THE BURGEONING FINTECH INDUSTRY; ITS REGULATION IN GHANA

• Oct. 4, 2021
• Harrison Kpotor, Esq

Abstract

Over the last decade, Financial Technology (FinTech) has grown astronomically all over the world. Almost every day, we hear of a new application software, built to help us execute financial transactions with ease. Our media space is fraught with advertisement of these applications. All these applications aim at making transactions simple and hustle-free. While some of these applications are built and owned by software startups, others are owned by traditional banks who could not afford to be left behind. The ease of accessing the internet, among other factors, has played a major role in this FinTech boom. This article explains what FinTech is, its evolution in the world and particularly in Ghana. A look will also be had at the laws that regulate this industry and what the statutory requirements are for persons who intend to operate in it. The Payment Systems and Services Act 2019 (Act 987) was passed in 2019 to regulate FinTech transactions and will be the main focus of this article. The Act identifies two main categories of persons who may obtain licenses to operate in the FinTech space, they are Payment Service Providers and Electronic Money Issuers.

1.0 Introduction

The rapid growth and advancement of Information and Communications Technology has impacted almost every aspect of our lives. Today, we can sit in the comfort of our homes and have video call with other persons who are not even within our jurisdiction. At present, our Ghanaian courts, by virtue of the High Court (Civil Procedure) (Amendment) Rules, 2014 (C.I 87), are able to take evidence via video link and we saw this exhibited clearly during the just ended Presidential Election Petition. The point is that Information Technology has grown beyond merely picking up a phone to make a call or sitting behind a computer to browse the internet. It has permeated every aspect of human life and the financial sector is no exception.

According to Statista.com[1], as of January 2021 there were 4.66 billion active internet users worldwide which represents a whopping 59.5 % of the global population. Of this total, 92.6 percent (4.32 billion) access the internet via mobile devices. In Ghana, gsma.com[2], states that as at the third quarter of 2019, mobile internet users were 10.7 million. Why did technology creep into the financial sector? The reasons are numerous but the few worth mentioning are as follows:

• Convenience in mobile banking 
• Security 
• Inclusion of the informal non-banking sector
• Easy access to the internet
• Distrust of the traditional banking system 

On the last point above, the 2018 Edelman Trust Barometer[3] provides that Technology (75 %) remains the most trusted industry sector, followed by Education, Professional Services, Transportation, Consumer packaged goods and Financial Services which scored 70 %, 68 %, 67 %, 60% and 54 % respectively. Financial Services was once again the least trusted sector. 

2.0 What Is Fintech

FINTECH is the contraction of the words: “Financial” and “Technology”.  Investopedia.com[4] defines it as “…new tech that seeks to improve and automate the delivery and use of financial services.” It continues thus:

“At its core, fintech is utilized to help companies, business owners and consumers better manage their financial operations, processes, and lives by utilizing specialized software and algorithms that are used on computers and, increasingly, smartphones. In recent years, Fintech has gained a lot of attention and traction and whetted the appetite of many young people and governments the world over.” 

Lee Reiners, CFA, the Executive Director of Duke University’s Global Finance Markets Center offers two definitions for Fintech based on its history[5]. The first definition he offers is that “the term refers to businesses who are using technology to operate outside of traditional financial services business models to change how financial services are offered.”  His second definition is that “fintech includes firms that use technology to improve the competitive advantage of traditional financial services firms by providing faster and more convenient products and services to their customers.”

The first part of the definition refers to those non-bank technology companies that have entered into the financial services space like mobile money, ExpressPay, Zeepay, Slydepay, BitSika, Bitcoin etc. while the second part refers to legacy financial institutions who are deploying and developing innovative new technologies. For example, Ecobank pay, G-Money by GCB, Calbank App etc. To better understand Fintech and its regulation, it is important to know its history and how it has evolved over the years to its current state. Hence, I shall now proceed to discuss the history and evolution of Fintech. I shall first discuss its evolution worldwide, then narrow it down to Ghana.

3.0 History & Evolution of Fintech

According to a paper by Arner, Barberis & Ross[6], fintech can be split into a number of different eras.

3.1 .1 Fintech 1.0 (1886 – 1967)

• This stage involves building the infrastructure that will support globalized financial services.
• The first transatlantic cable (1866) and Fedwire (1918) in the USA enabled the first electronic fund transfer system using technologies such as telegraph and Morse code. 
• It was basic by today’s standards, but at the time, it was revolutionary.
  1. Fintech 2.0 (1967 – 2008)

• This phase started with the installation of the first ATM by Barclays in 1967, and is characterised by the switch from analogue to the digitalization of finances.

