Regulating Innovation & Innovating Regulation

Context

Globally, the Financial Technology (FinTech) sector is among the most appealing for investors looking for the next wave of disruptive innovation. 

Technology-enabled innovation across many economic sectors in Africa has been growing in leaps and bounds recently, with many tech unicorns (Billion-Dollar Companies) rising faster than we could have imagined. These innovative business models pose unique challenges for legacy regulatory setup. At the same time, Regulators have a significant role in advancing responsible innovation while mitigating innovation’s inherent economic and social impact.

Intending to drive Financial Inclusion and broader adoption of financial services, the FinTech sector has proliferated across Africa. In 2019 alone, investment in FinTechs was estimated at over $1B across the continent, up from $357M in 2018.

Nigeria’s bustling FinTech scene leads the pack in Africa, raising more than $460M in 2019 and is now home to more than 200 FinTechs companies. 

Development of the FinTech sector has been a bright spot in the Nigerian economy, with an even more promising outlook as innovative startups take advantage of high levels of unmet needs within the traditional banking space by leveraging transformative technologies to power emerging business models.

Although the role of new players and new technologies are recognized to be vital to a vibrant financial market ecosystem, many of the solutions introduced in the market are often not well understood or assessed for potential market risks. Central Banks globally face the pressing need to establish and implement clear guidelines for proper assessments and approvals of new FinTech solutions.

Regulating Innovation

The impacts of Financial Services regulations are typically diffuse and hard to measure. Therefore, regulatory mandates often are very costly to comply with, especially when the “fear of the unknown triggers heavy-handed regulatory responses”. Although no estimates of the actual costs of compliance can be wholly relied on, some researchers peg the total annual of maintaining financial crime compliance at more than $181 billion for significant markets such as Asian-Pacific, European, Middle Eastern and African, Latin American, and North America markets. We will never know the actual costs of regulatory compliance, such as the value of jobs never created, solutions never built, or entrepreneurial ideas never realized.

From an innovator’s point of view, innovating in a regulated space can sometimes feel like riding a speedboat on murky waters. How then can regulators regulate innovation without stifling them?

Innovating Regulation

Regulatory Sandboxes. Here’s an excellent way to describe it. Remember when we were kids and got the chance to build sandcastles on the beach; I guess that was cool, right; and everyone passing would look in amazement at the 8th wonder of the world. Try building the same sandcastle in a living room or a public place like a shopping mall, and you have a disaster and a mess.

Like sandcastles on the beach, Regulatory Sandboxes help create a safe zone for innovators to test new products, services or business models, with live customers, subject to certain safeguards and oversight to address regulatory concerns before operating in the marketplace on a full-scale basis.

The complexity of regulatory compliance makes it necessary to apply transformative technologies such as advanced analytics, API, cognitive computing, and the cloud to achieve desired regulatory compliance outcomes, including cost-efficient compliance regimes.