The internet age, has given rise to financial technology (fintech), creating an ever growing list of fintech firms with catchy and imaginative company names offering a wide range of financial solutions.
Using digital software applications and algorithms, fintechs across Africa have become a driving force for giving greater access to financial services, especially for those classified as unbanked who make up over 50% of the total population.
In 2007, the meteoric rise of Safricom’s M-Pesa and mobile money was not a fluke. The need was always there. It only required the investment to tap into this need which fintechs are now continuously exploiting.
Cash is still king. However, more people are becoming comfortable with the digital platforms on which fintechs operate on due to the increasing use of smart phones. Better still, at least in Uganda’s case, these phones are now being assembled locally, making them more affordable.
Mckinsey & Company, the widely respected business consultancy says, ‘As the fastest-growing start-up industry in Africa, the success of fintech companies is being fueled by several trends, including increasing smart phone ownership, declining internet costs, and expanded network coverage, as well as a young, fast-growing, and rapidly urbanizing population’.
During 2023, African fintech start-ups collectively raised $1.5 billion. This reflects international investor confidence in the continued growth of the industry with Nigeria, South Africa, Kenya and Egypt taking the lion’s share of this money.
Together with these ‘Big Four’ the most activity in Africa’s fintech start-up landscape during 2023 took place in Burkina Faso, Cameroon, Ghana, Ivory Coast, Morocco, Rwanda, Senegal, and Uganda.
Here at home the industry umbrella, the Financial Technology Services Providers’ Association (FITSPA), has seen its membership grow fortyfold since 2017 to well over 200 firms today. These fintechs and their apps are transforming the way we think about financial transactions be it online purchases, paying school fees or for utilities.
Most occupy the payments space and many would like to diversify, but lack the long-term capital to do so. Hence the constant look out for venture capitalists willing to invest in their ideas.
Financial Sector Deepening Uganda (FSD Uganda), a non-profit company, led and supported the formation of FITSPA in 2017. According to FSD Uganda, previously there was no clear regulatory environment and a lack of clarity on the types of financial products and services that fintechs could engage in. Regulators, banks and mobile network operators struggled to meaningfully engage with the industry and a few early market entrants disproportionately dominated the scene. FSD Uganda provided the technical assistance and financial backing to enable FITSPA to evolve.
Making sure every dollar of their various assistance programmes reaches the intended recipient and in the most convenient manner, is of vital importance to the Bill and Melinda Gates Foundation. In also giving a helping hand to FITSPA, the Foundation was convinced fintechs are the key.
A FITSPA member survey found that fintech services mostly cater to the low income segments of the population that earn less than $13 per day. In terms of impact, this shows that fintechs are enabling access to financial services closer to this demographic that make up a significant portion of the Uganda population. It also supported other research that identified small businesses as becoming key beneficiaries and a key target segment of most fintechs.
Zianah N. Muddu the FITSPA Engagement Manager says, “As FITSPA, we lobby and advocate for better policies in the market for our members, but also create opportunities for them.”
Four years ago, several amendments were made to the National Payment Systems Act, incorporating some FITSPA recommendations, to accommodate fintechs under a specific Bank of Uganda regulatory framework. As handlers of other’s people money, the core of this new regulation is licensing under various categories and mandatory capital requirements similar to other financial institutions.
BoU also offers a regulatory sandbox where it can watch over smaller players in a controlled operational environment where they can test their innovations for a fee.
As of the end of January 2024, BOU had licensed 29 firms under the non-bank payment services providers and payment system operators. However, in October 2023, Richard Byarugaba, the acting Executive Director Finance at BoU, suggested many fintech owners were either ignoring or dodging being licensed.
Other sources say the detailed documentation required and getting the money together is a huge challenge. The fee for the most basic license for e-funds transfer services is UGX100 million while that for an electronic money issuer is UGX250 million.
On top of this, the applicant also has to be vetted by the National Information Technology Authority of Uganda (NITA-U), employ a designated Data Protection Officer and register with the Financial Intelligence Authority. All this costs money which many fintechs owners cannot come up with all at once, unless perhaps an angel investor shows up at the door.
This is a dilemma for BoU. You don’t want tight regulation to suppress innovations that can improve efficiencies in the financial system. Nor do you want fintechs to easily indulge in risky behavior that may cause a financial crisis.
Meanwhile, not only have Ugandan fintechs helped businesses and individuals to make and receive payments faster, but also reduced the costs. By venturing into the provision of digital small loans/credit facilities, specifically targeting rural populations, some are also breaking new ground where traditional banks have largely been absent.
Last year, Emata an agric-tech start-up, raised $2.4 million in seed money to expand its agri-loan services. Another one, Zofi Cash, which caters for salary advances, attracted a million dollars.
In 2022, Numida, a provider of working capital loans for micro businesses secured $12.3 million to expand its customer base and enter new markets. The deal had the backing of Serena Ventures, whose CEO is tennis star and entreprenuer, Serena Williams. Overall, and in the aftermath of the Covid-19 pandemic, Ugandan fintechs that year raised $41 million.
As an enabling force for financial inclusion, fintechs have proven to be adept at helping to make financial services more accessible to an increasing number of people and are now accepted as a vital cog in Uganda’s financial system.
Speaking during the 2023 Annual Bankers Conference, the deputy BoU Governor Michael Atingi-Ego said, “Fintech is improving financial inclusion. Mobile money has enabled millions of people who previously had no access to formal financial services to send and receive money, make payments, and save. Fintech has transformed payment systems, making them more efficient and accessible, such as through digital wallets and mobile payments.”
However he cautioned, “As more financial transactions move to digital platforms and online, our reliance on IT infrastructure grows, and so do the related IT and cyber security vulnerabilities. Cyber-security and IT security, therefore, become increasingly important because the new convenience comes with increasing risks, as cyber criminals exploit vulnerabilities in digital systems to breach defences and gain unauthorised access to valuable data, which is the ‘new oil’”.
The Deputy Governor’s concerns are justified. Around the world, stealing data is big business. Uganda’s fintechs must accept the added expenses associated with data protection, notably by investing in such things as hardware encryption.
Failure to prevent data breaches could mean identity theft, financial losses, and reputational damage. Fintech owners also face the ‘insider threat’, when and for whatever reason, an employee intentionally passes on confidential information.
There is a good reason why Data Protection professionals are in high demand and well paid. In a digital world, data is a valuable asset in the growth of your business. The more financial data you have, the more attractive you are to hackers and the bigger the implications if your systems are breached.
FITSPA’s mission statement is ‘to help create a conducive environment that stimulates innovation in Uganda’s financial services sector’. A couple of years ago, a Dutch bank executive said the threat of fintech is the impact it will have on customer expectations towards banking services.
Once upon a time, banks were perceived as places of great reverence. Monuments to money, as seen by the architecture of the impressive buildings of old and the hushed tones used within. Today, that picture has drastically changed.
Thanks to fintech collaboration with banks, (or banks setting up their own fintech subsidiaries) a customer may find trouble in remembering the last time they stepped into a banking hall. Having a smart phone or other mobile device has demystified banking.
Australian banking futurist, Brett King is blunt: “Banking is no longer somewhere you go, it’s something you do. The key skill sets in this new world will belong to the data scientists who understand when, why, and how customers use bank products, and the storytellers who can place the product or service in the customer’s life when and where they need it.”
He says, “It is not crypto that will end the banking industry. It is the fintech companies, the neo banks, the technologies companies that are rethinking banking that are going to challenge the industry.”