Regulation and supervision of Fintech Ecosystem in Ghana: A case for hybrid based- regulation

By Dr Richmond Akwasi ATUAHENE

In recent years, the financial industry has seen fast-growing adoption of financial technology, or fintech. Banks and venture capital funds have made sizeable investments in fintech, reflecting their expectations for substantial change in the industry.

In recent years, the financial industry has seen fast-growing adoption of financial technology, or fintech. Banks and venture capital funds have made sizeable investments in fintech, reflecting their expectations for substantial change in the industry.

The provision of financial services is being revolutionized worldwide by technology-driven innovations. This ongoing process, known as FinTech, is described as “technologically enabled financial innovation that could result in new business models, applications, processes, or products with an associated material effect on financial markets and institutions and the provision of financial services” (FSB, 2021).

Fintech is changing the ways in which financial services are delivered, and rapid advances in technology pose new challenges to financial regulation.

Fintech developments have typically been characterized by the unbundling and decentralization of services, rapid changes of technologies and business models, strong economies of scale and cross-border and cross-sectoral expansion, and a focus on retail services.

These developments present challenges for regulators: Traditionally, entities are granted permission to provide financial services based on a supervisory assessment where they need to meet certain minimum standards. Therefore, financial intermediation has traditionally been provided by regulated financial service firms, and regulation is put in place to mitigate excessive risk taking.

Fintech has upended this traditional link between provision of financial services and regulation of risk taking. Regulatory authorities have aimed at safeguarding financial stability while not stifling innovation and more recently have focused on the challenges brought on by Fintech.

Technology is changing the paradigm of financial services and putting pressure on financial sector authorities: pressure to adapt to innovations already advanced in their market, and pressure to foster financial innovation so that their market doesn’t lag behind peer countries.

The past few years have demonstrated that regulations will need to evolve to cover new activities and business models that have been brought about by financial technology (Fintech) as it works to disintermediate the financial services value chain and transform the landscape as a whole.

Technology enabled innovation in financial services are fast reshaping economic and financial landscape—promising customer-centric products and services, delivered with resilience, diversity and depth. Fintech has the potential to significantly disrupt the traditional business model of financial institutions by enhancing efficiencies, reducing costs and expanding access to financial services.

For many years, fintechs were unregulated in many countries as regulators were more focused on traditional banks and banking. Regulations have developed alongside the industry and did not initially fit the new breed of fintechs. This has changed, and fintechs in most countries are now regulated by main national financial regulators. Regulations have, in many cases, been adapted to cater to fintechs.

The regulation of the fintech industry is more complicated than for financial institutions. Fintechs are typically much smaller but still subject to the same intense regulation. They are also likely to operate across several jurisdictions (possibly from an early stage) and will need to comply with different regulations in each region or country. Regulations have evolved to protect financial institutions, their customers, and the wider economy from financial crime. AML and KYC regulation are frequently updated to reflect changes in fraudulent and criminal methods. Wherever fintechs operate – whether in financial services, customer verification, or transactions support – they should ensure the same checks and security as the major financial institutions.

While presenting opportunities, Fintech also presents risks at both the macro and micro levels. Digital disruption however is not new, and we have long been able to summon movies, food, cars and flowers at the touch of a button. However, the impact on the financial sector is different, primarily due to a) the macroeconomic impact it can have on financial integrity and stability, b) the challenges it poses for regulators and policymakers and the potential legal amendments that might be required and c) the risks towards consumers. Policymakers, regulators and supervisors worldwide are finding themselves in a regulatory dilemma when trying to achieve the right balance between enabling innovative Fintech and safeguarding the financial system. financial sector policy framework and the potential risks to statutory objectives are monitored closely and mitigated. The Basel Committee’s Principles for Sound Management of Operational Risk (PSMOR) are highly relevant to fintech developments because they address the inherent risks associated with new technologies and business models in the financial sector. The principles emphasize strong governance, a robust risk management environment, and effective oversight to mitigate operational risks arising from fintech activities.

Policy responses seen across jurisdictions to Fintech can be broadly grouped into: (i) applying existing regulatory frameworks to new innovations and their business models, often by focusing on the underlying economic function rather than the entity; (ii) adjusting existing regulatory frameworks to accommodate new entrants and the re-engineering of existing processes to allow adoption of new technologies; and (iii) creating new regulatory frameworks or regulations to include (or prohibit) Fintech activities.

To support the development of an appropriate legal, regulatory and supervisory framework around the three policy responses, countries have been exploring different regulatory approaches and initiatives designed to promote innovation and experimentation. This paper explores those global regulatory approaches in some detail. Global regulatory approaches can be applied either in combination or solely and are not mutually exclusive. We have classified them into four regulatory approach categories (a) “Wait & See”, (b) “Test & Learn”, (c) Innovation Facilitators (including Sandboxes) and lastly (d) Regulatory Laws and Reform.

Some advocate moving from an entity-based to an activity- based regulatory approach under the principle “same activity, same regulation”. However, there is only limited scope for further harmonising the requirements for different players in specific market segments without jeopardising higher-priority policy goals. In fact, there seems to be a strong case for relying more, and not less, on entity-based rules. The regulatory framework should incorporate entity-based requirements for fintechs in areas such as competition and operational resilience that would address the risks stemming from the different activities they perform. This strategy would not only help regulation to achieve its primary objectives, but would also serve to mitigate competitive distortion.

