Consumer protection has been entrenched in Article 46 of the Constitution which lays forth the rights of consumers including the right to the protection of consumers’ health, safety and economic interests (emphasis added), and gives Parliament the mandate of enacting comprehensive legislation on consumer protection. To this end, the Consumer Protection Act provides for the rights and obligations of consumers. It also provides for the promotion and enforcement of consumer rights and also empowers consumers to seek legal redress for infringement of their rights. Besides that, the Act also provides for compensation where consumer rights have been infringed. Moreover, a range of other rights has been provided such as the right to full pre-contractual information to ensure consumers make an informed choice, the right to complain with regards to quality, price, or delay in the provision of the goods/services, and the right to reasonable notice prior to termination of service, among others.
The provision of these rights in the aforementioned Act are important in that the fintech companies operating in Kenya are required to adhere to them as long as they are providing a service to the public. This Act, however, is an umbrella legislation meant to guide consumer-service provider relationships in different sectors spanning from real estate, e-commerce, manufacturing, agriculture, banking and finance and aviation, among others.
Closer to the subject matter, the Competition Act also protects consumers from unfair and misleading market conduct. With the aim of ensuring and promoting competition in the national economy, the Act establishes the Competition Authority as well as the Competition Tribunal. In light of the above objectives, the Authority has a role in ensuring it monitors the market conduct of the various fintech companies offering various ‘financial’ products to consumers. This can be demonstrated through the one-time issuance of a directive in 2015 to all digital financial service firms to disclose the cost of transactions to consumers transacting on their devices.
In this context, financial consumer protection is defined by the Organization for Economic Cooperation and Development (OECD) as the framework of laws, regulations and other approaches generally designed to ensure and promote fair and responsible treatment of financial consumers in their purchase and use of financial products and their interactions with financial service providers.
A United General Assembly resolution already recognizes that ‘consumer confidence and trust in a well-functioning market for financial services promotes financial stability, growth, efficiency and innovation in the long term,’ and is instrumental in the realization of the Sustainable Development Goals.
The recently held meeting of UNCTAD’s intergovernmental group of experts on consumer protection further emphasized on the need for financial consumer protection. Teresa Moreira, the Head of Competition and Consumer Policies at UNCTAD posited that ‘having access to and benefiting from financial services is a basic consumer right, and that it is essential in realizing most economic transactions nowadays. She further added that this, without a doubt, improves a consumer’s life.
The benefits that consumers get from the digitization of financial services are multiple and well-established. Some of the benefits include broad-based financial inclusion through the extension of the reach and access to financial services and faster access of such services by start-ups and scale-up companies. Transactions are more convenient, faster and secure and financial products are more individually tailored as consumers can interact with financial service providers through the digital interfaces and communicate their preferences.
1.1 The capacity of Fintech to steer the realization of Sustainable Development Goals (SDGs)
The Sustainable Development Goals were approved in 2015 by 194 participating States in the United Nations with the aim of progressively eradicating poverty, conserving the world and securing the prosperity of human beings. The use of digital financial or ‘fintech’ services has been touted as one of the best means to the realization of these goals. In fact, financial inclusion is one of the most significant processes towards achieving the SDGs. The increased use of smartphones together with the speed, flexibility and convenience of mobile money has led to an exponential growth of mobile money payment fintechs. Sending and receiving money has become the main usage of mobile money in Kenya.
M-PESA, the biggest and most successful mobile money payment platform in Kenya, has been attributed to at least 2% poverty reduction rate in Kenya. This is due to the ease it has presented in money transactions, as well as enabling the storage of money for future use, hence the word ‘mobile banking’ or ‘mobile wallet’. This is a significant contribution to the first Sustainable Development Goal whose aim is to eradicate extreme poverty for all people everywhere by 2030. While this is a small percentage of the rate of poverty reduction, increased financial inclusion through responsible financial innovation is expected to help reduce global and national poverty levels. Mobile money also serves as a vital means of financing smallholder farmers and has contributed to increased investments in agribusiness. This not only improves the standards of living among farmers but also ensures the country’s food security, which is also a key goal for sustainable development.
Fintech has also led to the mobilization of private capital which is critical for the realization of the aforementioned goals. Mobilization of private capital through sustainable investments has had significant impact on social and economic gains such as job creation, technical innovation, poverty alleviation, among other spill-over benefits. For instance, M-KOPA, a fintech company in Kenya, is providing affordable green solar energy systems to consumers who purchase these services with mobile service micropayments. M-KOPA’s model incorporates digital financial services with its solar energy products by making its customers’ micro-repayments available through the mobile money service, M-PESA. This is a clear demonstration of the use of digital financial services to bring about realization of the 7th Sustainable Goal on affordable and clean energy.
