Morris Maina, Chief Executive Officer at TransUnion Kenya.

By 2025, FinTech penetration in Kenya is expected to reach 13%, one of the highest in the world. This signifies a revenue potential of more than $30 billion. Given that Kenya is also one of only five countries in Africa that share 50% of the continent’s software developers, one cannot ignore the opportunities for FinTech growth in a market traditionally dominated by cash-only transactions. But for this to be realised, a comprehensive regulatory framework is needed while public and private sector stakeholders require access to data to make informed decisions on how best to capitalise on the potential of FinTech.

FinTechs that provide lending services, also referred to as Digital Credit Providers (DCPs), are governed by the Digital Credit Providers Regulations of 2022 of the Central Bank of Kenya Act. This puts parameters in place around the licensing, governance, and lending practices of digital lenders. These regulations are also designed for consumer protection, structure how credit information is shared, and outline the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) obligations of DCPs.

Countries often share similarities in regulations especially when it comes to the fundamental elements of know your customer (KYC), Anti-Money Laundering (AML), data privacy and protection, consumer rights, and so on. The most significant difference comes in around the stages of regulatory implementation within a country. In Kenya, extensive enforcement and collaboration between the stakeholders and the regulating bodies are taking place.

Licensing impact

To this end, unregulated DCPs were required to apply to the Central Bank of Kenya for a license by September 2022, or cease operations. The regulation also provides for specific licensing requirements to be met for new entrants in the space in addition to giving structure for the established FinTechs in the lending space.

As with any licensing requirement, there is an obvious impact on meeting the regulatory obligations. This includes making additional investments in financial and operational resources to become compliant. However, the short-term impact of this is significantly outweighed by the long-term benefits of compliance, for instance, credibility and good business practices that can spur growth.

These regulations have come on the back of significant growth of mobile digital lending in Kenya. Consumers were concerned with predatory practices of the previously unregulated DCPs such as the high cost of lending, unethical debt collection practices, and abuse of personal information. As a result of the need for and in the process of compliance, several DCPs in the country have ceased or scaled down operations.

Spurring innovation

Placing FinTechs under regulations fundamentally drives open and ethical business practices. It creates an enabling environment that drives healthy competition, and the need for continued growth which results in innovation in the sector. In particular, the credit information sharing mandate for licensed entities adds important value to the financial inclusion agenda for people new to credit and the underserved banking population in Kenya.

Further adding to the need for innovation has been the volatile global macro-economic environment of last year. Even though there are signs of recovery in Kenya, FinTechs do face several barriers to growth and profitability.

These include the time taken to gain licencing approval. Reduced funding further adds to the complexity of the environment as FinTechs must show exceptional discipline around costs and driving internal efficiencies. They must also ensure that they get maximum returns on their spending. This means that access to robust internal and external data becomes a key component of being more innovative. Additionally, fraud and lack of cybersecurity remain key threats to sustained growth especially when it comes to consumer trust and building confidence in the digital ecosystem.

Fortunately, these are not insurmountable challenges. A pro-active, pragmatic policy and regulatory framework and facilitation become critical to unlocking the macro-operating and regulatory elements that may pose a barrier to the operating environment. This requires an open-door engagement between all stakeholders and regulatory bodies. As such, feedback on corrective action is essential with FinTechs needing to adopt business models that align with regulatory requirements. They must also consistently engage toward supporting and shaping the direction of policy in Kenya.

Data analytics building blocks

Credit reporting becomes a critical driver in this regard especially when it comes to aiding credit, and overall, financial inclusion. Getting more FinTech players into the credit info sharing (CIS) ecosystem will aid in the growth and increasing profitability of companies in this space. With this in place, FinTechs will be able to apply robust and fair credit decisioning and risk assessment, fraud mitigation, and improved customer experience to build more personalised offerings. They can also then more effectively manage their portfolios, conduct risk monitoring, and develop new products based on insights generated by access to the latest data.

There are several trends shaping the FinTech sector in Kenya that help push towards creating a more enabling environment. One of the key trends is consistent partnerships and merger and acquisition activity between traditional financial sector role players and FinTechs. This helps increase agility and innovation while expanding on the existing customer base. Most traditional banks are also creating FinTech operations as separate entities within their businesses to become more agile.

Alternative data critical to growth

FinTechs have also expanded into new areas such as insurance and agriculture to meet the needs of a more diverse client base. Furthermore, FinTechs are also using alternative data when it comes to mobile money transactions, social media, phone usage data, and lifestyle data in conjunction with traditional credit data for enhanced visibility.

This is where data from TransUnion becomes invaluable, as well as partnerships to provide insights into alternative data that could further empower and improve decision-making capacities. For example, KYC verification, access to mobile reports, driving portfolio analytics for customer growth and improvement, and leveraging market benchmarking reports and fraud data to refine solution development.