By Elizabeth Emongor
Fintech, which is the application of advanced digital technologies in the provision of financial services, encompasses diverse operations, including mobile banking, peer-topeer lending, and digital wallets. In Kenya, fintech has been instrumental in promoting access to a variety of financial services. The FinAccess Household Survey (2021) opines that access to formal financial services has expanded from 26.7 per cent in 2006 to 83.7 per cent in 2021 owing to fintech developments in mobile money and mobile banking. Despite fintech’s promising growth and benefits, concerns about consumer protection persist. The FinAccess 2021 survey denotes that about 47.4 per cent of mobile money users reported the loss of money while transacting in 2021 compared to 8.4 per cent in 2019. The survey additionally showed a significant decline in the use of digital loan applications attributable to competition from formal credit products, harassment during debt collection, and listing of defaulters to the credit reference bureaus. Further, the FinAccess Household Survey (2021) revealed that digital application loan default rates stood at 46.3 per cent, while that of mobile banking loans stood at 50.9 per cent, highlighting the challenges of inadequate financial literacy. Ensuring consumer protection is crucial for a fair marketplace and fostering trust in the adoption of digital financial services. This blog aims to identify ways of promoting consumer protection in the fintech ecosystem in Kenya. The key issues include cybersecurity, data privacy, and financial literacy.
Cybersecurity
Cybersecurity embodies efforts to protect information infrastructure from unauthorized access. This is critical in the advent of digital financial services to minimize financial losses and disruption of services. The financial sector is constantly targeted due to the sizeable funds and sensitive data held. The rapid growth of fintech has attracted the attention of cybercriminals, who exploit vulnerabilities in digital systems to gain unauthorized access to financial information. These cyber threats include data breaches, identity theft, and phishing attacks, which can have severe consequences for both fintech firms and their customers. The Central Bank Stability Report of 2021 revealed that savings and credit cooperative societies (SACCOs) lost about Ksh 106 million within a year to cybersecurity breaches. This demonstrates the need for robust cybersecurity measures and continuous monitoring to detect and mitigate fraudulent activities. Kenya’s cybersecurity landscape, as outlined in the Cybersecurity Strategy 2014, and subsequent legislative measures, demonstrates a commitment to safeguarding critical information infrastructures (CIIs). The establishment of the Kenya Computer Incident Response Team and Coordination Centre and the National Digital Forensics Laboratory reflects a proactive approach. Further, the enactment of the Computer Misuse and Cybercrimes Act of 2018 provides a legal framework, designating the National Computer and Cybercrimes Coordination Committee as the national authority for cybersecurity coordination. The designation of CIIs, outlined in Gazette Notice No. 1043 of January 2022, aims to protect sectors crucial to national security and essential services.
Despite these measures, cybersecurity requires continuous vigilance. In 2023, for instance, a national cyber-attack on the e-citizen and financial institutions platforms halted services for hours, leaving consumers stranded. The 2022 National Cybersecurity Strategy identifies key issues, including the exploitation of ICT vulnerabilities, vendor weaknesses, and a lack of coordinated governance structure in cyberspace. Moreover, insufficient cybersecurity awareness is noted among the public, who tend not to prioritize the protection of important information such as passwords. Fintech firms, therefore, need to focus on investing in advanced security technologies and implementing strict authentication protocols. Furthermore, setting up incident response planning and recovery procedures can improve turnaround time in the event of a cybersecurity attack. The Kenya National Digital Master Plan for the period 2022-2032 has emphasized the creation of smart identity cards as a distinctive identifier, a project that can significantly enhance security through robust authentication methods. Fintech companies can also proactively communicate potential security threats, offer guidance on cybersecurity safeguards, and ensure swift resolution of breaches.