2.0 Overview of Ghana’s Fintech Ecosystem.

The Fintech industry’s emergence in 2017 significantly impacted the financial services sector, particularly in relation to mobile money and digital-enabled channels for various financial services. The Fintech industry encompasses a wide range of companies that leverage technology to offer financial products and services, often disrupting traditional banking and financial institutions. In the context of the mobile money ecosystem, Fintech companies have played a crucial role in enabling digital financial services such as payments, savings, credit, and investments. These services are often provided in partnership with Specialized Deposit-Taking Institutions (SDIs) and Electronic Money Issuers (EMIs). The enormous prospects of these strategic alliances in driving financial inclusion and cash-lite agenda called for a new regulatory regime to bring FinTech’s under regulatory scope (GCB BANK PLC, 2023). Ghana’s fintech sector is experiencing rapid growth, spurred by a vibrant entrepreneurial ecosystem, increased mobile penetration, and a growing demand for inclusive financial services. With government support, expanding digital infrastructure, and an increasingly favorable regulatory environment, Ghana is positioning itself as a key player in West Africa’s fintech space. Key drivers of growth include digital payment systems, mobile banking innovations, financial inclusion initiatives, and the government’s push for a cashless economy.

The total number of players include 46 licensed Fintech Companies including 34 PSP Enhanced Licences;5 Dedicated Electronic; Money Issuers; 1 special approval (MTN) ((Ghana Fintech Report April, 2024)   The Fintech sector in Ghana has witnessed unprecedented growth in recent years, driven by a combination of factors such as increased internet penetration, mobile technology adoption, and a vibrant startup ecosystem. This transformation has led to new opportunities for businesses and individuals, as well as challenges for regulators seeking to maintain a balance between innovation, consumer protection, and financial sector goals. Digital technology has changed the way the Ghanaian financial service industry offers products and services to consumers.

New financial service business models based on digital technologies, popularly referred to as Fintechs, are enabling inclusive access to financial services across diverse product types including savings, payment, credit, advisory services, investment management, insurance and pensions. Broadly, the regulation of Financial Technology (Fintech) innovations in Ghana can be grouped into Primary and Secondary Regulations with established regulators. The Primary Regulations provide primarily for the licensing, supervision, and regulation of financial products or services while Secondary Regulations generally deal with the management and operations of businesses in Ghana. In the below snap review, we take a look at the Regulatory Bodies providing statutory services for the Fintech Companies and innovations in Ghana. Fintech companies in Ghana are subject to a dedicated licensing regime with the aim to promote financial stability, consumer protection, and innovation in the financial sector.

The Payment Systems and Services Act 2019 (Act 987) is the main legislation which gives the Central Bank, the authority to provide for the licensing of Fintech companies as well as exercise regulatory and supervisory oversight over them. Broadly, three licensing categories have been created namely Payment Service Providers (PSPs), Electronic Money Issuers (EMIs), and Dedicated Electronic Money Issuers (DEMs). Fintech companies operating and/or seeking to operate under any of these categories are required to meet certain minimum capital requirements, governance requirements (fit and proper test for directors and key management personnel), and operational requirements (demonstration of technical and financial capacity to provide the licensed financial services

The development and deployment of digital payment services – the use of mobile payment apps, electronic payment systems, mobile wallets, etc. – without the use of physical cash has become the main offering of Ghana’s Fintech ecosystem. These payment innovations particularly mobile money (Momo) have enabled greater financial inclusion than any traditional financial service channels –despite their risks (Ghana Fintech Report April, 2023)

Ghana’s regulatory approach to the fintech industry is characterized by a collaborative and adaptive framework, primarily overseen by the Bank of Ghana (BoG). The BoG’s Fintech and Innovation Office (FIO), established in 2020, plays a central role in promoting digital banking and the fintech ecosystem. This office is responsible for licensing and oversight of various fintech activities, including electronic money issuers, payment service providers, and other emerging forms of payment. Ghana’s approach also emphasizes regulatory sandboxes, enabling fintech startups to test innovative products and services in a controlled environment. The BoG utilizes regulatory sandboxes to allow fintechs to test innovative products and services in a controlled environment under supervision. With the passage of the Banks and Specialised Deposit-Taking Institutions Act, 2016(Act 930) and the Payment Systems and Services Act, 2019(Act 987), a conducive environment has been created to spur innovative digital financial services without risking the stability of the financial service industry.

However, the dynamism in the digital financial service ecosystem requires regular retooling of the regulatory environment for continuous relevance in the promotion of innovation and the mitigation of emerging risks. To consolidate the gains and further grow digital payments, Bank of Ghana in May 2020 established the Fintech and Innovation Office to drive the cash-lite, e-payments and digitization agenda. The Fintech and Innovation Office is responsible for the licensing and regulation of dedicated electronic money issuers (DEMIS/ Mobile Money Operators), Payment Service Providers (PSPs), Closed Loop Payment Products, Payment Support Solutions and other emerging forms of payments delivered by non-bank financial institutions

In Ghana, the Bank of Ghana (BoG) is the primary regulator and supervisor of fintech operations, with the Fintech and Innovation Office (FIO) overseeing the sector’s growth and ensuring compliance with financial regulations. The Payment Systems and Services Act, 2019 (Act 987) is a key piece of legislation governing fintech activities, particularly those related to payment services and electronic money.

To this end, the Bank of Ghana has established a regulatory and innovation sandbox as an important tool for evolving a regulatory framework supportive of responsible innovations and for nurturing new business models. This framework enables small scale, live testing of innovative financial products, services and business models by eligible financial service providers and start-ups (operating under a special exemption, allowance, or other limited, time- bound exception) in a controlled environment under the supervision of the Bank of Ghana. By this arrangement, innovators are permitted to temporarily test new ideas without being subjected to the full set of regulatory requirements applicable outside the sandbox while addressing users’ and the regulator’s respective concerns.

Fintech solutions have simplified digital payments, allowing individuals and businesses to transact seamlessly in the comfort of their homes and offices. The interoperability of mobile money services in Ghana, introduced in 2018, has further enhanced convenience. By 2021, interoperability transactions reached GHS 299.9 million, illustrating the system’s growing acceptance and use. The Ghanaian government has been supportive of the fintech sector, implementing policies and frameworks to encourage innovation and protect consumers. In 2020, the Bank of Ghana launched the Fintech and Innovation Office to oversee and promote the Fintech ecosystem. This office ensures that regulatory measures are adaptive and conducive to fintech growth.

