As it is becoming abundantly clear, anything that can be done physically in a bank today will eventually be done digitally and out of a bank. Although the term has only gained some currency in recent years, fintech has been in existence in one form or another for decades, since the first computer programs replaced or complemented paper ledger entries. At least a decade ago, some Nigerian banks were already providing their customers with java banking apps for use on feature phones.
In Kenya, for example, the mobile banking platform MPESA has practically replaced banks for transactions. And the company behind it is not a bank but a telco, making the biggest “bank” in Kenya a telco. Although relatively slow on the uptake, agent banking in Nigeria might soon become as entrenched and central as in Kenya. Paga has been leading this charge although the CBN, NIBSS and the Bankers’ Committee are exploring options to increase the spread of agent banking. With the introduction of open banking in Nigeria, the sector is set for explosive growth.
This growth comes with significant risks. Untamed, innovation might lead to excesses, which then significantly impact the health of the financial industry. In insurance, for instance, companies want access to data to target customers least likely to constitute risks, a practice which flies against the founding principles of the insurance industry: the inability of both insurer and insuree to predict future events with great certainty. How far can an insurance company go in its drive to maximize profits?
The potential for disaster is significantly increased with the democratization of access to financial data. Ponzi schemes, phishing attacks and social engineering will be on the rise. Therefore, the CBN, whilst mindful of the need to innovate, needs to put together stringent guidelines to licensing the fintech industry. Compliance with global security and business continuity standards needs to be rigidly pursued. Capital insurance, in which a stipulated amount of money in held in reserve at the CBN, can also be introduced. The trick here is to balance risk taking with risk management.
There should be regulation around ownership, setup, structure, scope and functional areas. Technology should be a key component of regulation, because the financial industry has been transformed for good. Regulations around financial control, anti-monetary laundering regulations, the amount of money that can be transacted should also be put in check, as the easiest way to launder money these days is through EFT (Electronic Fund Transfer). The same stringent rules that apply to the traditional banks should be applied to fintech companies, such that a certain amount of money or beyond for private individuals/corporates should be declared or reported just as it is done in the banks. Stated qualifications should be made as to who and who can invest into fintech, so it does not become the new route for money laundering.