By FinTech is at a crucial point in its development: StartUps have managed to disrupt the status quo by taking business from traditional financial services firms or access new markets. The potential of FinTech is also highlighted by the fact that many firms have attracted significant investments while some even secured collaborations with large existing banks. The future seems bright, but at the same time, FinTech has attracted the attention of regulators around the globe, too. Facing increased regulatory scrutiny, it will be decisive for the future of the industry how regulators respond to the call to create rules to govern the new trends of an old industry. It has also already become apparent that different jurisdictions react in very different ways to the change FinTechs are bringing.
Some financial regulators in Africa are considered to be embracing the FinTech revolution by taking steps to collaborate closely with newcomers to accommodate their needs and promote innovation while at the same time gaining a very good understanding of the new technologies that are applied. One of the tools that have been used in this process is the regulatory sandbox: a model that aims to create a ‘safe space’ in which businesses can test innovative products, services, business models and delivery mechanisms in a live environment without immediately incurring huge costs. While this structure primarily intends to give start-ups a chance to test their products and services against existing rules, it also gives regulators valuable insights into the direction innovation is moving.
Following the stage of understanding the new trends and their functioning, regulators would have to evaluate if and how these new services and instruments are covered by existing regulation and decide whether gaps exist that ought to be filled with new rules. Regulation therefore always has to be drafted with a view on potential developments of the industry as opposed to short-sighted and isolated rules, in particular in a field as dynamic as innovation.
Therefore two key factors become apparent that need to be considered in order to create a favourable regulatory environment that guarantees both innovation and consumer protection: expertise and communication.
Expertise can either come through the hiring of thought leaders in the respective fields or through close collaboration with industry members and academics to gain the necessary understanding of the subject. This is not only paramount to create an environment that is neither too strict to stifle innovation and promote growth or too lenient and seriously threaten consumers and investors. It is also important to draft rules that are dynamic and can adapt to the evolution of the financial technology industry over time.
Communication is vital between regulators and market participants as described above and for example through the use of regulatory sandboxes or similar initiatives, but also in respect of regulators themselves. Without a clear direction from the top, a fragmented framework does not only leave room for regulatory arbitration and constitute a risk to the integrity of markets; it is very likely to hamper innovation and increase the cost of doing business, too.
On Monday 9th December 2019, the Central Bank of Nigeria through Financial Services Innovators (FSI), launched the first fintech industry innovation sandbox in Nigeria. It is an initiative that intends to support fintech entrants who have innovative ideas in financial services, with information and resources to start, succeed, and scale their businesses.
The organization (FSI) is set up as a non-profit and governed by a board of trustees comprised of representatives from the CBN, the NIBSS, and chaired by an elected member representing the country’s Fintech community.
The initiative is supported by ₦250 million ($690,000) in multi-year grants from Flourish — a venture capital firm — and EFInA (Enhancing Financial Innovation and Access) with the intention of diminishing obstacles to innovation within the financial services ecosystem.
Other African countries like Kenya, Mauritius and Sierra Leone also have some form a regulatory sandbox.
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