Regulatory sandboxes allow fintech startups to test their innovations in a controlled environment under regulatory supervision. This approach helps balance innovation with consumer protection and regulatory compliance. The sandbox framework, introduced in 2019, has enabled numerous fintech startups to develop and refine their products, contributing to the sector’s dynamism. Ghana’s adoption of regulatory sandboxes can strike a harmonious balance between fostering innovation and maintaining robust regulation, allowing fintech firms to experiment while simultaneously ensuring adequate safeguards. By drawing from Kenya’s experiences and collectively embracing the path forward, Ghana can develop coherent regulatory frameworks and policy approaches that unlock the full potential of fintech innovation while safeguarding consumer protection and market integrity. While the fintech sector in Ghana shows great promise, challenges such as cybersecurity threats, infrastructure limitations, and the need for continuous regulatory adaptation remain. Addressing these challenges will be crucial for sustaining growth and maximizing the benefits of fintech. Furthermore, increasing collaboration between fintech startups and traditional financial institutions can drive further innovation and market penetration. Fintech is a driving force in Ghana’s economic growth, enhancing financial inclusion, economic efficiency, and overall development. With continued support from the government, increased private equity and venture capital investment, and ongoing advancements in technology and infrastructure, the fintech sector in Ghana is poised for further expansion and impact. The data and case studies presented illustrate the significant strides made and the potential for future growth in this vibrant sector (Shaibu, 2023).

3.0 Typology of Regulatory Approaches

This section seeks to explore the most common regulatory strategies used by financial regulators around the world to address the challenges associated with the rise of fintech. These strategies include the imposition of bans, regulatory passivity, adoption of new legislation, permission on a case- by -case basis, and more interactive approaches such as innovation offices, accelerators and sandboxes. The regulatory approaches observed across jurisdictions could be broadly grouped as follows:

a• Regulatory Passivity (or “Doing Nothing”). The first regulatory strategy potentially implemented to deal with the fintech industry may consist of “doing nothing”. According to this model, based on the idea of a regulatory passivity, financial regulators would not do anything beyond enforcing the regulatory framework and monitoring the market. This regulatory model varies across regulators and fintech matters. On the one hand, some regulators use this model with a “laissez-faire” scope. Regulators opting for this approach seek to let the fintech industry develop first, and then implement regulation or apply existing regulatory frameworks.61 An example of this model was used by China prior to 2015.

Other regulators, however, have decided not to promote specific regulatory initiatives for fintech issues, what basically leads to apply the existing framework. Examples of this latter approach include the regulation of crypto-assets in most jurisdictions around the world, including the United States, the United Kingdom, Singapore and Canada. In these jurisdictions, crypto -assets are subject to securities regulation if the crypto-assets issued by the issuers are considered ‘securities’. If so, the issuance of tokens will be subject to the regular framework for securities regulation. What some countries have done, however, is clarifying the treatment of crypto-assets by issuing some guidelines.

In those cases, however, the regulatory framework remain the same. An exception can be found in Canada though, since the Canadian Securities Administrators (CSA) took jurisdiction over the trading of non-securities on the basis of the relationship between the trading platform and the user forming an investment contract or a derivative. The adoption of a regulatory passivity (or “doing nothing”) approach to promote financial innovation and address the challenges of the fintech industry may create several advantages. For example, the evidence shows that allowing the development of the market without regulating new players and products can promote innovation. For instance, Chinese financial regulators originally (before 2015) chose the ‘doing nothing’ approach for crowdfunding.

   b• Applying existing regulatory frameworks to new business models by focusing on the underlying economic function—for example, regulating digital currency exchanges as money services business or exchanges. Countries with legal and regulatory frameworks that are principles- and outcomes-based have found it easier to extend the applicability of existing frameworks.

c• Adjusting existing regulatory frameworks to accommodate reengineering of existing processes and allow adoption of new technologies—for example, minor tweaks to allow market entry of digital-only banks (digital banks or neo-banks), use of digital forms of ID to open accounts, and adoption of cloud computing for banking services along the lines of existing rules for outsourcing.

d• Another regulatory strategy to promote financial innovation may consist of the enactment of new legislation for fintech companies. Several countries adopted this strategy, such as Hong Kong (with the new licensing regime for neobanks), Germany and Malta (with the enactment of new legislation for blockchain and virtual assets), the United States (with the fintech charter proposed by the Office of the Comptroller of the Currency), and Mexico (with the enactment of a Fintech Act in 2018). The enactment of new regulatory frameworks has the advantage of giving a clear and homogeneous strategy to all market participants. Moreover, the new regulatory framework, if properly designed, may provide a more adequate response to the needs and risks of the current financial services industry.  Creating new regulations to extend regulatory perimeters and introduce specific requirements for new classes of players in the ecosystem—for example, creating a new class of regulated entities for e-money and marketplace lending platforms, and requiring bank providers to offer application programming. interfaces (APIs) to allow other institutions to directly access information and provide services to customers (open banking).

e• Adopting new frameworks to promote innovation and experimentation in areas where the regulatory framework is either unclear or not present. These frameworks include developments like the following: Sandboxes are probably the most popular form of interactive approach to deal with the fintech industry. The term ‘sandbox’ comes from the technology sector, where a “sandbox” represents an isolated testing environment to monitor new software or processes. In the field of financial regulation, the term sandbox is being used with a similar meaning. Namely, a sandbox is a regulatory strategy to promote financial innovation that consist of providing a testing environment where innovators can develop their products under the close supervision of the regulators and usually benefiting from a lower regulatory burden during the testing period. Regulatory sandboxes are structured to allow for experimentation, albeit with restrictions imposed on the scale, duration, and scope to mitigate risk while allowing for demonstration of new technologies and approaches.

*The learning from regulatory sandboxes could then be used to structure the regulatory framework.