Data Privacy
Data privacy is another key area in the fintech industry, since fintech firms are involved in the collection, storage, and analysis of sensitive financial information. Fintech companies rely heavily on customer data to offer personalized services and improve decision-making. However, this increased reliance on data brings various challenges related to privacy and security, especially where consumer data is misused. The Central Bank of Kenya through the Digital Credit Providers Regulations of 2022 has provided a framework to protect consumers of digital credit products from breach of privacy and unethical debt recovery practices. The guidelines stipulate that credit providers keep a record of customer transactions, create a customer complaints mechanism, provide secure systems, disclose material information, and educate customers. Moreover, in the conduct of debt collection, providers are required to refrain from harassment, access to customer’s phonebooks, and the pursuit of improper debt collection tactics. This initiative corroborates the provisions in the Data Protection Act of 2019, which prohibit disclosure of personal data for purposes unrelated to initial use and without prior authorization.
Further, the Consumer Protection Act of 2012 protects the rights of consumers, prevents unfair trade practices in consumer transactions, and promotes fair and ethical business practices in Kenya. The Act aims to establish a legal framework for a fair, accessible, efficient, sustainable, and responsible consumer market, reduce disadvantages experienced by consumers, and improve consumer awareness and information. The Act also provides for developing a culture of consumer responsibility and empowerment through education, vigilance, advocacy, and activism. The Competition Act No. 12 of 2010 has a mandate to protect consumer welfare in the conduct of business transactions. The Act criminalizes the use of unfair tactics, the use of misleading representations, and the secrecy of charges relating to financial services. The National Information and Communication Technology Policy of 2019 cements the Government’s commitment to protect citizens from fraudulent business practices, enhance consumer education, and restore property that has been violated.
However, despite the existing consumer protection frameworks, data privacy breaches by digital credit lenders are still persistent, and this has necessitated audits and fines to restore ethics in the conduct of business. Digital lenders have been on the spot for the use of unfair tactics in debt collection, and consumers denote the lack of transparency in loan pricing especially where there is default. Enhancing the ability of state agencies to enforce existing cyber security and data protection regulations is therefore critical. This will require planning for resource requirements that include adequate skilled staff, and sensitization programmes for fintech firms to improve their capabilities in complying with the set code of conduct. Improved coordination between regulators will enable knowledge sharing in industry developments and best practices and enhance their ability to adapt to the ever-changing fintech landscape.
Financial Literacy
Financial literacy has become an issue of concern owing to household indebtedness that has emerged as a challenge, particularly in the context of fintech lending. The accessibility and convenience offered by fintech lending platforms have made it easier for households to access credit, resulting in a surge of household debt levels. These platforms often offer loans with higher interest rates with less stringent credit requirements compared to traditional institutions, making it easier for borrowers to accumulate debt. While the emergence of fintech lending platforms has undoubtedly expanded access to credit for many individuals who were previously excluded, it has also intensified the problem of increased default rates among borrowers, as they struggle to meet their financial obligations. The FinAccess Survey of 2021 reveals that at least 46.3 per cent of households defaulted on digital loans, and another 50.9 per cent on mobile banking loans. The FinAccess MSE Survey tracker of 2023 reveals that 60.7 per cent of MSEs defaulted on their loans, with many of the loans being digitally acquired. The survey further highlights that 44.8 per cent of MSEs took loans to cover household expenditures. This shows that there may be insufficient knowledge of the implications of default on credit scores and extra charges incurred by consumers at the time of credit application.
Promoting financial literacy activities, therefore, can empower individuals to make wellinformed decisions about their finances. Improved financial literacy not only facilitates a better understanding of risks but encourages users to objectively evaluate options and steer clear of potential scams and fraudulent activities. Service providers can furnish transparent information on pricing and bolster support services to enhance the quality of products. Promoting financial literacy can be accomplished through education programmes tailored to address specific evidence-based gaps, which may include aspects such as the necessity for financial planning, emergency funds, debt management, expenditure control, and the adoption of financial products. These initiatives can be a partnership between state agencies, and the private sector.
In conclusion, as Kenya’s fintech sector continues to grow, there are increasing concerns about consumer protection. By prioritizing cybersecurity resilience, data privacy compliance, and promoting financial literacy programmes, Kenya can foster a sustainable fintech ecosystem that safeguards consumer interests and promotes the financial well-being in the digital era.
