Role of regulatory oversight in digital payment systems adoption

Most industries around the world have become more efficient with the advancement of technology. These technological advancements are even creating new and profitable industries.

However, as tech-driven companies push the boundaries of convenience and efficiency, regulatory bodies work to establish safeguards that ensure fairness, security, and stability, but this work causes tension between innovators and regulators.

These tensions are not new. From the early days of electricity to the rise of the internet, confrontations between disruptors and regulators have always existed.
But when we take a closer look at the tensions and clashes between innovators and regulators, we see that regulation, rather than stifling innovation, often provides the framework needed for long-term success.

A prime example is the creation of the Securities and Exchange Commission in 1934, following the 1929 stock market crash. The SEC was established to enforce securities laws, mandate transparency, and protect investors, which helped restore confidence in the U.S. financial markets and laid the groundwork for long-term stability.

Today, regulation remains just as important, especially in the rapidly evolving digital payment space. In Africa, where digital payments are booming, strong regulatory frameworks are essential to maintain trust, safeguard consumers, and ensure the growth of a secure, innovative financial ecosystem.

A great way to exemplify the importance of regulation is to look at the early days of banking in Nigeria.
According to a 1989 paper titled *The Evolution of the Nigerian Financial System: Problems, Challenges and Prospects*, the first attempt to create locally owned banks in Nigeria between 1925 and 1952 failed due to imprudent banking practices.
However, the establishment of a regulator, the Central Bank of Nigeria (CBN), ushered in standards that led to the creation of trustworthy banks.

As Nigeria’s financial space evolves, the CBN has been pivotal in ensuring standardized banking practices that have improved financial inclusion and trust in financial institutions. The same can also be said for regulators in other parts of Africa.

Over the years, the adoption of digital payments in Africa has grown significantly. In East Africa, the volume of mobile money transactions went from 18 billion in 2020 to 28 billion in 2022. West Africa also saw a growth from 6.4 billion to 12 billion within the same time frame.

The meteoric rise of mobile money in East Africa, particularly Kenya, is due to the regulatory framework adopted by the Central Bank of Kenya (CBK) and the Communications Commission of Kenya (CCK). While the innovation was new, the CBK ensured minimum standards were met to protect users.

This regulatory flexibility enabled M-Pesa and similar services to innovate rapidly, offering millions of unbanked people access to financial services for the first time. This balanced regulatory approach allowed mobile money to thrive, leading to financial inclusion for millions and transforming the region’s economy.

Although the issue of monopoly by M-Pesa is still a long-standing debate, regulation was key in the growth of mobile money in Kenya.

Besides mobile money, new innovations like blockchain technology are making their way into Africa, and there has been very little progress made in terms of regulation, especially with crypto, one of the applications of blockchain technology.

The innovators in this space are constantly at loggerheads with regulators across the world.

Interestingly, there is a company that is not only trying to innovate payments with blockchain but also building technologies that make regulating payments easier.

Known as Zone, the company has built a regulated blockchain infrastructure that currently serves existing financial institutions in Nigeria. This regulated blockchain creates a network where financial institutions and regulators are connected.

In 2022, it acquired a switching license to make this interconnectedness with blockchain technology happen. The goal is to speed up payments and make it almost impossible for payment errors to occur.

Zone’s technology is intriguing because it is perhaps the first time in any industry where the innovator builds for the market and the regulator. The biggest banks in Nigeria are already on this network, while a major regulator affiliate — Nigeria Inter-Bank Settlement System Plc (NIBSS) — has partnered with the payment company.

The partnership helps NIBSS conduct its Payment Terminal Service Aggregator (PTSA) functions effectively. In simple terms, a PTSA validates a terminal, making sure it meets certain standards before it can execute transactions.

This is an additional layer of security that could slow down transaction time. What Zone has done is to include PTSA functions on its blockchain network, essentially allowing NIBSS to embed PTSA capabilities into each participating institution.

Instead of routing transactions through a switch and then a PTSA, participating institutions can bypass these intermediaries and route transactions directly between each other, while the embedded switch and PTSA functions fulfil the regulatory roles of the switch and PTSA, making everything a seamless peer-to-peer process on Zone’s regulated blockchain.

Innovation and regulation are needed to advance Africa’s digital payment space, and with Zone, both could happen at the same time. But being a new innovation, regulators should perhaps exercise cautious optimism.

The same cautious optimism has enabled the CBN to create policies and regulatory guardrails that have established innovative players like Flutterwave and Paystack as trustworthy players when it comes to payments in the country.

Digital payments have come a long way in Africa, but as McKinsey puts it, there is still a lot of room for growth, and the only way to ensure stability and trust while we achieve this growth is through standardized practices that can be enforced through regulatory compliance.