It’s been thirteen years since the Ugandan payments landscape was disrupted by the First mobile money system. MTN Uganda introduced the service in 2009 changing the tide in this cash-based economy.
When MTN began carrying out mobile money transactions, more private players including Airtel Uganda, Uganda Telecom, Warid Telecom, Orange Telecom followed suit. Between 2009 and now, more than 170 players have entered the market, according to Mackay Aomu, Director National Payments Systems Department at Bank of Uganda (BOU). This network of operators on the mobile transactions scene is comprised of mobile network operators, commercial banks, non-bank financial institutions, third-party operators, Fintech innovators, and technology providers. At entry of the service in the market, main services offered were transfer of funds from one person to another. However, services have since evolved to include remote purchase of airtime, payments of utilities, school fees payments, taxes, insurance premiums, international remittances, savings and loans among other things. For years, the main concern for Bank of Uganda has been ensuring safety of customer’s funds transacted over mobile money platforms.
In 2013, Bank of Uganda issued Mobile Money guidelines to stipulate approved procedures, foster consumer protections, promote financial inclusion and offer clarity on the responsibilities of service providers, customers, agents and banks. Other concerns rotates around addressing anti-money laundering, fighting financing of terrorism, tracing all transactions, data backup arrangements, liquidity of providers among other things. Under the guidelines, Bank of Uganda was in charge of approval and supervision of mobile money services. Bank of Uganda was mandated to issue directives regarding mobile money operations whereas, Uganda Communications Commission was responsible for licensing and supervision of mobile network operators; ensuring that telecommunications networks were effective. Outside of these, the scene lacked a comprehensive payment system law that supports the National Payment System. This created fertile ground for risk.
After more than a decade of operations, Aomu says the time is ripe for some order in the sector hence the introduction of the National Payments Systems Act. He likens the Act to a “plumbing system” for money in the economy that ensures effective transmission of monetary policies. The National Payment Systems Act provides regulations and guidelines that help to maintain the integrity of the sector.
The Act affects the operations of banks, Minority Depository Institutions, payment service providers, payment systems operators like Interswitch, shared banking platforms and Financial Technology companies (FinTechs).
The Act which was passed by the Parliament in May 2020 and assented to by the President on the 29th day of July 2020 is now a law effectively regulating payment systems in Uganda. The Act applies to an operator of a payment system, a payment service provider (PSP) and an issuer of a payment instrument. In late September, Bank of Uganda released the legal and regulatory framework for payments systems.
Key points to note in the Act
Power of the Central Bank
The Act provides for the Central Bank’s power to, among other things, oversee the operations of qualified systems and thereby ensure the safety of participants’ funds and the efficiency of payment systems.
Among its mandates is to be in the know if insolvency proceedings have been brought against the payment system and the power to cease or suspend proceedings of an operating system if found detrimental in any way.
The central bank has the power to grant licenses to applicants if they have satisfied the requirements necessary. It will enact licensing regulations providing eligibility and procedure of application, under the Licensing Regulations and the Electronic Money Regulations.
So far Aomu says five licenses have been given to MTN, Airtel, Mcash, Micro pay and Interswitch. Other operators await their licenses too.
The concern for consumer protection in the digital space was catered for in the Act. The Central Bank is mandated to ensure payment service providers promote transparency, accountability and confidentiality in the provision of their services.
The Act requires protection of the privacy of participants and non-disclosure of their information unless such disclosure is in accordance with the law, an order of court or consent of the participant or customer as per Section 59 of the Act. This requirement is in tandem with the recently passed Data Protection Act, 2019.
The Regulatory Sandbox Framework
The National Payment Systems Act provides a regulatory sandbox framework. The purpose of the sandbox is to govern the manner in which a person or institution can obtain a limited access level to a payments system’s ecosystem for purposes of testing.
A person who wishes to operate a sandbox, within the provisions and objectives of the National Payment Systems Act will be required to make an application to the Central Bank specifying the location, whether physical or virtual, that is adequately accessible to the Central Bank from which experiments will be developed and where all required records and data will be maintained.