Technological advancements in the finance sector such as the application of machine learning (ML) and artificial intelligence (AI) are expected to tilt financing priorities in investments. ML and AI allows for measurement of sustainability of each financial investment. These innovations can also be programmed to identify and give priority to sustainable business models especially with regards to investment decisions being made by investors. Moreover, ongoing studies show that the use of blockchain and AI in finance will transform monetary transactions information into carbon footprints, hence the environmental impacts of financial transactions will be assessed, and necessary mitigations can be put in place.
The application of AI and ML in provision of digital financial services has also brought about easier access of funding for micro, small and medium enterprises (MSMEs) as a result of the expansion of peer-to-peer lending and crowdfunding platforms. These enterprises positively contribute to the realization of the goal on promoting sustainable industrialization and fostering innovation. Access to funding and the subsequent growth of MSMEs also contributes to the realization of inclusive and sustainable economic growth, employment and decent work for all.
1.2 Fintech-driven resilience during the Covid-19 pandemic
The COVID-19 crisis furthered the need for increased financial inclusion, that is, access to financial services. The use of digital financial services was most critical during this period, as they promoted contactless transactions which helped in mitigation of the spread of the virus. Various governments also rolled out their social protection strategies through digital financial services platforms such as fintech firms, mobile money companies and digital banking. The absence of, or difficulty in accessing digital financial services meant the failure of governments’ fiscal support measures in reaching the most vulnerable and poor.
In Kenya, for example, digital financial inclusion helped in bolstering the resilience (economic) of citizens in weathering the COVID-19 crisis. Resilience can be described as the ability of individuals to cope with external shocks in their environment. Digital financial services were used to reach the most vulnerable populations that had been affected by the crisis. In this regard, the government introduced three protection measures to cushion its citizens;
a) The Kazi Mtaani National Hygiene Programme, an urban public works programme, which predominantly targeted youths aged between 18 to 34 years in selected informal settlements whose prospects for daily work had been disrupted by the crisis. Payments were being done weekly, with a daily compensation of KES 600, via Safaricom’s mobile money platform, M-Pesa.
b) National Council for Persons with Disabilities (NCPWD) cash transfer. This sought to cover vulnerable households with a person with disability, although households with someone experiencing chronic illness were considered. This cash transfer program was administered via M-Pesa. This program supported households with a total of KES 6,000 over a period of three months.
c) The multi-agency COVID-19 cash transfer. This was being administered by a multi-agency team and sought to cushion the poor and vulnerable from the negative effects of COVID-19. The program supported households with a total of KES 16,000 over a period of four months, and the transfers were done via M-Pesa.
In all the instances articulated above, it is evident that receiving the government-driven support measures was pegged on the ability of having a mobile money payment account, specifically an M-Pesa account. Having demonstrated how the Kenyan government conducted its social protection strategies to cushion its people from the economic effects of COVID-19, it is clear that financial inclusion, especially one that is ‘fintech’ or ‘digitally’ driven, is an essential pillar of resilience to absorb the shock. Kenya has made significant strides with regards to financial inclusion. As of 2021, The Central Bank of Kenya placed the financial inclusion index among Kenyans at 83%, and the growth of mobile money can be attributed to this.
In light of the above findings, it is clear that ‘fintech’ driven financial inclusion is desirable. In fact, proponents of ‘fintech’ driven financial inclusion posit safe development of digital financial inclusion rests on a combination of factors such as proper financial regulation and increased financial literacy among consumers.
2.0 Existing regulatory frameworks for fintech
To better understand the existing regulatory framework guiding fintech companies, it’s important to first look at the various models present, and the type of financial products they offer. To comprehensively handle this, the definition of digital finance enterprises would help.
Digital finance enterprises have been described as companies developing technologies for the incorporation of integrated digital banking, mobile applications and distribution networks, microfinance, payment solutions, peer-to-peer lending, and crowdfunding. To my mind, any disruptive firm offering financial products that, to some extent, were being offered by the traditional financial institutions, while majorly relying on technology to do so, qualifies to be considered as a fintech firm. The most common fintech models in Kenya so far are Payment Service Providers, the Digital Credit Lenders, and Crowdfunding through the use of Initial Coin Offerings (ICOs). More innovations such as artificial intelligence, distributed ledger technologies, cloud computing and internet of things are expected to drive the fintech revolution in the next decade.
