New regulations expected to spur Ugandan fintechs

September 21, 2021 in Business, Financial Services, Technology & Telecoms by Editor

Ugandan fintechs have become vital cogs in enabling companies, business owners and ordinary consumers to better manage their financial transactions and processes.

For players in Uganda’s fast expanding financial technology (fintech) ecosystem, it was something of a relief when the National Payments Systems Act 2020 was enacted.

Previously, there was a sense of being in limbo and a mounting concern due to the minefield of potential problems that lay in wait for lack of regulation. These firms have gained access to masses of personal data which also raises privacy issues and the need for secure data storage in the face of increasing cases of cybercrime.

The situation needed urgent attention not least of all, because in recent years, Ugandan fintechs have become vital cogs in enabling companies, business owners and ordinary consumers to better manage their financial transactions and processes. Having clear cut rules helps to reduce the ever present risk of things going wrong and allows for a safe environment to operate in.

Kenneth Kwesiga, a co-founder and Chief Executive Officer of Mcash said, “An example is people providing payment services.  It’s a good service, but there were gray lines for providers. You find the providers or innovators are the telecoms regulated by the Uganda Communications Commission, yet providing financial services should be regulated by the central bank. When it comes to issues like money that stays on the wallet—let’s say a customer has died, you find that the fintech players didn’t know what to do with it simply because there was no regulation. We needed guidelines to follow.”

Part of the credit for helping to clear the minefield goes to the Financial Technologies Service Providers Association (FITSPA). This is an independent, nonprofit, membership-based association representing Uganda’s local and global fintech community.

‘Building a safe and regulated ecosystem’ was the theme for the recently held FITSPA Annual Conference largely focusing on what regulation will mean to the growth of the sector.

The current FITSPA Board Chairman and the Managing Director of Interswitch, Peter Kawumi said, “Last year, when FITSPA was working closely with Bank of Uganda (BoU) on this issue, one thing came out very strongly. We had to have very clear objectives for what we wanted to see in the outcomes of the proposed regulations. Thankfully, BoU took a very collaborative approach with us and we saw many of our concerns being addressed in the discussions that we had. The role FITSPA played in drafting the regulations was actually extremely key, in ensuring that the regulations would be responsive to not only the consumers, but also service providers. In a nutshell, FITSPA and BoU are on the same page. We believe there must be a regulated ecosystem, which would be better for our customers, better for the economy and certainly better for the growth of our fintech space.”

FITSPA membership has grown from less than 20 firms at its launch in 2017, to about 160 today. This is a reflection of the increasing demand for these services and the innovation that is driving further growth in the fintech industry. The companies are diverse in size but areas of operation touch upon almost every single sector of the economy. FITSPA has the job of juggling all the interests and presenting a common stand.

Kwesiga said, “The only way FITSPA can create a landscape of convergence is by constantly working on policy that is inclusive of all players. These policies have to be fair to both big and small players. If policies are not crafted well then bigger companies can take advantage to create monopolies. FITSPA should continue what they are doing now, which is to engage all members and stakeholders before coming up with new policies and refine those in existence on top of ensuring compliancy.

“Security has become a discussion all by its own. Fintechs must have some insurance to protect themselves from such things as cyber attacks. We are in a market that is highly lucrative and this is another area where FITSPA can play a role.”

On the other hand, Vincent Tumwijukye – CEO of Future Link Technologies, said the issue of security cuts across the board. “FITSPA and its members have to push the reality of the fact that security is an all inclusive effort that also includes the end consumer. Creating that awareness is critical to be able to safeguard the customer. We come from a background of where people largely trust each other with many people taking these relationships for granted. They share PINs, phones, but now in the context of fintech, this has to change.”

Kawumi said one of FITSPA’s latest initiatives was recently signing an MoU with the Uganda Bankers Association to help build the capacity of fintechs to better anticipate and manage fraud cases.

“Secondly, we are working closely with the National Information Technology Authority-Uganda (NITA-U)  to make sure fintechs in Uganda are responsive to the new data protection and privacy rules and regulations. This is to make sure all fintechs understand  and comply with the relevant regulations, for example how do you store data, where do you store it, is it a safe location or suppose a consumer says I don’t want you to have my data anymore–how do you destroy it? It is this level of detail that fintechs now have to appreciate and adopt. Once we do so, the risks of data mismanagement will come down.”

Tumwijukye said, “Another point concerns collaboration to protect infrastructure. Fintech technology is integrated with a number of different players. There is need for a minimum understanding amongst ecosystem players of what ought to be done to bring in international standards. This is something FITSPA can play a critical role to articulate those particular standards that have to be in place in order to offer fintech services.”

While welcoming regulation, Ugandan fintechs have to also accept that it comes at a price, notably the necessity for stronger capitalization of their companies. Kawumi said, “We have to be cognizant of the fact that we are dealing with peoples’ money. You have to take a step back to understand why BoU requires that there is capital in place for anybody delivering financial services to consumers in the country and when you do, you then come to the conclusion that it is a good thing. It is good for players in the financial sector to have enough capital because from time to time things may go wrong. We have seen things go wrong even in the Ugandan market before, so we cannot run away from the need to have a strong capital base.”

“Secondly, no one is saying, indigenous players cannot go out and seek partnerships with investors, either locally, or across the continent or across the world. In fact, we have seen some Ugandan companies attract capital from international investors. That is a good thing and sends a signal to the capacity of these companies, but also a very positive signal to investors of the opportunities available in this market. What, we as players in this space need to do, is to make sure we are presenting ourselves in the best way possible to attract this capital.  We can do this in a strong way by showing them we are complying with regulations and provide services in a safe manner.”

Tumwijukye added that although the bulk of fintech foreign investment has been going to Nigeria, Kenya, South Africa and Egypt, “Uganda stands out in the sense that our market is largely untapped. Where the potential for value creation is seen, we expect to see more capital coming in during the near future,” he said.