The Central bank may from time to time inspect the manner in which the sandbox is to be conducted and make such decisions as regards the approval to operate as it sees fit, in efforts to maintain the payment system industry.
Aomu says the sandbox framework also means that FinTechs have room to test their product on the market to ascertain its viability.
“Here, FinTechs are allowed to come into the market to test a product. If a fintech is not successful in the first six months they can ask for an extension. When they succeed they can get a licence,” he explains.
Aomu believes that the National Payment Systems Act will not only benefit FinTechs but the entire ecosystem, BOU inclusive. He says success has already been registered by the agent banking model, a well-regulated service now facilitating 85 per cent of transactions deposit. To him, mobile money services are enabling inclusion of the informal sector, an indication that their funds are available for intermediation.
Regulators are aware of the challenges that FinTechs face in relation to the new Act but promise that amendments are possible through continuous engagements with BOU. Recent amendments saw FinTech tiers go from three to six tiers thus accommodating all FinTechs.
“There is an office at BOU dedicated to FinTechs. It has an open policy that will ensure that there is communication across the parties in the sector. In order to benefit from the opportunities and advantages the Act brings, we need to have collaboration of key stakeholders,” Aomu says.
The Executive Director of the Uganda Bankers Association, Wilbrod Owor says the Act is a welcome move because it brings order, oversight, rules, data security systems, operating systems, network systems and corporate governance.
“We are dealing with a lot of money going to a lot of people. The financial sector thrives on the integrity of its systems and therefore it’s important to mitigate any risk,” Owor says.
He adds that FinTechs are huge and necessary partners in the current digital climate therefore as more enter the space, more frameworks are needed. FinTechs, like banks, have embraced the Act despite murmurs in some corridors. Some think the Act will create barriers of entry but all=so stifle growth given its financial implications. However, Financial Technology Services Providers Association at their recent annual conference committed to ensuring their members meet the regulations in place. The rationale? The regulations will not only guide the sector but facilitate healthy growth as well.
Xente’s Founder and Chief Executive Officer, Allan Rwakatungu is currently undergoing one of the licensing processes required under the Act for one of his products.
“Of course, it means more paperwork, a lot of it, and it takes time,” he says as he welcomes the move too.
The FinTech has spent five months trying to meet regulations for one of its products. Regardless of this, Rwakatungu believes that this is a small price to pay for something as progressive as the Act. He says that at an early stage, startups may not see the necessity but once the company grows and gets big clients like government agencies and corporations, there will be a need for trust and assurance that money is safe and this is where regulatory frameworks become crucial.
Another player in the ecosystem, Zofi Cash also welcomes the Act. Chief Executive Officer and Founder of Zofi Cash, Paul Kirungi is particularly in the tier system that allows FinTechs to register under the tier they can afford and then upgrade as the business grows.
“Honestly, I personally look at it as a fair law. If you checked other markets that have put in place similar mechanisms, even for developed countries, they have the same requirements that BOU has set in place,” Kirungi says, adding, “I would rather look at how to meet what is required of me to run a business.”
He says FinTechs should welcome the idea because as players in the infancy of this framework, they have a say in molding it into a policy that serves the industry’s best interests.
The Innovation Village speaks out
Hellen Mukasa, the Legal Lab Lead at The Innovation Village appeals to FinTech startups to read the Act and ensure that they are compliant so as to benefit from it.
“Regulation of the startups in this sector is welcome because it means that the terms of engagement for all players involved are clear. There are benefits to adhering to the law and obvious heavy costs to operating outside regulatory frameworks especially in the financial sector which comes with risk,” she says.
Overall, there is relief among the ecosystem players, with the enactment of the Act. Many startup founders feel that this advancement means that Uganda has embraced the digital economy. This kind of operating environment is expected to open up space for more innovations in the FinTech sector while enforcing safety through the regulations.