big tech sees us as free raw materials to extract, manufacture, feed and sell,” he said. But he quickly added, “Our most dangerous illusion in wonderland (tech ecosystem) is that these platforms, which are supposed to be tools to increase freedom and democracy, actually erode democracy and reduce freedom.” He referred to the influence that social media companies and their founders now have in countries like America, arguing that without regulation democracy can be in free fall.
Some stakeholders argued that more tech-savvy operators are needed in government for regulations that meet the needs of the ecosystem to be implemented. “Basically, an inward look is needed with the aim of finding a working principle to provide better services to people,” said co-founder of Pennee, Mejero Emmanuella, adding that the processes to get businesses licensed in the country can be at times free . He also argued that the regulations must be localized for the Nigerian experience. “Most of the regulations we have look like a copy and paste of other regulation books. Often they do not take into account the circumstances surrounding how the Nigerian climate works. The regulations must be adapted. “Regulators and innovators need to meet in the middle to provide appropriate governance,” he said, adding: “If regulators want people to come to them, it will be difficult to regulate. To regulate properly, you have to regulate from a place of knowledge.”
Last line
In order for the industry to start charting a way forward that is beneficial, there must be proper communication between regulators and innovators. The Nigerian technology industry and regulators should consider how the ecosystem can move forward amid the challenges that are hindering the growth of the industry.