2.1 Payment service provider fintech
The most prevalent model of fintech in Kenya as well as in Sub-Saharan Africa is the use of mobile money payments or the payment service providers (PSPs). This form of payments enables peer-to-peer instant payments. The payment segment of fintechs is the largest in the fintech space, with about 27% of fintech firms in Kenya being such. Njuguna Ndungu affirms that financial transactions using a digital platform or electronic banking services are the first step to increased financial inclusion and a gateway to a wide range of financial services provided by more diverse financial institutions. The existence of PSPs can be traced from the development and launching of M-Pesa in 2005 and 2007, respectively. The period between the development of M-PESA and the launching allowed the various regulators to perform due diligence of the product the mobile network operator, Safaricom wanted to launch. While the then Central Bank Act had given the Central Bank of Kenya the oversight mandate of payment systems, it had not provided operational modalities.
In a bid to ensure consumer protection and financial stability, Parliament enacted the National Payment Systems Act in 2011, hence fully placing all PSPs within the regulatory mandate of the Central Bank. The Bank also came up with regulations which provided for operational modalities of both mobile and non-mobile PSPs, including the requirements for licensing.
The Act defines a payment service provider as;
- a person, company or organisation acting as provider in relation to sending, receiving, storing or processing of payments or the provision of other services in relation to payment services through any electronic system;
- a person, company or organisation which owns, possesses, operates, manages or controls a public switched network for the provision of payment services; or
- any other person, company or organization that processes or stores data on behalf of such payment service providers or users of such payment services
Both the provisions of the aforementioned Act and regulations provide for progressive means of consumer protection in the use of payment systems and payment instruments. For instance, the Act provides for the placing of any service provider under designation where;
- the payment system poses systemic risk;
- the designation is necessary to protect the interest of the public; or
- such designation is in the interest of the integrity of the payment system
Designation of a payment system means the declaration of the system as systematically important payment system based on defined minimum standards that designated systems will be expected to meet in order to adequately control systemic risk. The payment system on designation will therefore have to operate under more stringent regulations to ensure the risks are kept at minimum through close monitoring.
Such arrangements ensure that consumers using the said payment service system remain confident in its ability to provide payment services. Furthermore, it avoids a situation where all customers want to ‘exit’ from loop of the PSP provision of services, commonly referred to a ‘contagion’ situation, which poses a risk to a country’s financial stability.
The regulations also further the need for consumer protection in the conduct of PSPs as they require that, among other things, the availing of terms and conditions that shall apply to its consumers to the Central Bank during the application process before authorization. This aids the regulator to assess whether the terms are fair or not, and in the instance that they are unfair, the prospective PSP can come up with fairer terms and conditions. The Central Bank, therefore, bargains and protects the interests of the consumers even before the commencement of operations of PSPs. Moreover, the regulations contemplate liquidity risks, and provides for the availing of a report showing how the payment service provider is going to settle the payment obligations arising from its provision of electronic retail transfers during the application process prior to authorization.
The presence of a comprehensive regulatory framework for the operation of Payment Service Providers, the largest in the Kenyan fintech industry so far, has ensured that the risks posed to consumers are minimized. This has led to responsible financial inclusion and consumer-centric innovation.
2.2 Digital lending fintech
Digital lending involves provision of loans to customers through digital interfaces by deploying a combination of the traditional customer data and alternative data to determine creditworthiness and credit limit while reducing the time for loan appraisal.
Previous financial exclusion of poor, underserved individuals as well as MSMEs made the impetus of informal sources of funding considerably high. Such sources included ‘shylocks’, credit terms from suppliers, chamas, friends and relatives. The prevalence of digital lending platforms in Kenya has changed the lending landscape, with more people increasingly preferring mobile loans. Credit scoring improvements, fewer regulatory barriers, and the widespread use of mobile phones and mobile money have enabled the development of the digital lending industry, providing borrowers with a quick and convenient credit option.
The use of digital loans can be traced to the launch of M-Shwari, a mobile money lending service. KCB-M-Pesa is also a mobile money lending service which has gained traction in its use by consumers, although both of them are bank-backed products. Furthermore, there has been a wide uptake of loans from smartphone applications by consumers, with examples of such applications being Tala, Branch, Okash among others. The regulatory gap that previously existed in the operations of such digitally enabled lending was the fact that these enterprises do not take deposits from consumers, hence they could not be categorized as a bank as defined in the Banking Act, or as a Micro-Finance Institution as defined by the Microfinance Act, or as a SACCO as defined in the SACCOs Act.