*Innovation hubs seek to allow innovators to directly interface with regulators and industry experts to help mainstream innovations. Some countries have decided to implement innovation offices as a first step to interact more closely with the fintech industry. Although the denomination of these offices varies across jurisdictions, they all have a similar objective, identified with promoting interaction between regulators and innovators and, by doing so, facilitating mutual learning.

Under this model, regulators increase their knowledge on financial technology and new business models in technology-based companies. Thus, they will be in a better position to regulate and supervise financial markets. At the same time, developers have the opportunity to solve their doubts about the regulatory framework applicable to their products. Therefore, it can be a mutually beneficial regulatory model. Currently, there are jurisdictions with operating innovation offices. These innovation offices are relatively easy and affordable to implement. They do not require prior regulatory development and they can start as small teams within the regulator or supervisor. These innovation offices can choose to offer a permanent space for interaction, or they can designate spaces for customer service where they can interact with innovators. For example, the LabCFTC of the United States Commodity Futures Trading Commission (CFTC) is an innovation office with specific business hours. In fact, the CFTC team that belongs to the innovation office not only works from Washington DC, headquarters of the CFTC, but also travels around the country opening these interaction spaces for specific days.

*Accelerators seek direct financing to help demonstrate and bring to market new innovations. Some regulators have also chosen to implement accelerators or incubators, which are an additional layer of interaction compared to innovation offices. Accelerators typically provide advice and monitoring to entrepreneurs. An example of an accelerator was created by the Monetary Authority of Singapore through the Global Fintech Hackcelerator. Another example is the Fintech Hive organized by the Dubai International Financial Centre

Each approach has its own pros and cons, and many share similar risks. A combination of the approaches can and has been used by different jurisdictions.

4.0 Challenges and Risks in the Regulating and Supervising of Global Fintech Ecosystem

1. a. Overview of select regulatory challenges posed by global financial technology firms (Fintech) Ecosystem.

According to World Bank (IBRD, 2020) there has been an increasing number of non-bank financial institutions that have come into existence since 2008, and innovation will continue to accelerate. Although there are numerous benefits that Fintech brings, policymakers need to also be cognizant of the risks to consumers and, more broadly to financial stability and the challenges that regulators face in regulating this, as yet, unfamiliar territory As the financial system adapts, concerns arise regarding a range of issues, including: consumer and investor protection; the clarity and consistency of regulatory and legal frameworks, and the potential for regulatory arbitrage and contagion; the adequacy of existing financial safety nets, including lender-of-last-resort functions of central banks; and potential threats to financial integrity. Moreover, the adoption of Fintech may pose transition challenges, and policy vigilance will be needed to make economies resilient and inclusive, so as to capture the full benefits of this emerging trend. This brings a number of challenges for regulators. One of the most prominent challenges of regulating Fintech is that it blurs international borders and creates borderless platforms. Providers can offer services globally, causing complex transaction monitoring for public authorities. This issue is exacerbated as some of the players are outside the scope of regulation and regulation is not harmonized across borders highlighting the need for international co-operation. These include services such as crypto-exchanges, peer-to-peer lenders and those offered by Big Tech players—like Google, Amazon, Facebook and Apple that are entering the realm of financial services.

Another important issue that regulators have had to deal with is the increased disintermediation of the value-chain and the bypassing of traditional intermediaries. This is further complicated by bringing different sectors from finance and technology together with to telecommunications and infrastructure to compete and collaborate as they provide services. Often sectors fall under the mandate of different regulators and call into question regulators’ assumptions about market participants and practices. The rate of adoption of Fintech and the potential for players to scale rapidly and the impact this has on the financial system puts further pressure on the regulator to respond rapidly without necessarily having the full picture. Other issues include the lack of reliable information about the structure and operations of Fintech markets and the fragmentation of the institutional and supervisory setting. The rapid pace of change necessitates regulators to be agile and adapt to the constantly changing environment. To do so, policymakers need to understand how to balance support and encouragement of Fintech and disruptive technologies while also mitigating risks, including macro-fiscal risks of financial integrity and stability. While many Fintech risks might be addressed by existing regulatory frameworks, new issues are arising from new firms, products, and activities that lie outside the current regulatory perimeter requiring adaptation of the framework to facilitate the safe entry of new products, activities, and intermediaries.

1. Overview of select risks posed by global financial technology firms (Fintech) Ecosystem.

Policymakers and financial regulators should be aware of major risks posed by Fintech prior to identifying an approach to regulating it. The major risks posed by Fintech include (but are not limited to):

1. Legal / Regulatory Risks:

To the extent that Fintech activities are novel and are not appropriately covered by existing legislation, requiring legal and regulatory frameworks to adapt. This may be even more prevalent when considering cross-border activities. Moreover, due to the novelty of the products, services and players, the correct legal / regulatory response is not always clear. As a result, jurisdictions may buck the trend and swing towards particular approaches which may not always be the most appropriate option given the context of a particular jurisdiction.

1. Oversight, Risk Management and Governance

The due diligence on Fintech firms could be somewhat less rigorous than for regulated firms that sit clearly within the regulatory perimeter introducing a risk of potential regulatory arbitrage. This could introduce contagion, dependency or even concentration risk that might not be mitigated in a timely manner. In addition, the rapid pace of change makes it more difficult for authorities to monitor and respond to risks in the financial system (including general business risk), especially given the limited availability of relevant data and indicators.

• Lack of coordination:

Efforts toward adapting legal and regulatory frameworks to new innovations often span across different ministries, departments and agencies, who often have parallel and overlapping supervisory and regulatory functions. Without proper coordination, including clear lines of communication with other relevant stakeholders and institutions involved (both domestically and internationally), policy frameworks may become fragmented, designed inappropriately, or result in policy gaps, all which can impede the development or diffusion of innovations and limit efforts to promote stability and inclusion.

