Market forces and legacy regulatory structures are hindering fintech innovation. How can regulatory sandboxes help them land and scale? EMTECH February 6, 2023
Market forces and legacy regulatory structures are hindering fintech innovation. How can regulatory sandboxes help them land and scale?

Startups continue to face challenges such as extended product time-to-market, increased competition from monopolies, an uneven playing field for startups, increased barriers to entry as requirements from regulators, and in some cases, exorbitant, and limited engagements with regulators.

Globally, FinTech innovation is thriving, opening up numerous opportunities for financial services to become more accessible and convenient for consumers. By 2026, the global FinTech market will be worth $31.5 billion, nearly four times what it was six years ago. By offering a variety of new and innovative products and services that can help millions of people gain access to finance, the sector has the potential to revolutionize Africa’s financial services industry. While all of this is impressive, some bottlenecks may stifle fintech innovation. Finance is one of the world’s most strictly regulated industries. Startups continue to face challenges such as extended product time-to-market, increased competition from monopolies, an uneven playing field for startups, increased barriers to entry as requirements from regulators, and in some cases, exorbitant and limited engagements with regulators.

Market forces (such as a lack of bank cooperation and mobile money service restrictions in some countries) and legacy regulatory structures stifle FinTech growth in Africa. Google, for example, recently implemented a policy in Kenya requiring digital lenders to provide proof of a business license before they can deploy or maintain apps in its App Store. This policy was put in place to address the issue of rogue loan apps in Kenya and ensure that only providers licensed by the Central Bank of Kenya (CBK) are listed on Google’s Play Store. Google’s plan to regulate lending apps in Kenya follows similar steps taken in Nigeria, India, Indonesia, and the Philippines, where loan companies must have some form of license or approval from financial services regulators or relevant government agencies to be featured on the Play Store. Although the policy is intended to protect consumers who use these rogue apps, it is an example of how market forces, in this case, a tech behemoth like Google, can inadvertently implement a rule that could harm FinTech growth in Africa. 

Similarly, the Nigerian government investigated 40 fintechs / digital loan apps for operating under dubious conditions and causing distress to citizens. Furthermore, it has been reported that the majority of these loan apps operate with expired licenses and, in some cases, no licenses at all.

Regulators are typically and rightly wary of the unknowns and risks posed by fintechs and in some cases, have outrightly banned their services. A good example is how the operations of Machankura, a USSD-based platform for bitcoin trading, were restricted in certain countries because their USSD gateway service provider increased the requirements for “cryptocurrency” use cases of USSD infrastructure to maintain their good standing with their telecoms and regulators. This has made it difficult for FinTech companies to gain traction and scale their services.

Given this trend of marketplace platforms and regulators restricting access to fintechs, it is not inconceivable that domain and cloud service providers will seek fintech licenses before providing domain services or hosting their services in the near future or that investors will seek to validate the regulatory status of fintechs before investing in them to comply with strict and fragmented regulatory requirements. This will further stifle FinTech growth in Africa.

Despite the challenges mentioned above, there are reasons to be optimistic. If these issues are addressed, Africa’s FinTech sector has the potential to grow and thrive in the coming years. One possible solution to these challenges is to use regulatory sandboxes; they can play a critical role in facilitating the growth of FinTech in Africa. Regulatory sandboxes are controlled environments where fintech companies can test and refine their products and services in a real-world setting with the guidance and support of regulators. This allows innovators to understand the relevant regulatory requirements and make necessary adjustments to their services before fully launching them in the market. Ultimately they can offer an environment where companies can innovate while ensuring consumers are protected.

Furthermore, sandboxes can provide a welcoming environment for fintech firms to experiment and innovate. This can help address the regulatory uncertainty that is currently stifling fintech innovation in Africa and provide fintech companies with the support and resources they need to launch and scale their products and services. A growing Uganda fintech is an example of the effects of a regulatory sandbox, with the Bank of Uganda awarding at least 20 licenses to fintechs in its regulatory sandbox. EMTECH, a digital regulatory sandbox provider, provides a controlled environment for fintech companies to test their products and services, working closely with regulators to ensure compliance and minimize risk. By partnering with EMTECH, fintechs can access the support and resources they need to bring their innovative products and services to market.

In summary, ecosystem stakeholders and fintech partners should feel confident working with regulated and compliant innovators in order to solve challenges faster.  This is an opportunity for regulators to accelerate their reviews and approval processes so fintechs can expand on well established infrastructures instead of operating outside of them.