• The 1990s saw the first movements towards digital banking, with connected customers starting to manage their money in different ways. PayPal was launched in 1998 which would hint towards the new payment systems that would come as the world increasingly went online.
  1. Fintech 3.0 (2008-Current)
• Post-financial crisis, lack of trust in banks aligned with regulatory change opens up the market to new providers. Bitcoin was born in 2009, followed by other cryptocurrencies using blockchain technology.
• Smartphone adoption. Which means that mobile devices have become the primary means by which people access the web and other financial services.
• This is the era of startups: they are springing up in every nook and cranny of the globe.
• Even established banks are starting to act and brand themselves like start-ups and this move away from the established banks of the Fintech 2.0 era has been the defining element of Fintech 3.0.

3.2 Ghana

In Ghana, the evolution of Fintech within our local economy has been attributed to the introduction of Sika Card by Social Security Bank (Now Societe General) in 1997[7]. In 2007, the Bank of Ghana incorporated a subsidiary called the Ghana Interbank Payment and Settlement Systems (GhIPSS) Limited, whose main aim was to migrate Ghana to an electronic payment system. This led to the introduction of E-Zwich and Gh-Link smartcards. It is surprising to learn that the e-Zwich card set the tone for biometric banking in the world.  Keith Breckenridge, a South African professor, in a paper[8] he published in 2010 in Africa: The Journal of the International African Institute had this to say about Ghana’s e-zwich:

“Two years ago, the Ghanaian Central Bank began to implement a plan for the world’s first biometrically regulated money supply. Banks have been flirting with the idea of substituting fingerprints for the flimsy and detachable pin codes on their cards for nearly two decades, but none of them have in mind the kind of scheme that is under way in Ghana.”

Soon, other banks jumped on the bandwagon by incorporating technology into their service delivery to better serve their customers. Following the rapid growth of Fintech in Ghana, it became necessary for the government to regulate it. This then led to the passage of the first ever Fintech related legislation in Ghana, the Electronic Transactions Act 2008, (Act 772), in 2008. This Act was to be applied to all forms of electronic transactions including financial transactions. 

MTN Mobile Money (MoMo) was launched on July 21, 2009 which allowed persons who had the sim cards of MTN to open a Mobile Money account and transfer and receive money on their phones. This was innovative and novel. In 2018, the Bank of Ghana, under GhIPSS launched Interoperability in Ghana, which made it possible for transactions to be done across different networks. Awesome news! By the end of 2015, “MoMo” had become a household name. Traders and other professionals became accustomed to its use due to the convenience it provided. Following MoMo came an avalanche of other fintech like Expresspay, slydePay, zeePay, the various bank apps, G-money, an interoperable QR Code system and now cryptocurrency. 

4.0 Cash-lite Agenda 2024

As part of efforts to reduce the cost of doing business and improve revenue collections in the country, the Bank of Ghana (BoG) in 2019, set the year 2024 as a deadline for the country to move towards using less cash in financial transactions. In March 2019, the Government of Ghana passed the Payment Systems and Services Act 2019 (Act 987), which allows for a direct regulation of Fintech industries by the Bank of Ghana.

5.0 Current Legislation Regulating Fintech in Ghana

The Payment Systems and Services Act 2019 (Act 987) was passed in 2019. This Act effectively repealed the Payment Systems Act (Act 662) passed in 2003. Act 987 is an Act to amend and consolidate the laws relating to payment systems, payment services, and to regulate institutions which carry on payment service and electronic money business and to provide for related matters. 

Section 1 provides the entities the Act is to apply to as follows: 

1. a bank,
2. a specialised deposit-taking institution
3. a dedicated electronic money issuer, a payment service provider
4. an affiliate of a bank, a specialised deposit-taking institution or a financial holding company, and an agent of a bank, a specialised deposit-taking institution, a dedicated electronic money issuer or a payment service provider
5. ) an affiliate of a bank, a specialised deposit-taking institution or a financial holding company, and
6. ) an agent of a bank, a specialised deposit-taking institution, a dedicated electronic money issuer or a payment service provider.