1. Consumer Protection and Capabilities:

Vulnerable population groups do not always possess the required skills and experience to appropriately use digital financial products and services. As a result, new risks like fraud (i.e. digital ponzi schemes) or theft (i.e. data breaches from a P2P platform) are compounded for vulnerable consumers who are using digital channels to often enter the financial sector for the first time. In addition, insufficient digital disclosure, redress and transparency by new providers put depositors and investors at higher risks.

1. Cyber risks. Cyber-attacks are becoming more prevalent, and the susceptibility of financial activities to cyber-attacks is higher as products and services continue to migrate to digital platforms, particularly as different entities become more inter-connected and platforms are opened or shared. The greater use of technology and digital solutions expand the range and number of entry points for cyber-attacks. In this regard, Fintech activities could increase the overall vulnerability of the consumer as well as the financial system to cyber risk.
2. Consumer Protection and Capabilities:

Vulnerable population groups do not always possess the required skills and experience to appropriately use digital financial products and services. As a result, new risks like fraud (i.e. digital ponzi schemes) or theft (i.e. data breaches from a P2P platform) are compounded for vulnerable consumers who are using digital channels to often enter the financial sector for the first time. In addition, insufficient digital disclosure, redress and transparency by new providers put depositors and investors at higher risks

• Data: Transparency, privacy and ownership.

With the rise of open banking, Fintech, BigTech and alternative sources of data, newer players have access to customer information given the nature of interaction with the customer. Privacy is an important element of trust in a service, but transparency is also needed to reduce transaction costs. Getting the balance right and answering questions around the ownership, usage and jurisdiction of the underlying data and transactions remain an important consideration for regulators

• AML/CFT risks.

Fintech can be used to conceal or disguise illicit origin or sanctioned destination of funds, facilitating money laundering or terrorist financing, and the evasion of sanctions. In the case of crypto-currencies, for instance, their traceability is limited due to user anonymity and anonymizing service providers that obfuscate the transaction chain. The decentralized nature of governance along with the anonymity offered by these platforms has created additional vulnerabilities that require regulatory responses.

1. Third-party reliance.

Some Fintech activities can increase third-party reliance within the financial system. Disruptions to these third-party services may pose wider systemic risks the more central these third parties are in interconnecting multiple systemically important institutions or markets. In some cases, the third parties may not be financial institutions (e.g., cloud services) and hence not subject to financial regulation and supervision.

1. Business Risk of Critical Financial Market Infrastructures:

If innovative payment and settlement services grow into critical FMIs, they could introduce a stability risk—for example, general business losses can have the potential to impair the provision of critical services and interfere with recovery or an orderly wind down. Some of these critical services may be provided by a parent company with other business lines, such as technology or data aggregation, which may sometimes conflict with the offering of financial services.

1. Contagion risk: For instance, large losses hitting a single Fintech firm could be interpreted as indicating potential

losses for the whole sector and lead to contagion effects.

Contagion risk may also be raised by increased access and

problems associated with weak ‘links’ between the multiple entities involved within a particular financial activity.

• Disintermediation: Digital currencies and wallets could themselves displace traditional bank-based payment systems, while aggregators could become the default means of accessing banks and applying for new bank accounts and loans. Oligopolies or monopolies may emerge, for example, in the collection and use of customer information, which is essential for providing financial services.

4.0.  Principles and Policy Considerations for the Regulation and Supervision of Fintech Ecosystem

1. Proportionality as an Overarching Principle for Responsive Supervision to foster financial inclusion.

This overarching principle emphasizes that supervisors should consider the level of risk and economic impact of FinTech activities, recognizing that, in the region, these do not involve financial intermediation or maturity transformation. Therefore, the supervisor must adapt their processes and allocate resources considering the risk profile of the FinTech firms under their supervision.  FinTech activity risks in the region are mostly concentrated in transactions involving retail customers. This requires more intensive efforts to detect problems with a firm’s ability to avoid market misconduct, as a failure to mitigate these risks has a significantly negative impact on financial inclusion. This principle is also consistent with the BCBS Core Principles for effective banking supervision (BCBS, 2019), specifically Principle 8, Supervisory approach, as well as Recommendation 1 (Assessing risks and applying a risk-based approach) issued by the FATF in its 40.

ii…Technology Neutrality:

A more specific principle for the supervision of FinTech activities is technology neutrality. This denotes that the supervisory process should focus on the functionality of the FinTech products and services, irrespective of the technology used. The experience with e-Money services in the African region shows that allowing financial innovation based on new technologies can have substantial benefits to the economy and financial inclusion. But it is also important to recognize that these technologies are constantly evolving, for example, with the ongoing substitution of financial services based on text messages to more secure ones using data-intensive communication channel. Technology neutrality is not yet considered an international standard. Instead, standard setting bodies and several national authorities explicitly state that their principles and processes are technology neutral. This includes the FATF standards, 34 and similarly, the Financial Stability Board, which in its assessment of the financial stability implications from FinTech,35 recommends that supervisors adopt an approach that is technology neutral.

iii…Cooperation and Collaboration

As FinTech activities blur the traditional delimitation of financial markets and national boundaries, it is important to analyse developments and design policies with the widest view. For this purpose, supervisors should actively seek to exchange information and experiences on FinTech with other authorities, both within their jurisdiction and internationally. Authorities should also consider joint approaches to supervise FinTech activities straddling different financial segments or those that operate across borders. This principle is analogous to those recommended for banks by the BCBS’s Core Principle 3 (Cooperation and collaboration) and the FATF’s Recommendations 2 (National cooperation and coordination) and 40 (Other forms of international cooperation).

iv…Clear Supervisory Purview and Enforcement Power

To develop a set of effective policies, it is necessary

that the legal framework affords the supervisor with

an appropriate mandate to engage in the oversight

of FinTech firms. Also, the regulatory framework

must provide the authority with the powers to apply

corrective action. As with traditional financial

institutions, the supervisor’s goal is to ensure financial stability, through prudential supervision and consumer protection, through the supervision of market conduct.

