The double-edged sword: how the fintech companies are leveraging the digital payments and e-commerce proliferation

By Samuel Lartey( Prof) [email protected]

The  financial landscape has experienced a significant transformation over the past decade, driven by the rapid proliferation of e-commerce, virtual payment technologies, and the rise of fintech and techfin companies. These innovations have redefined how Ghanaians conduct transactions, manage their finances, and engage with the economy.

While these advancements have brought convenience and financial inclusion, they have also exposed traditional banks, financial institutions, and customers to new challenges and exploitative practices. This feature explores how fintech and techfin companies are leveraging these changes to their advantage and the broader implications for inflation, market operations, and economic growth in Ghana.

The Rise of Fintech in Ghana: A New Era

In 2009, the Bank of Ghana introduced the Electronic Money Issuers Guidelines, laying the groundwork for the rise of fintech in the country. By 2015, mobile money services had gained significant traction, with the likes of MTN Mobile Money, Vodafone Cash, and AirtelTigo Money leading the charge. The introduction of the Payment Systems and Services Act, 2019 (Act 987), further bolstered the sector, allowing fintech companies to offer a wider range of services, including savings, loans, and insurance products.

Techfin companies, such as global giants like Google and Facebook, as well as local tech firms, have also entered the financial services space, offering digital wallets, online payment platforms, and other financial products. These entities have disrupted traditional banking models, offering services that are often more accessible and affordable than those provided by conventional banks.

Exploitation of Banks and Financial Institutions: The Struggle to Adapt

Ghana’s traditional banks, such as GCB Bank, Stanbic Bank, and Ecobank Ghana, have been forced to adapt quickly to the changing landscape. These institutions, which have long been the pillars of the Ghanaian financial system, are now competing with agile fintech firms that offer more flexible and customer-centric services.

Fintech companies like Zeepay and PaySwitch have capitalized on the inefficiencies of traditional banks by offering faster, cheaper, and more convenient services. For instance, Zeepay’s mobile money services allow Ghanaians to send and receive money across borders with ease, a service that was previously cumbersome and expensive when conducted through traditional banks. These fintech firms have leveraged the regulatory flexibility afforded to them, allowing them to operate with fewer constraints than traditional banks.

Moreover, fintech companies have exploited the extensive customer data that banks have accumulated over the years. Through partnerships and collaborations, fintech firms gain access to this valuable data, which they use to refine their services and outpace traditional banks. Banks, in their quest to stay relevant, sometimes enter into these partnerships without fully considering the long-term consequences, inadvertently enabling fintech companies to erode their market share.

Customer Exploitation: Convenience at a Cost

While fintech and techfin companies have democratized access to financial services in Ghana, they have also introduced new risks for customers. The aggressive marketing tactics employed by some of these companies often push customers towards high-risk financial products, such as short-term loans with high-interest rates, without fully disclosing the potential downsides.

For instance, since the introduction of instant loan services via mobile money platforms in 2018, there has been a significant increase in consumer debt. According to the Bank of Ghana, the non-performing loans (NPL) ratio for the banking sector rose from 18.9% in 2019 to 15.3% in 2021, partly due to the rising consumer debt burden facilitated by fintech companies.

Additionally, the reliance on digital platforms increases the risk of cyber threats. While traditional banks have invested heavily in cybersecurity, some fintech companies may not have the same level of protection, leaving customers vulnerable to fraud and data breaches.

A notable example occurred in 2021, when a major fintech platform in Ghana experienced a data breach that compromised the personal information of thousands of users, exposing them to potential financial fraud.

Impact on Inflation and Market Operations

The rapid growth of fintech and techfin companies in Ghana, coupled with the surge in e-commerce and virtual payment technologies, has significant implications for inflation and market operations. On one hand, these technologies have reduced transaction costs, improved efficiency, and increased competition, potentially leading to lower prices for goods and services.

However, the ease of access to credit and financial products offered by fintech firms has contributed to rising levels of consumer debt, which can drive inflationary pressures. For example, the expansion of mobile money credit services has increased household spending, contributing to an inflation rate that reached 31.7% in July 2023, up from 21.4% in the same period in 2022.

The impact on market operations is also evident in the increased volatility of financial markets. The high velocity of money facilitated by instant payment systems and digital wallets has made the financial system more susceptible to rapid changes in consumer behavior. Moreover, the concentration of financial services in a few dominant techfin players, both local and global, raises concerns about market monopolization and systemic risks, which could destabilize the broader financial system.

Economic Growth: Opportunities and Challenges

The fintech revolution in Ghana has undoubtedly contributed to economic growth by fostering financial inclusion, particularly in underserved areas. As of 2022, mobile money services had reached over 38 million active users in Ghana, significantly expanding access to financial services in rural and remote areas.

However, this growth is accompanied by challenges. The exploitation of traditional financial institutions and the associated risks of market instability could undermine long-term economic stability.

The uneven playing field, where fintech companies operate with fewer regulatory constraints than traditional banks, may also lead to increased inequality. This could exacerbate existing socioeconomic disparities, particularly if the benefits of fintech-driven economic growth are not widely distributed.

Conclusion

The proliferation of fintech and techfin companies in Ghana, driven by the expansion of e-commerce and virtual payment technologies, presents both opportunities and challenges for the country’s financial system.

While these innovations have brought significant benefits, including increased financial inclusion and economic growth, they have also introduced new risks and opportunities for exploitation.

As Ghana’s fintech ecosystem continues to evolve, it will be crucial for regulators, industry leaders, and consumers to work together to create a balanced and sustainable financial environment.

By addressing the inherent challenges and mitigating the risks, Ghana can harness the full potential of fintech and techfin to drive inclusive economic growth and ensure the stability of its financial system.

The post The double-edged sword: how the fintech companies are leveraging the digital payments and e-commerce proliferation appeared first on The Business & Financial Times.

Read Full Story