Financial regulators in Africa should go back to “core regulation and principles” in order to enable fintech startups to “revolutionise” the continent, according to Andi Dervishi, chief investment officer and global head of fintech, e-payments and new finance at the International Finance Corporation (IFC).
In many countries in Africa, fintech startups are bringing new solutions to market too quickly for financial regulators to keep up. Where this situation does arise, startups can continue to innovate at full pace uninhibited. However, the risks posed by rapid innovation in the financial space are not kept in check.
This presents a dilemma for African financial regulators: take a hard line, or allow innovation to unfold?
“Some regulators are tempted by a conservative approach which would essentially ban new non-bank players from having any significant role, an approach which would prevent their population from benefiting from the positive impact these players are bringing,” says Dervishi.
“A more sensitive approach is a “sandbox” policy, allowing innovation to thrive while being closely watched, and to issue regulations that catalyze their growth while limiting the risks.”
According to Dervishi, the key to developing the best approach to fintech regulation is essentially to throw the decision over to consumers. Regulators should open the market to thriving competition and innovation, and let consumer choice dictate what solutions work in the market.
Regulators should step back and focus on “core regulation” of the financial sector, and allow the market to respond to innovation.
“Given the amount of innovation, prescriptive solutions do not work and fall out of date rapidly. Going back to core regulation and principles would rapidly revolutionise the continent,” he says.
The regulation of fintech startups shouldn’t be the full extent of the conversation, however.
There will be knock-on effects of the current surge of fintech startups re-shaping the financial landscape. There will be multiple impacts on the market, most obviously, traditional providers will feel the change may lose their relevance, and some may go out of business.
“Whenever we have had such massive market shift and market concentration, it is fair to worry about the providers that will cease to exist and the market impact. It should not stop the desire to adopt the new and the better, but it is worth a careful look to minimise the potential pain, especially of depositors,” Dervishi says.
On a more long-term view, care should be taken that the current market disruption doesn’t eventually result in a re-consolidation of power in the hands of a few players.
“Any concentration of power may eventually lead in market constipation and drop in the rhythm of innovation. A big attention of regulators and governments should be placed at this inevitable epilogue of this current story.”