Given the evolving nature of FinTech activities, this will require a dynamic approach from the authorities, the use of technology in its processes, and continuous evaluation of emerging trend. This principle is similar to BCBS’s Core principles 1 (Powers) and 4 (Permissible activities), and the FATF’s Recommendations 26 (Regulation and supervision of financial institutions) and 27 (Powers of supervisors).

5.0 Research Methodology

To assess and evaluate the financial regulation and supervision the fintech eco-systems in Ghana using literature analysis. The investigation is qualitative and is based on the literature. Information is compiled from secondary sources, such as academic Journals, news pieces, reports, and websites with Research articles. The research includes an analysis of papers that were published in different journals.  By integrating global literature produced between 2014 and 2025, this study will add to the corpus of existing literature by offering a perspective on the multi-faceted financial approach is needed in the global fintech ecosystem regulation to maximize the advantages from the underlying technology and to manage the risks arising from regulatory arbitrage and the interconnectedness within the fintech ecosystem, as well as the potential of spillover into the traditional financial systems.

6.0 Literature Review on Global Fintech Regulatory Strategies and Approaches

Fintech is changing the ways in which financial services are delivered, and rapid advances in technology pose new challenges to financial regulation. Fintech developments have typically been characterized by the unbundling and decentralization of services, rapid changes of technologies and business models, strong economies of scale and cross-border and cross-sectoral expansion, and a focus on retail services. These developments present challenges for regulators: Traditionally, entities are granted permission to provide financial services based on a supervisory assessment where they need to meet certain minimum standards. Therefore, financial intermediation has traditionally been provided by regulated financial service firms, and regulation is put in place to mitigate excessive risk taking. Fintech has upended this traditional link between provision of financial services and regulation of risk taking. Regulatory authorities have aimed at safeguarding financial stability while not stifling innovation and more recently have focused on the challenges brought on by both Fintech and BigTech.

In the following, a taxonomy of different approaches will be given ranging from activity- based regulation to outright prohibition of new services. Various global regulatory approaches have been adopted or are being considered by regulators and policy makers. This section discusses some jurisdiction examples pertaining to a wide spectrum of regulatory approaches such as activity based, entity based, risk-based, self -regulation, tech neutrality regulation and outright prohibition (World Economic Forum, White paper, May 2023 and Lehmann, 2020).  Despite the lack of global standards for (or adapted to) fintech, Ghana must seek to embrace the fintech promise must adopt appropriate regulatory and supervisory arrangements. According to Pazarbasioglu et al. (2020) the policy response to fintech should aim at: (i) identifying, mitigating and addressing risks to financial stability and integrity, (ii) safeguarding consumer protection (iii) enabling new players and approaches, (iv) promoting competition, and (vi) fostering consumer demand and confidence. But designing and implementing such a balanced policy response can be challenging in the absence of global fintech standards and approaches.

1. Risk-Based Regulation

Firstly, risk-based regulation has gradually become the predominant approach to the regulation and supervision of financial markets around the world. “Risk-based approach” (RBA) is a related concept in which regulatory and supervisory measures are applied based on the risks posed by the activities or entities taking into account limited supervisory resources.  As a general principle, any fintech firm that carries out a regulated activity should fall in the regulatory perimeter and be regulated and supervised as a provider of that service. In addition, under a risk-based approach, a non-exhaustive list of considerations would include: (i) the nature of the activity being conducted, (ii) the size of the market, and (iii) potential risks if left outside the perimeter, including for consumers, financial markets, and overall financial stability due to its interlinkages (in some cases, a fintech activity may entail few risks in isolation but when provided by a firm that carries many other activities, the risks can become systemic). Under this model, there is a comprehensive risk assessment within the financial system. Risk-based supervision has a normative emphasis on focusing on what should really matter to the regulator: assessing the level of risk generated by certain actors and activities and implementing regulatory strategies to address those risks in a comprehensive manner. Therefore, this approach not only seeks to address individual risks but also the risks for the entire financial system. In addition, under this approach, there is a permanent monitoring activity by the regulator, since the risks might be evolving or changing over time. In our view, this approach seems more suitable for the current fintech issues, characterized by rapid changes and technological developments. Materiality and proportionality that characterized the risk-based approach, are critical factors to adequately regulate financial technologies. When the risk posed by new technology becomes material, then regulation should be proposed, and the regulation must be proportionate to the risk posed. Regulating prematurely may stifle innovation and potentially derail the adoption of useful technology.

The Risk-Based Approach (RBA) is a strategic regulatory framework that focus on proactively identifying and managing the potential risks of money laundering and terrorist financing that a business may encounter. It involves a systematic assessment of these risks, aligning them with robust and effective control measures. Regulators and supervisors must identify risks arising from three main fntech-related drivers, namely the increasing reliance of financial services firms on technology, the increasing interconnectedness within the financial sector, and the prospect of greater concentration and herd-like behavior. FinTech should be treated as any other financial activity, hence, a risk-based approach is justified. In most scenarios, FinTech products and services specifically targeting the financially excluded have very specific inherent risk.

1. Principles Based Regulation

Secondly, principles-based regulation aims at meeting regulatory outcomes. The idea behind this objective is that entities should pursue goals (e.g., protecting the interest of the consumers), rather the following procedures, and the explain to the regulator how they achieve these goals. Principles-based regulation in the fintech industry focuses on setting broad guidelines and outcomes rather than specific rules, allowing for flexibility and adaptability to the rapidly evolving nature of financial technology. This approach emphasizes core values like financial stability, consumer protection, and market integrity, encouraging firms to embed these principles into their operations Principles-based regulation defines desired outcomes rather than dictating specific methods for achieving them.

