How FinTechs are disrupting Uganda’s financial services market

By Jimmy Ebong

The Fintech industry is growing fast around the world including Uganda. Investments in Fintech doubled from $ 51 billion in 2017 to $ 112 billion in 2018. It is estimated that each year, about four new Fintechs are entering Uganda’s market for financial services. Fintech disruption is pervasive, cutting across payments, lending, investments and savings, insurance, banking infrastructure and markets regulations. Uganda is experiencing most Fintech disruption in the payments space, where the volume of transactions facilitated by Fintechs was valued at about $ 5 billion in early 2017. The latent market failures posed by Fintech pervasiveness and high speed of disruption is a good rationale for better Fintech regulation. However, Fintech regulation is challenging due to the current regulatory posture where there are many regulations for the financial sector but none of the regulations provide for a systematic approach to properly regulating Fintechs.

‘Fintech’ embodies the entire technological innovation in finance as well as business modules, products and companies that drive such innovations and business models. In Uganda, the high uptake of mobile phones and relatively underdeveloped banking infrastructure has fostered an explosion of mobile financial services offered through feature phones. The market for financial services is accentuated by the small but growing Fintech industry. Fintech has been synonymous with mobile money aggregators. However, Fintech activities go beyond mobile money aggregation services to include broader technology solutions that can deliver affordable and high-quality financial products and services. Also, Fintech is viewed as an enabler of banking products and services and some view it as the future of banking.

Fintech disruptions is causing increased innovation in the provision of financial services, increased competition, reduced transaction costs and increased financial inclusion. Given the national impetus to ensure that all Ugandans have access to and use a broad range of quality and affordable financial services by 2022, Fintech disruption can be viewed as a blessing. Nonetheless, the threat of market failures arising from Fintech disruptions calls for caution. Threats of market failure arise from the way in which consumers interact and interphase with Fintech services, the presence or absence of competition among Fintech companies and the pace of Fintech disruptions.

Fintech products and services are predominantly digital, and consumers may not have information concerning the essential features of the product. In addition, innovations give companies that innovate monopoly powers especially if such a company is providing a unique product. Mergers and acquisitions which have characterized global trends in Fintech investment also fuel global and local market concentration and less competition. Lastly, Fintech tends to be active across multiple segments of a financial sectors as well as in multiple segments across many countries. This poses local and cross-border systemic risks. Other justifications for Fintech regulations relate to potential for them to enhance fraud, cybercrime and money laundering as well as concerns over the cost and benefits of regulation. Notably, regulation may inhibit innovations or alter focus and direction of innovations, a situation often referred to as circumventive innovation. 

Even though the justification for regulating Fintech is extant and perceptible, regulating Fintech is challenging for global and local regulatory authorities. A debate regarding a systematic approach to regulating Fintech is ongoing. In the case of Uganda, regulatory fragmentation poses a key challenge for regulating Fintech. It is typified by multiple regulations in the financial sector, yet not specific regulation is adequate. Regulatory fragmentation leaves room for regulatory arbitrage, a practice where Fintechs may capitalize on weaknesses in the regulatory system in order to sidestep or circumvent regulation, sometimes by restructuring transactions, or by geographic relocation to amenable jurisdictions, especially for a Fintech working in multiple countries. An additional challenge to regulating Fintech in Uganda is the lack of a framework for regulators to learn from Fintech activities and innovations, which would enable regulators develop appropriate regulations. A framework for learning would be appropriate especially because Fintech innovations and consequential disruptions happen so quickly, and continuous learning is required.

There is no universally accepted approach to the regulation of Fintechs. Regulators have adopted very different measures to address technological innovation in finance. They range from no objections, bans on such innovations and recently, regulators are taking more proactive approaches to accommodate and learn from the new dynamics brought about by technological innovation in finance. Regulatory sandbox is an example of such proactive approaches. Several countries around the world have adopted sandboxes including Kenya, Sierra Leone and Mozambique. Uganda should adopt sandboxes because they provide for proactive learning and are adaptable to changing technologies.

The writer is a Finance-Research specialist

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