This has since changed with the amendment of the Central Bank of Kenya Act in 2021 which has placed digital credit providers under the regulatory purview of the Central Bank. This move is as a result of concerns of unfair pricing, intrusive marketing strategies and use of debt-shaming methods in debt collection being raised. In addition, the widespread negative listing of digital borrowers in credit reference bureaus pointed to the difficulty many borrowers had in repaying digital loans. Unlike the regulation of the Payment Service Providers just a few years after the launch of M-Pesa, the regulation of the digital lenders has taken a while since their prevalence, and it would therefore suffice to posit that these regulatory measures are ‘reactive’ in nature.
The Amendment Act gives the Central Bank the authority of licensing and supervising digital credit providers that are not regulated under any other written law. The Act has also given the Bank the mandate of approving digital channels through which the digital credit business may be conducted, determining parameters for pricing of digital credit, suspending or revoking a license among other things.
To further buttress my argument on the need for consumer protection while accessing digital financial services, in this regard, digital credit, the Act also provides for the availing of, among other things, two important documents when applying to be a digital credit provider which are;
- Certificate issued pursuant to section 19 of the Data Protection Act, 2019 (DPA)
- A statement as to compliance with the provisions of part VII of the Consumer Protection Act.
The provision of these two documents points to the progressive regulatory efforts of ensuring that financial regulation is consumer-centric.
Data protection measures are also aimed at ensuring that consumers’ data is not misused or mishandled. Going by the provisions of the Data Protection Act, digital creditors/lenders are expected to ensure their use of data collected from their customers respects their[customers] rights such as the right to be informed on the use to which their personal data is to be put to, the right to access their personal data in custody of the controller, the right to object to the processing of all or parts of their personal data, the right to correction and/or deletion of false or misleading data.
The Data Protection Act places duties of ensuring data protection of individuals [data subjects] on data controllers and data processors. It defines data controller as a natural or legal person, public authority, agency or any other body which, alone or jointly with others, determine the purpose and means of processing personal data. It also defines a data processor as a natural or legal person, public authority, agency or any other body which processes personal data on behalf of the data controller. The data subject is also defined as an identified or identifiable natural person who is the subject of personal data.
Going by the definitions provided by the aforementioned Act, the digital lending ecosystem consists of the three; the data controller as the lending entity as it uses the collected and analyzed data to come up with individual user profiles on creditworthiness and credit limit, the data processor who may be contracted by the data controller to process or derive consumer data, and the data subject who is the consumer consenting to the use of his data in exchange of tailored digital credit. For a person or an entity to qualify either as a data processor or a data controller, they will have to make an application to the Data Commissioner so as to be authorized and there are prerequisites to fulfil before one qualifies to be registered as such. Moreover, the Act sets succinct principles to be observed by data controllers and processors when handling data belonging to the data subject. The Data Protection Commissioner has already issued a notice to the 40 Digital Credit Providers to make a compliance audit report on their handling of consumers’ data.
The fact that digital credit providers have been placed under the regulatory mandate of both the Data Protection Commissioner and the Central Bank of Kenya is an encouraging and progressive realization of consumer-centric regulatory measures. While there may be justified concerns that such arrangements are stringent and act as a deterrence to the much-needed financial innovation, they can be addressed through regulatory collaboration where there are jurisdictional overlaps. In fact, the Central Bank of Kenya (Amendment) Act anticipates such an instance and provides a legal basis for regulatory collaboration between itself and, but not limited to, the Office of the Data Protection Commissioner and the Communications Authority. This ensures that the regulatory measures taken are proportional to the risks posed.
Moreover, the Central Bank has already issued regulations in order to operationalize the regulatory mandate given to the Bank by the Amendment Act, 2021. These guidelines are comprehensive enough to guarantee consumer protection and financial stability. This is evident from the exhaustive list of requirements needed by the Central Bank before being authorized to operate as a digital credit provider, and the provisions on instances which a license may be suspended or revoked.
Going forward, due to the increased use of data analytics arrived at through AI and ML to assess credit risk, these generated outcomes will need to be more transparent, accountable, explainable and fair. There are concerns that the decisions generated may be biased or with errors as they may not take into consideration outlier variables/proxies which would have been recognized by a human mind, hence may be discriminative. The Data Protection Act actually provides that should a data controller use a fully automated system to arrive at a particular decision bearing legal effects on the data subject, the data controller or data processor ought to reasonably inform the subject that the decision has been arrived at through an automated system, and the data subject may object such a decision and may seek review of that decision.