Therefore, this approach differs from the rule-based approach that was adopted in the past, or is adopted in other areas. Advocates of the rules-based approach argue that principles-based approach does not provide legal certainty for market participants and it is reduced to de-regulation or lax regulation. Nonetheless, in practice, it is rare for to have either a purely principles-based or a purely rules-based regulation. Rather, they represent two ends of the regulatory spectrum in most cases. Every principles-based regulatory regime has some rules, and every rules-based regime has some element of principle. The appropriate mix of each will depend on a number of factors, such as the regulatory objective, maturity of the market, the characteristics of market participants, and quality of the regulator. However, in our opinion, a principle-based regulation is more appropriate for most fintech matters due to the inability of the regulator to catch up with the market and to give enough room for innovation. Principle-based regulation offers a promising approach for governing the fintech industry, balancing the need for innovation with the need for stability and consumer protection. However, its success depends on careful design, effective implementation, and ongoing monitoring to ensure that it achieves its intended outcomes and adapts to the ever-evolving fintech landscape

1. Activity Based Regulation

Thirdly, we also think that activity-based regulation is more appropriate than an institution-based approach, especially in this new era of financial technologies. Strictly understood, an institution-based approach involves the imposition of different rules for different entities even if they perform similar functions or they create similar risks. Thus, leaving aside other considerations (e.g., fairness, antitrust issues, level playing field), this approach not only can create regulatory arbitrage and shadow banking but it can also be insufficient to address individual and systemic risks generated in the financial system. The activity-based approach to regulation in a fintech context might be challenging given that a firm often provides a product or service and in the process. Activity-based approach is when regulations are applied to any person or firm that engages in certain regulated activities, for example, facilitating the buying and selling of investments or operating lending activities. Activity based regulation strengthens the resilience of a systemically important activity directly, by constraining entities in their performance of that activity alone.  Activity-based regulation in the fintech industry focuses on establishing broad guidelines and expectations for financial conduct rather than detailed rules. This approach emphasizes values like transparency, fairness, and accountability, allowing for flexibility to adapt to the rapidly evolving fintech landscape. It encourages firms to internalize these principles and apply them to their specific contexts, fostering innovation while mitigating potential risks. Activity based regulation strengthens the resilience of a systemic activity directly, by imposing restrictions on how entities perform this activity alone, ie on a standalone basis. Activity based regulation does not vary with the type of entity that performs the activity or to the other activities that the entity performs. However, it can vary with the importance of an entity for the functioning of the activity. The banking industry has frequently stressed (IIF (2017)) that regulation could promote a level playing field through the adoption of an activity-based approach, as opposed to an entity-based one. That would mean imposing similar requirements upon all active players in a particular market segment, regardless of the legal nature or other characteristics of those entities and, in particular, whether or not they hold a banking licence. The Asian regulatory approach has become generally proactive, with the issuance of specific activity-focused regulations at an early stage of market development.

1. Entity Based Regulation.

Fourthly, entity-based approach allows the regulatory framework to be principle based, flexible, and proportionate to the risks of the entity and its wider group. Entity-based approach is when regulations are applied to licensed entities or groups that engage in regulated activities (such as deposit taking, payment facilitation, lending, and securities under- writing). Requirements are imposed at the entity level and may include governance, prudential, and conduct requirements. The entity-based approach may facilitate a level playing field by applying specified rules equally to all firms in a given activity. A robust regulatory framework should lay the foundation for effective supervision of financial institutions, and while approaches differ across jurisdictions, two approaches are prevalent: entity-based regulation and activity-based regulation. Entity-based approach is when regulations are applied to licensed entities or groups that engage in regulated activities (such as deposit taking, payment facilitation, lending, and securities under-writing). Requirements are imposed at the entity level and may include governance, prudential, and conduct requirements. Implementation of those regulations is supported by a number of supervisory activities (such as offsite monitoring and onsite inspections). The entity-based approach can be built on principle-based regulations that allow more flexibility, relying on governance arrangements and oversight. Importantly, a continuous engagement between supervised firms and supervisors allows for the monitoring of the buildup of risks and the evolution of business models. Supervisors normally have a range of early actions that can be taken to modify firms’ behaviour that could lead to excessive risk taking and instability. Supervisors can take enforcement actions (such as fines and revocation of licenses), but there is usually a ladder of interventions to achieve supervisory goals. Entity based regulation strengthens the resilience of activities indirectly, by imposing restrictions on their combination at the level of entities. Entity based regulation strengthens the resilience of activities indirectly, as it is calibrated at the level of the entities that perform them. It restricts those features of an entity that affect the risk and repercussions of its failure. Since an entity’s resilience hinges on the mix of its activities, Entity based- regulation imposes constraints on the combination of those activities