Under Act 987, the Bank of Ghana shall be responsible for regulating the following matters relating to the payment, clearing and settlement systems:

• Regulating the issuance of electronic money, payment instrument, payment service providers and electronic money business.
• To ensure that financial services are extended beyond traditional branch-based channels to the domain of every day transactions.
• Ensuring that electronic money is only provided by authorised financial institutions regulated under the Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930) and duly licensed non-bank entities which are engaged solely in the business of electronic money and activities related or incidental to the business of electronic money
• For the licensing of non-bank financial institutions under the Payment Systems and Services Act 2019
• For the formulation, monitoring and review of policies on payment systems in Ghana
• For any other payment system or product, the Bank of Ghana may determine

Under the Act, there are two broad categories of persons who can or who may apply for licenses to operate any business related to electronic businesses, payment systems and services. These are Payment Service Providers and Electronic Money Issuers.                                                                         

5.1 Payment System Providers

Section 102, which is the Interpretation section of the Act, provides the following definitions, which will aid us to understand “payment system providers.”

“Payment system providers” means a body corporate licensed or authorised under this Act to provide payment service;

“Payment service” means the provision of service to facilitate transfer of funds from a payer to a payee using various forms of payment instruments or electronic money;

“Payment instrument” means any medium in electronic or written form used for ordering transmission or payment of money;

“Electronic money” means monetary value which is stored electronically or magnetically, and represented by a claim on the issuer which is issued on receipt of funds, redeemable against cash and may be accepted by a person.

According to section 7, a body corporate other than a body corporate regulated under the Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930) shall not operate a payment system or provide a payment service without a payment system license issued by the Bank of Ghana in accordance with this Act. This means that all non-bank entities must acquire a license to operate a payment system.  Further, section 10 provides that a corporate body seeking to be a payment service provider which is regulated under Act 930 must apply for authorisation rather than a license. Examples of such institutions are the banks, savings and loans, investment institutions etc.

5.2 Electronic Money Issuers (EMIs)

Again, section 102 provides the definition for “electronic money issuer”. According to the section, “Electronic money issuer” means a payment service provider that issues electronic money. Electronic money has already been defined above.

The Act also permits corporate bodies to register as Dedicated electronic money issuers. An applicant for a license to be a dedicated electronic money issuer, not regulated under the Banks and Specialised Deposit-Taking Institutions Act 2016, must fulfill the following preconditions:

1. Be duly incorporated under the Companies Act 
2. Include in its regulations of incorporation a stipulation that the electronic monies owed to its customers are held in trust and shall not be encumbered in case the company is wound up;
3. Ensure that its significant shareholders and directors are fit and proper persons;
4. Ensure that it engages in only the business of electronic money and related or incidental activities like money transfers and remittances or set up a separate entity for such business if its main business is different from or not related to electronic money
5. Ensure that the company has 30% equity participation of a Ghanaian
6. Ensure that the body has a customer float account holding bank
7.  Ensure that any other requirement set by the Bank of Ghana is fulfilled

On the 30^th of April 2020, the BOG in a press release[9] informed the general public that in furtherance of efforts to deepen financial inclusion and in accordance with Act 987 has issued its first Dedicated Electronic Money Issuer License, to a local Fintech company, Zeepay Ghana Limited. The license authorises Zeepay Ghana Limited, to operate as a Dedicated Electronic Money Issuer, providing the following services: 

1. Cash In; 
2. Cash Out; 
3. P2P Transfers (Peer to Peer); 
4. Bill Payments;
5.  Airtime Top-Up; and 
6. International Money Transfer (IMT). 

Again, the Bank of Ghana on 5^th May 2020 announced that it had established a new FinTech and Innovation Office to drive the Bank’s cash-lite, e-payments, and digitisation agenda.                            

5.3 Foreign Participation Under the Act

Under section 8(4) of Act 987 all foreign companies that wish to be service providers or electronic money issuers must have 30% equity holding from a Ghanaian. This 30% requirement is more than what is provided for under the Ghana Investment Promotion Centre (GIPC) Act 2013 (Act 865). Under Act 865, particularly section 28, foreign enterprises that seek to partner with Ghanaians to form a joint venture must have not less than 10% equity participation by a Ghanaian. Presently, the license fee for payment service providers is Gh₵20,000,000[10]. Thirty percent (30%) of that would be Gh₵6,000,000, which is considerably high. It is however important to state that Act 987 does not limit the number of Ghanaians who may participate in a company’s shareholding, neither does the Companies Act. What this means essentially is that a foreign company may partner with as many Ghanaians as possible within the limits of a private or public company, to raise this capital.

6.0 Conclusion 

Financial Technology has become part of our daily lives and it has come to stay. From this point onward, it will only get better and more complex. With time, the most sophisticated transactions will all be in our palm, and executable by the push of a button. The Payment Systems and Services Act 2019 (Act 987) has made progressive provisions to regulate transaction in the FinTech space but as already stated, FinTech is growing very fast and soon, the Act will need some amendments to accommodate these changes.