There are a number of reasons why Africa has been earmarked as the next hub for FinTech. A youthful population, increasing smartphone penetration, a pan-continental push for financial inclusion, the largest share of the world’s unbanked and underbanked population, and a desire for cashless payments have created the perfect storm for FinTech innovation to flourish. Three of the continent’s unicorns – Flutterwave, Interswitch and Fawry – are FinTechs and emerging markets investment analysts are betting on this sector to provide even more unicorn-status companies for the region in the near future. With the aftermath of Covid-19 forcing more companies to go digital, continued growth is forecast across the board.

What’s regulations got to do with it?

Africa’s financial services industry is rapidly evolving into a largely digitised space. Innovation creates buzz and can transform societies – yet, in many African countries, there is a need to address the perennial race between fast-moving innovation and the slower pace of regulation. With varying starting points and capabilities, African markets, whilst ready to take advantage of FinTech innovations, have a long way to go before their full potential can be realised.

The connection between regulations and a flourishing FinTech sector is an important one. It is no coincidence that investors and businesses in FinTech are drawn to markets with more robust financial regulatory ecosystems. It is one of the reasons that funding remains concentrated in a few markets: South Africa, Nigeria, Kenya and Egypt are recognised as the four FinTech hubs in Africa, securing 80% of fundraising in 2020.

The hares of African FinTech…

South Africa was one of the earliest movers in FinTech regulation and development. The country welcomed digital innovation and supported electronic money solutions as early as 2009. In 2018, the South African Reserve Bank established the Financial Technology programme to strategically assess the emergence of FinTech in a structured and organised manner and to consider its regulatory implications.

In East Africa, the clear leader in mobile money adoption and usage, countries favoured a telecom-led regulatory model. In this framework, the telecom provider worked with the financial regulator to establish the infrastructure for mobile payments. In Kenya, M-Pesa’s success – which triggered the mobile money revolution in the region – has been partly attributed to Safaricom’s good working relationship with the Central Bank of Kenya. The company was given regulatory space to design M-Pesa in a manner that fit its market, and this provided sufficient prudential comfort to the central bank.

However, even the countries heralded as FinTech success stories are having their challenges. This is due in part to the fact that FinTech, by its very nature, sits uneasily amid existing regulatory frameworks. It requires a more customised response. Furthermore, even in countries with more robust regulatory ecosystems, regulators are continually playing catch up as the sector continues to evolve. The result is that often, frameworks and regulations are overlapping, sometimes unclear and occasionally only cover certain aspects of FinTech-orientated business. Even in Nigeria, many players in the FinTech industry do not know exactly which regulators and governing bodies they have to adhere to. This means that companies may find themselves unaware of the regulations they must comply with, thereby risking hefty fines.

… and the tortoises

In other countries where there is no FinTech regulatory ecosystem, things are more confusing and investors are likely to steer clear altogether as governments are seemingly making no effort at all to keep up with the rapid pace of change. The absence of robust regulations can expose both end-users and FinTech service providers to a multitude of risks.

Critically, there is no convergence of regulatory frameworks across Africa. With conflicting and fragmented regulatory regimes with regard to FinTech, cross-border operations for financial service providers remain a particular challenge.

To address these challenges, legal responses must be both adequate and timely. However, many legal systems in Africa have been slow to reform. There are several reasons for this. First and foremost, the lack of regulations across the continent in multiple sectors, not just FinTech, underscores the need for resources – there is not enough funding allocated toward government training or entities to address regulations for new and constantly evolving sectors.

If the regulators don’t strike the right chord and regulations are too stringent, it will discourage innovation. Due to the potential offered by the sector, early signs seem to suggest that regulators and governments know how important balance is. They are also increasingly aware of the need to act quickly to ensure the sector is regulated to protect consumers. And while they are at varying stages of thinking and implementation, there is no doubt that Covid-19 has acted as a catalyst for digitisation and also stimulated urgency.

How about the Afric perspective