1. Self-Regulation

Fifthly, self-regulation, one way to draft efficient rules is through the industry itself. In many areas, codes of conduct, best practices, or other measures adopted by self-regulatory organizations can play an important role. Firms have an interest in ensuring a level playing field, excluding unfair competition, and maintaining the reputation of their industry. Self-regulation within the FinTech sector could be one way of achieving this delicate balance. By pivoting towards a culture of self-governance, FinTechs could proactively set and adhere to industry standards and best practices. This approach could empower the sector to demonstrate its commitment to responsible conduct and innovation even in the absence of formal regulation. Through collaboration, the sector could collectively identify and address challenges, foster an environment where innovation flourishes, and guide shared commitment to ethical business practices. The advantage of adaptability to rapid technological advancements and evolving market dynamics could also be achieved by self-regulation. In essence, the path of self-regulation could enable the FinTech sector to align growth with self-imposed standards, be answerable to peer demands, and be guided by exemplary conduct norms. Appropriately designed, self-regulation can usher in self-discipline, imbibe high levels of internal governance and foster an environment conducive to an organised and orderly development of the FinTech sector. Self-regulation necessitates a well-defined structure based on consensus and co-operation amongst the entities. By participating in self-regulatory organizations and subscribing to their codes, firms may signal to the market that they are particularly trustworthy. When they are unwilling to participate or try to free- ride, it is also possible to force them by law to comply. Indeed, some countries, such as the United States and Switzerland, require that FinTech providers join self-regulatory organizations Self-regulation presents a number of advantages over state regulation: first, it incorporates the experience and expertise of the industry representatives, who are the most knowledgeable about industry problems. Second, the fact that the obligations are drafted by those who are subject to them ensures a higher rate of compliance. Third, the cost of information, monitoring and enforcement may be lower. Lastly, industry rules are not territorially limited and can be adopted on a worldwide scale. In this way, the mismatch between the perimeter of the regulator and the scope of the market can be eliminated. There is no doubt that codes of conduct and similar measures can contribute to better governance of FinTech. They can increase investor protection and enhance the reputation of the industry. Yet despite these benefits, it would be naive to blindly rely on self-regulation. It is unlikely the industry will adhere to socially optimal norms as it is more likely to increase its profits by adopting rules at the expense of the public interest. The industry has a strong incentive to conduct itself below socially desirable norms. This weakness of self-regulation was particularly apparent with the global financial crisis. It is difficult for private rule-making to conceive of and address this flawed incentive structure. The problem is compounded by industry peculiarities that make collective action difficult: providers may come from any part of the world, which encompasses different values, business models and cultures. Due to their global spread, a close relationship between industry representatives is unlikely to develop. Each of these problems creates obstacles for self-regulation. Therefore, exclusively relying on self-regulation by the industry alone is not a viable option. That does not, however, exclude a renewed model of self-regulation, where regulators set clear goals to practice and monitor compliance. This path is increasingly adopted by regulators. For example, the Swiss Financial Markets Authority (FINMA) sets mandatory minimum standards for the creation of industry codes of conduct. FINMA calls them “minimum standard for minimum standards.” This new method seeks to combine the virtues of self-regulation with those of state regulation. Yet by limiting state intervention to the “minimum of the minimum,” the state reduces its grip ever further. The industry standard will not succeed without some form of state intervention. Given the limited territorial jurisdiction of FINMA, the standards can only affect those self-regulatory bodies and industries that are within the remit of the Swiss authorities. They do not extend to outsiders, putting into doubt its usefulness and effectiveness (Lehmann, 2020).

f…Tech Neutrality Regulation.

Sixthly, tech neutrality in fintech regulation means that regulators should not favor or discriminate against any specific technology used by financial technology (fintech) companies. Instead, regulations should focus on the functions and risks associated with the services being offered, regardless of the underlying technology. This approach allows for innovation while ensuring financial stability and consumer protection. Regulations should target the specific financial activity or risk, not the technology used to provide the service. A technology-neutral approach helps create a more competitive market where different players can compete based on the value they offer, rather than on the technology they use. Regulators can focus on identifying and mitigating risks associated with financial activities, regardless of the technology, helping to maintain the stability of the financial system Though it is true that FinTech cannot be left to regulate itself, one may at least try to adapt current regulatory rules so as to not block its development. Many FinTech initiatives by legislatures and regulators around the globe have precisely this aim. A key principle is “tech neutrality,” i.e., the requirement that regulation should treat traditional financial services and FinTech on an equal footing. One can discern two versions of Tech Neutrality. The first is tech friendly and tries to treat FinTech similarly to traditional modes of operation. Most modern legislation dealing with FinTech fall into this category. One example is a California statute that allows residents to pay for state services with traditional currencies or with bitcoin. Similarly, the Swiss FINMA accepts the use of video and online identification of clients as being compliant with its anti-money laundering legislation. For FinTech firms, this development is good news because it allows them to compete with traditional operators. These new rules are designed to introduce more consumer choice and competition. In the eyes of the proponents of Tech Neutrality, this principle is necessary to create a level playing field between traditional and modern financial service providers.  Tech Neutrality can be also understood in the opposite sense, for example, that tech firms should have to obey the same rules as traditional service providers. According to this view, new technologies should not benefit from any exceptions, amendments, or accommodations to existing rule.  If one applies this reasoning to FinTech providers, they would have to obey, for example, the same rules regarding capitalization and governance as a classic “brick-and-mortar” bank. They would also be subject to the full breadth of provisions on money laundering and the prevention of terrorism financing. Bitcoin exchanges, for example, could not rely on the particular anonymity that comes with the virtual currency, but would have to identify their clients in the same way that other financial intermediaries do. It would also not be possible to allow video and online identification to accommodate the business model of online payment service providers. In the view of its proponents, this version of tech neutrality is necessary to avoid an unfair competitive advantage to new market entrants over the incumbent firms and to maintain a level playing field that is not distorted toward the technologically driven offerings. Both of these strategies will encounter difficulties due to the restricted scope of the adopted rules. For instance, the permission by California to issue alternative currencies is restricted to corporations organized under the law of that state. Similarly, it would be difficult to enforce a state law requiring FinTechs to identify clients domiciled outside the territory of the state that has adopted it. Moreover, it would necessarily conflict with potential rules of other authorities given the transnational nature of FinTech services. In sum, rather than eliminate the problem of global regulation and supervision of FinTechs, Tech Neutrality rules heighten it. The states that provide for technological neutrality can do so within their territory or for those providers over which they have enforcement powers, limiting the practical effects of these rules. At the same time, the divergence of national rules with regard to Tech Neutrality creates a problem for the global business model of FinTechs (Lehmann, 2020).

Some examples of Tech Neutrality in Fintech are European Union and Swiss Financial Market Supervisory Authority

The European Union’s Second Payment Services Directive (PSD2) requires banks to provide secure access to customer data through APIs, enabling third-party providers (TPPs) to develop innovative financial products and services. This directive promotes technology neutrality by allowing banks and TPPs to communicate using secure channels, regardless of whether they use a bank’s existing online banking interface or a dedicated interface. FINMA, the Swiss Financial Market Supervisory Authority, recognizes the need for technology-neutral regulations regarding digital identification. They have established rules for online and video identification, ensuring that the process is equivalent to traditional methods while acknowled Read Full Story