- March 15, 2022
- Posted by: Amos Ekow Coffie
- Category: Finance
Software developer and Managing Director for Money Card Limited, Dr George Mante, has made calls for the setup of a decentralised regulatory framework by the Bank of Ghana for the country’s budding fintech ecosystem.
According to him, the BoG on realising the economic benefits of a thriving fintech startup ecosystem should be keen on seeing many more start-ups enter the market.
Adding that the BoG should decrease the requirements for entry of fintech start-ups as well as standard payments service providers into the fintech ecosystem.
He makes these arguments and proffers some recommendations in the write-up below.
A DECENTRALISED REGULATORY FRAMEWORK FOR GHANA’S FINTECH ECOSYSTEM (ACT 987 AMENDMENT)
The PAYMENTS SYSTEMS AND SERVICES ACT (Act 987) was passed in 2019. It saw initial implementation by the Payments Systems Department, BoG, headed by Dr. Setor Amediku. For the past 2 years, the Fintech and Innovations Office, BoG headed by Mr. Kwame Agyapong-Oppong has had direct oversight over the PSP implementation at BoG.
PSP Categorization (Act):
PSP Electronic Money Issuer (Mobile Money Operators)
LICENSED PSP CATEGORIES AND STATISTICS (AS AT APRIL, 2021):
Total licensed – 26, representing 37 % of fintechs (71 fintech companies in Ghana – BoG, 2020,). Some other reliable sources place total numbers at 100+
Electronic Money Issuers – 5 (19.2% of licensed)
(Airtel MCGL, GCB GMoney, Yup Gh Ltd, Zeepay Gh Ltd). MTN excluded.
PSP Enhanced – 19 (73.1% of licensed)
PSP Medium – 1 (3.8% of licensed)
PSP Standard – 1 (3.8% of licensed)
DISTRIBUTION OF LICENSES – THE IMPLICATIONS
5 out of the 6 known Dedicated Electronic Money Issuers have been licensed. (MTN MML excluded). [BoG List of Licensed PSPs, last updated April, 2021]
19 PSP Enhanced license holders. [BoG List of Licensed PSPs, last updated April, 2021]
This set of licensed fintechs have majority members as firms known to the regulator who has had some oversight over them for nearly a decade. A license regime applied to same group will be synonymous to a school that decides to adorn their students in standard school uniform. There is yet a tall list of Enhanced PSPs awaiting licenses.
Only 1 Standard PSP is licensed, which is quite concerning. The reason will be explained later on.
By the conservative figures above, more than 45 fintechs are awaiting licenses (if we assume all have applied).
One possible explanation is fact that lower category PSPs applicants require a higher PSP License holder partner to qualify for licensing. It will therefore make sense for BoG to license these top tier PSPs first before considering lower categories. The arguments against this assumption is fact of low numbers of Medium and Standard PSP after more than 2 years of implementation of the Act.
THE EXPECTED STRUCTURE OF FINTECHS IN GHANA.
The structure of fintechs takes the shape of a pyramid with the broader base and smaller apex. To apply this structure to the PSP categorization by BoG, and based on the compliance requirement (capital, infrastructure, certification), the pyramid for Ghana fintech ecosystem will take the below form:
Apex – Electronic money issuers (EMI) or operators of mobile money wallets namely Mobile Money Limited, Airtel MCGL, Vodafone MFS, Zeepay, Yup by SG-Bank, GMoney.
Middle zone – Scheme and Enhanced PSPs. Enhanced PSP refers to the Payments aggregators. They directly integrate their systems with EMI and then extend these integrations (APIs) to the Medium and Standard PSP. Nalo, NSANO, Hubtel, ITConsortium, Flutter wave fall in this category. Each of this middle zone group has at least 10 to 20 firms they share their integrations with.
Base of pyramid – Standard PSPs. This category per the Act, have a payment application solution/ development, merchant development platform, a payment solution they seek license for.
No capital requirements involved and minimum compliance requirements. This level of PSP has solutions that come in various forms and with varied functionality. The many at this level derive integration from the Enhanced PSP partners as described above. The enhanced PSPs will tell you this group is a very large one. This level is the experimental level from where new tech is expected. When industry people ask young people to innovate, they often are referring to this group. The BoG in an earlier release, referred to this Group as Start-Ups. The role of this bracket when it comes to winning foreign direct investments need not be over-emphasized. Many fintechs in this category worldwide, have won 100s of mllions of USD into local economies. This means that particular attention is to be paid this group if we as a country want to reap from the 4th industrial revolution.
PS: There are other specialized categories within the framework but form insignificant portions of the pyramid.
CURRENT STRUCTURE OF LICENSED FINTECHS IN GHANA (INVERTED PYRAMID)
A pyramid with a narrow base, ie an inverted pyramid.
The standard PSPs (base) had only 1 licensed fintech as at April, 2021 (2 years ago after the implementation of the Act).
The Enhanced PSPs (middle zone) have the majority of licensed firms.
The E-Money Issuers (apex) have second highest over same 2-year period.
“A pyramid suspended on its Apex, will tip over”.
The Enhanced PSPs requires and depended on a vibrant Standard PSP environment which extends their integrations in the markets. A thriving standard PSP will be beneficial to the economy as previously explained. Where the Enhanced PSP does well the EMI performs better.