The Data Protection Act is a progressive legislation that has the capacity of ensuring that consumers’ data collected in their use of financial products from fintech firms such as digital creditors is protected and can reduce instances of digitally driven discrimination which may lead to financial exclusion. Moreover, the Data Protection Office will also need to keep itself abreast with the latest development in the industry to ensure that it actively addresses any data risks, and continuously propose regulations to ensure that it doesn’t rely on redundant regulations given the revolutionary nature of technology.
2.4 Cryptocurrency-based fintech
There has been increased uptake of crypto-currency-based assets despite the failure of the Central Bank of Kenya to recognize crypto-currencies as a legal tender. This therefore means that crypto-currencies are not considered as assets under the laws of Kenya, hence there is no licensing that has happened so far for any crypto-currency-based fintech in Kenya. In fact, the Central Bank had in the past issued a warning to the public on trading using cryptocurrency assets, and even restricted banks from handling or facilitating such transactions due to the volatility and unregulated nature of the crypto-assets, and the anonymity of the owners of these assets.
However, the fact that over four million people in Kenya hold digital assets in the form of cryptocurrencies has made the Central Bank reconsider its stance, and there are already plans to propose regulations on digital assets by a technical committee that has been suggested by the Joint Financial Sector Regulators Forum (JFSRF). This move is in a bid to ensure that the interests of the investors operating in that sector are protected, and financial stability is maintained. The bank’s earlier approach and response to consumers on cryptocurrencies has been ‘you are on your own’ one, but if the recent developments are to go by, there’s hope for investors interests’ protection in the coming future. This positive development also comes just after the collapse of the US-based crypto-currency firm, FTX,  with claims being that it is as a result of the conduct of one of its top officials.
The Capital Markets Authority does not also recognize crypto currencies as securities. While the Capital Markets Act empowers the Authority to include any other instrument, in addition to those provided by the Act, as a security to be traded, it has not yet prescribed crypto-currencies as such. This places the issuance of Initial Coin Offerings (ICOs) for crowdfunding purposes outside the regulatory purview of the Authority, as of now. However, the Authority has already introduced a regulatory sandbox which allows for live testing of innovative products that are likely to deepen capital markets development. This allows it to give investors more access and usage of regulated investment options while it assesses the potential risks of the product so as to come up with proportional regulations for such products. So far, there have been 16 companies that have already been admitted to the sandbox, and a number of them have successfully exited the sandbox. These firms provide services such as crowdfunding, robo-advisory, screen-based securities lending and borrowing, regtech, Intermediary Service Platform Provision, and blockchain technology.
The regulatory measures taken by Kenya so far to ensure that ‘fintech’ or digital financial services are regulated is a step towards greater consumer-centric innovation around that space. Furthermore, the fact that the Central Bank has already shown commitment to exploring ways of regulating unregulated digital financial products such as cryptocurrencies shows that there is a positive paradigm shift in the approach to financial regulation. Regulators ought to take the lead in ensuring that they understand digital financial products and put in place regulations that are proportional to the risks. This will ensure that they observe the market conduct of the players closely to enhance consumer protection.
The use of the ‘test-and-learn’ approach (as seen with M-Pesa), as well as the use of regulatory sandboxes (such as one adopted by the Capital Markets Authority) to regulate the new financial products and markets, is the desired approach as the regulator can take a proactive role in the development of the industry. Waiting for the industry to ‘develop’ and risks to prevail to come up with regulations (the ‘wait-and-see’ approach) is akin to chasing the wind, as technological advancements are revolutionary and fast-paced, and will end up having consumers as the casualties if they are not adequately regulated.
Furthermore, regulators will need to deploy more resources to conduct comprehensive and collaborative research on the possible risks that new financial products and/or technological advancements pose to consumers and to the financial system. The regulators will also have to embrace the continuous revision of existing legal frameworks to ensure that they are fit for purpose and not redundant.
The writer is a student at the University of Nairobi, Faculty of Law as well as a Research Assistant at the Committee on Fiscal Studies. His interests include financial inclusion, financial regulation, taxation law as well as fiscal law. He can be reached through firstname.lastname@example.org
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*The Joint Financial Sector Regulators Forum constitutes the five financial regulators including the Central Bank of Kenya (CBK), Capital Markets Authority (CMA), Insurance Regulatory Authority (IRA), Retirement Benefits Authority (RBA) and the Sacco Societies Regulatory Authority (SASSRA)
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