In this week's podcast episode - Follow the Money, Part Two - we explore how money moves across borders and within the African continent.

An important consideration here is regulation. Most remittance companies that enable the movement of money from the US or Europe to the continent are only licensed to receive money in African markets. To enable the sending of money out of these countries is an entirely different regulatory requirement.

Whether companies believe that to operate in this space, as sender countries, is not "worth it" because of low volumes, or whether regulation prevents them to do so, the end result is inaccessible and/or expensive options for consumers trying to send money across borders in Africa.

Whenever we talk about high-growth, venture-scale startups, the continent's fragmentation plays a recurring role in that discourse. It's not only operationally challenging but also expensive - in some cases prohibitively so - for companies in licensed sectors to expand across the continent.

We've wondered out loud how many countries a given company needs to operate in to call itself "pan-African". And an important corollary is why companies need to be pan-African in the first place.

The reality is that most African markets (with few exceptions) are sub-scale, so growth will come from entering new markets. If building or investing in Africa is a bet on a billion-plus and growing population, pan-African expansion is requisite.

And here lies the dissonance - while regulation plays an important role in protecting consumers, in fragmented markets it's regulation that makes it difficult for startups - those that are perhaps best positioned to service consumers with more innovative and inclusive offerings - to expand into markets in which its citizens may benefit.

A conversation about growth and expansion feels increasingly academic without also discussing the realities on the ground, and the need for regulatory harmonization to reduce such fragmentation.

Regulation, I must admit, is a topic I've been eager to avoid talking about on The Flip. But avoid no longer.

One license, one market

Let's start with the problem.

For the majority of countries on the continent, licenses are issued on a market-by-market basis. While this may be in and of itself problematic, what further compounds the problem is the disparate requirements across markets.

In Nigeria, there are different licenses for different payments services: switching and processing, mobile money operations (MMOs), payment solution services (PSS) - of which there are Super-Agent, Payment Terminal Service Provider (PTSP) and Payment Solution Service Provider (PSSP) licenses - and a regulatory sandbox. Whereas in Zambia, much of the above falls under the Payment Service Business (PSB) license.

In Ghana, Payment Service Providers (PSPs) are required to put up a minimum capital requirement, and additionally any entity applying for a PSP license must have at least thirty percent equity participation of a Ghanaian. The PSP must also have a board of directors with whom at least two members, including the CEO, are residents in the country.

To ensure regulatory compliance across multiple markets means not only licensing - and properly determining what licenses apply to a company's products or services on a market-by-market basis - but, in many cases, capital requirements on a market-by-market basis, organizational and operational considerations on a market-by-market basis, and so on. It's precious manpower and money spent not on operating, but on merely enabling that a company can operate in a given market.

In light of this overwhelming complexity, there may be an inclination to avoid regulation altogether - regulators are too slow, they don't understand, their sandboxes aren't meaningful.

But even if some startups are proactively engaging with regulators, it strikes me that fragmented regulation is such an overwhelming challenge that there's a commensurately overwhelming need, a moral imperative, to engage with regulators to a much, much greater extent than ever before.

Working with regulators

I was recently introduced to and read Leaving the Tarmac: Buying a Bank in Africa, in which Aigboje Aig-Imoukhuede tells the story of acquiring and building Access Bank into a leading Nigerian financial institution.

In it, he talks of the crucial importance of working with regulators,

The position of governor of the CBN has always been important, especially given the peculiarities of Nigeria's economy, and in view of our many economic challenges the role of the CBN is contentious and can from time to time be controversial.

Aigboje recounts a story from 2003 in which forty banks, found guilty of foreign exchange malpractice, were sanctioned from the CBN and banned from FX markets for at least a year. Access Bank executives had also committed malpractice prior to Aigboje's takeover of the bank, so the new executive team proactively investigated and self-reported their infractions to avoid any sanctions altogether.

In another instance, in June 2004, then CBN governor Professor Charles Soludo convened a meeting of the banks in Abuja and sprung on them the news that the CBN was raising the minimum capital requirement from 2 billion to 25 billion Naira, and that all banks who did not meet the minimum requirement by the end of 2005 would have their license withdrawn (Access Bank's capital at the time was about 4 billion).

In the book's forward, President Olusegun Obasanjo, Nigeria's president at the time of this regulatory change, wrote positively of the government's consolidation strategy to engineer "mega-banks" in Nigeria, able "to catalyse the growth of the real sector and finance large infrastructure projects".

There are two lessons - one is the benefit of working proactively with regulators. And two, the realization that governments and regulators are always going to have larger objectives that may run contra to the strategies or desires of regulated entities, including both fintechs and corporate banks. This, perhaps, makes lesson number one even more important.

I don't mean to say that fintechs are not proactively engaging with regulators. But it strikes me that the degree of regulatory fragmentation, as illustrated above, makes regulator engagement and collaboration of paramount importance.

And it shouldn't be limited to just domestic regulation.

In this era of the African Continental Free Trade Area and ECOWAS' endeavor to launch the unified Eco currency in West Africa, should we be talking more about regional and continental regulatory cooperation and harmonization?

This week's episode features Stone Atwine, the Co-founder and CEO of Eversend. He talks about the challenge of building and scaling a fintech company across the continent - needing to handle regulation, partnerships, etc. on a market-by-market basis - and compares that experience to

...our European counterparts can just go to Solarisbank or Railsbank and they basically take care of every single thing… In Africa, on the other hand, there's no single player who's providing this kind of infrastructure, so you actually have to build it out yourself, which is extremely, extremely difficult.

Of course, European fintech companies benefit from the regulatory harmony across the European Economic Area (EEA). Banking-as-a-service companies like Solarisbank and Railsbank provide the infrastructure, and through their banking licenses in Germany and Lithuania respectively, give their fintech customers regulatory cover across the EEA.

Is a comparable regulatory environment in Africa feasible?

Entrepreneurs and fintech operators are increasingly engaging with regulators and government. We're seeing it in places like Nigeria after the crypto ban, and in Zambia under President Hakainde Hichilema's new government.

Domestic regulatory improvements are important, but the tech ecosystem's ambition cannot stop there. In order for the fintech opportunity to be fully realized, regional regulatory harmonization and/or integration must be the end goal.

It starts by talking to regulators and talking about regulation even more.

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✌️ Justin

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