LETTERS: Policies that can grow digital financial services

Kenya is known across the globe for its achievements on financial inclusion. FinAccess 2019 shows that formal inclusion is rising, making Kenya a leader in Africa, and putting it at par with many developed countries.

Digital financial services (DFS) have become the leading driver of financial inclusion for the unbanked. This explosive growth in the number and scale of DFS providers has fundamentally altered the country’s financial services landscape, making her one of the leading fintech hubs in the globe.

This growth in adoption and usage of DFS has, however, created various challenges for consumers, policymakers and regulators alike, the most imminent being the lack of a robust regulatory framework supporting sustainable development of DFS ecosystem through competition, oversight, and protection of consumers.

Although prudential financial regulations such as safeguarding user funds, protecting against fraud, terrorism financing and money laundering are in place in Kenya, these do not adequately address the myriad of issues specific to digital financial services.

This is because DFS differ from traditional financial services in several ways that have major implications for stakeholders.

These innovative digital technologies enable new operating models that involve a wider range of actors in the chain of financial services from design to delivery. This in turn brings new risks and calls for new ways to mitigate them.

Some of the diverse risks facing users of DFS include high cost of accessing and maintaining a financial product or service, unexpected charges, loss of money through fraud, lack of transparency in pricing of financial services and products, and unreliable market infrastructure systems, causing downtime for payment services, mobile money and electronic funds transfer systems.

These digital innovations have reshaped the way we perceive and consume financial services and highlighted shortcomings in the existing “institutional-model” of financial sector regulations in Kenya, prompting calls for reforms.

It has also made apparent the low levels of financial literacy among users of digital financial services in Kenya.

One thing is certain. For the DFS ecosystem in Kenya to continue to thrive, it requires introduction of robust legal, regulatory and policy framework that protect the interest of clients and thus creating trust among users while preserving the commercial incentive to provide these services at scale.

To support the growth of DFS and at the same time provide effective oversight and supervision, collaboration among financial, telecommunications and competition authorities is required.

At a global level, the International Telecommunication Union’s Focus Group on Digital Financial Services, for example, brings together financial and telecoms regulators to examine various prudential and market conduct issues that fall under their remit.

In the case of Kenya, the five financial sector regulators are cognizant of their role as economic enablers rather than just gatekeepers, and regularly engage with private-sector players as well as with each other under the Financial Sector Regulators Forum to develop a more pragmatic and enabling regulatory environment.

A prominent example of how financial sector regulators are responding to new digital services innovation is through “regulatory piloting efforts” that allow for new services to be tested including those that might not fit into traditional oversight categories.

The overall concept of allowing for such “testing” is not new.

Notably, the Central Bank of Kenya (CBK) allowed mobile operator Safaricom to introduce its M-Pesa mobile payment service in 2007, without a regulatory framework yet in place.

In conclusion, it is important to note that for DFS in Kenya to thrive, there must be a balanced regulatory framework in place capable for examining and supervising DFS providers for compliance with existing rules so as to protect the interests of consumers, industry and the society at large.

Such a regulatory framework will help to expand the scale, scope and reach of financial services as well as to drive the development of inclusive financial systems.

Idah Kinya and Peter MwenchaConsumer Unity and Trust Society