It is thus unfathomable that the Standard PSPs/start-Ups numbers/growth is stunted, not by a lack of fintechs in such category, but from a slower process or a lack of urgency by the regulator to prioritize fintech start-ups. The rest of the analysis will focus on the Standard PSP group (Start-Ups)
ANTICIPATED CHALLENGES IN LICENSING STANDARD PSPS (START-UPS)
The numbers. This group is the largest of all PSPs. The regulator will have a herculean task tending to this large group, further worsening the very low numbers of licensed start-ups. The numbers of start-ups increased by 17.3% from 2019 to 2021 in Africa (Statista.com). This adds to fact of the inability of current regime to license cater for the needs of fintech start-ups. Time to market is crucial.
Technology. This group produces novelle technology often difficult to categorize. It is common knowledge that the BoG relies on its IT consultants in vetting the technology of this group. A longer chain of licensing introduces delays (90-day cycles). Again, for novelle solutions, time to market is crucial.
PSP partner requirement. The BoG requires Standard PSPs to sign agreements with Enhanced PSPs. This means the BoG believes this group requires the oversight of a PSP with a higher license. One will ask why require this group (supposedly the majority) to apply to be processed at the BoG when their license can’t stand alone.
Other License requirements. The requirements for a Standard PSP by the BoG, though relatively lesser to other categories, are heavy for this group. Though there is no capital requirement, the other items required for compliance are capital intensive and require significant amount of time to obtain. Some experts ask if fintechs are being regulated as though they are financial institutions, who hold customer funds. The numerous checks for small fintechs firms, including the members of the Board of a fintech could take forever to complete.
Focus. The biggest challenge for a Start-Up need not be licensing but capital to start business in a well-controlled environment. The current license regime which responds to applications and prescribes corrections using the 90-day cycle will stifle the growth of Start-Ups if left unchecked. It is understandable that a single entity as the BoG with its consultants will be overwhelmed by the numerous extant start-Ups and the many others formed on a daily. Statistica.com reports that on the average Africa saw a 17.3 % rise in Start-Ups over 2020 (statista.com, February, 2021,).
Are we prescribing a no-license regime for Standard/Medium PSPs?
This is far from what we hope for as explained in the next section.
AMENDMENTS (LESSONS FROM PREVIOUS REGIME):
The pre-PSP license regime had an approach that should be reconsidered. Start-Ups seeing Approval letters had to partner licensed Banks, Aggregators and Mobile Money Operators. These Principal firms were then able to assist with compliance checks on the start-Ups and helped to package the novelle solutions which was then presented to the BoG by same Principal firms. This made the process easier and ensured that after approval, the startups had big brothers to advise and ensure their growths in the markets. The large numbers of Banks, Aggregators, Mobile Money Operators made the process faster for Start-Ups. Decentralization was key.
Secondly the Mobile Money Operators and Enhanced PSP Partners are largely Tech firms. Their tech background made it easier for same entities to quickly vet novelle fintech solutions as opposed to the BoG who is a financial regulator and relies on other firms to vet tech software of start-Ups in current regime. The process is delayed in this instance as it largely depends on these consultants who are most likely a handful.
The Aggregators, Banks and Mobile Money Operators have helped start-Ups meet international standards. Currently the BoG requires the start-Up to be compliant with the many requirements prior to engaging the BoG. How easy will it be for say a young fintech to navigate the rough terrain. The Enhanced PSPs are also now interested in Signing agreements to enable the startUp apply for licensing. They subsequently have to wait for the standard PSPs to receive nod from the regulator.
Many standard PSPs live in constant fear of closure where BoG finally sets a deadline for only licensed PSPs to operate. Others have lost their business opportunities to the few licensed PSPs.
- The BoG can adopt portions of the old regime (decentralization)
- Enhanced PSP, E-Money Issuers and Banks can run basic compliance checks for the Standard PSP (partly bearing responsibility for the actions of the start-Ups).
- Where satisfied, these Principal bodies can go to market with the start-Ups, assigning them sub-licenses.
- The principal bodies will subsequently and periodically submit the list of start-Ups they have helped to market to the BoG.
- The BoG may then assign these vetted start-Ups unique temporary license numbers (1 year).
- The BoG will assign permanent licenses through the E-Money Issuers/Enhanced PSPs
The BoG will be able to provide the needed oversight easily through its numerous licensed Fintechs if these approaches are adopted. The challenge with this system is the likelihood of the bigger fintech to appropriate the intellectual property of the new entrant.
- The BoG need specify the need to protect the intellectual property of Standard-PSP vis-à-vis the use of NCNDs for such engagements. The BoG can specify sanctions for offending parties and the mechanisms for conflict resolution in such matters.
- The BoG should decrease the requirements for entry for the Standard PSP/Start-Ups.
- The BoG, realizing the economic benefits of a thriving start-Up ecosystem, should be keen on seeing many start-Ups enter the market. There is no way the current regime and the inverted pyramid portrayed is sustainable. It is obvious how start-Ups have positively affected the many economies and Ghana need not be left out.
- Standard PSPs or Start-Up status should qualify a firm for Tax break for a maximum of 5 years (license validity period)
- Standard PSP or Start-Up status should qualify a firm to access funding from BoG as happens in Egypt and other places for fintechs.
Dr. George T. Mante,
Software Developer and MD, MONEYCARD LTD