Consumer protection and the role of the financial regulators was the focus of the NDIC annual FICAN conference held in Yola, the Adamawa State capital, from 10-12 December 2019.
The topic could not have been more apt than now when there is a renewed commitment by regulators to neutralize the efforts of criminals to undermine consumers of digital financial services (DFS) by exploiting the latter’s vulnerabilities in an increasingly digital and data-driven world.
There is a Consumer Protection Department at CBN and two consumer desks at the NDIC, which shows a national commitment to provide safety nets to consumers.
Digital financial services (DFS) have been defined as financial operations using digital technology, including electronic money, mobile financial services, online financial services, i-teller and branchless banking, whether through a bank or non-bank institutions. It can encompass various monetary transactions such as depositing, withdrawing, sending and receiving money, as well as other financial products and services including payment, credit, saving, pensions and insurance. DFS can also include non-transactional services, such as viewing personal financial information through digital devices.
It is only as recently as 2018 that the G20 countries came up with a non-binding policy guidelines on financial consumer protection in the digital age, indicating the fact that regulation in this sector is just emerging.
The Nigeria Deposit Insurance Corporation (NDIC) is aware of the paucity of regulatory policy initiatives in this sector and is therefore providing a platform for stakeholders in the nation’s financial sector to rub minds on how to better the economy and protect the consumer. This is the essence of the Financial Correspondents Association of Nigeria (FICAN) workshop, sponsored by Nigeria Deposit Insurance Corporation (NDIC) annually.
The 16th edition of NDIC/FICAN workshop was refreshingly intellectual and went a long way in adding value to the general public’s financial literacy in the country. The high points of the annual workshop’s brilliant discussions around developments in the financial sector focused attention on the protection of the consumer by the financial regulators. The MD/CEO of NDIC, Alhaji Umaru Ibrahim, was ably represented at the occasion because of the value he put on promoting financial literacy and his commitment to financial journalism practice. It is not surprising that the MD declared in his opening remarks that “with the recourse to technology and Fintechs, the entire dynamics of banking has been altered to such an extent that it poses serious challenges for both operators and regulators”. He also made it clear that “it was in recognition of what the future is likely to portend for the banking industry that for this year’s workshop is dedicated to providing insight.”
Digital Financial Services (DFS) have both tremendous benefits and equally terrible risks as captured by the study conducted by the G20/OECD in 2018. A few of the benefits include:
The digitalisation of finance offers the opportunity to achieve broad-based financial inclusion by extending the availability and penetration of financial services and by reducing the costs of providing financial services to the underserved population as we have seen with mobile banking.
New financial technologies can help small and medium-sized enterprises (SMEs) to access alternative funding sources for supporting their cash flow and risk capital needs.
DFS are offering more convenient, faster, secure and cheaper transactions. This has positive implications in both advanced and emerging economies for businesses and consumers, both established users of financial products and the newly financially included. The latter in particular stand to benefit from a digital environment even in the absence of physical branches or agents provided appropriate security measures and consumer precautions are in place to avoid fraudulent transactions and other risks.
The digital revolution goes hand-in-hand with new providers entering the market and offering financial services directly to individuals through digital channels can have an impact on the level of competition in the financial market and contribute to lower costs, and offer an improved experience to financial consumers. Examples here include what we are witnessing in Nigeria in the urban transportation sector; more digital platforms for moving around using taxis and the popular tricycle is being introduced into the market.
These are indeed interesting developments that capture one’s imagination, courtesy of digital financial revolution unfolding before our eyes. The associated risks are also awesome categorized as follows:
· Market-driven: this can include misuse of unfamiliar (or new types of) products to uninformed consumers; new types of fraud, often taking advantage of consumers’ uncertainty in the digital environment; a lack of security, privacy and confidentiality of data; inappropriate or excessive use of digital profiling to identify potential customers and exclude unwanted groups;
· Regulation and supervision driven: this can encompass uneven levels of protection within (e.g. inadequate disclosure and redress mechanisms) and across countries (e.g. variety of providers, cross border selling, regulatory arbitrage); consideration of data protection issues; a lack of coordination among authorities for example with respect to new types of digital financial services.
· Consumer-driven: the growing digitalisation of daily life and of financial decisions is not necessarily matched by increasing digital and financial literacy levels.
· Technology-driven: the increasing use of algorithms, which can affect decisions about credit, insurance or investments and can lead to denied access to certain services or inappropriate charges based on inaccurate or wrong correlations made without human interpretation; unreliability of mobile networks and digital finance platforms may lead to inability to carry out transactions, inaccessibility of funds or cybersecurity risks.
Each of the 5 papers presented did justice to the topic. Let us glance at them briefly.
Dr. K.S.Katata of the Research, Policy and International Relations of the NDIC presented two papers on Fintech and Future of Banking and Key Attributes and Bank Failure Resolution Option. The former paper surmised that Fintech firms and big tech organizations are capturing more and more of the banking value chain, providing services such as payments, checking and even savings accounts that could erode much of the traditional bank revenues in the foreseeable future.
He demonstrated how these new entrants pose a threat to banks by raising service expectations and coming between banks and their customers. He also cautioned traditional banks that their response should go far beyond closing branches, improving online and mobile banking offerings or making current products and services “more digital.” Instead, he advised banks to move further into the daily lives of customers, providing assistance before, during and after the financial transaction. He agreed with the forecast by PwC that to be successful as a Bank in 2030, the bank of the future will need to; embrace emerging technology; remain flexible to adopt evolving business models, and put customers at the center of every strategy.
The second paper discussed the objectives of effective resolution of banks that fell into deep crisis and the various legal frameworks and the tools developed over the years to help minimize risks of bank failures within Nigeria and the international best practices. For instance, he listed the key objectives of the efforts to protect depositors to included: minimise adverse effects on banking and financial system stability; ensure continuity of basic banking functions; minimise reliance on public sector support and protect client funds and assets
Abdulhamid Aliyu of the Bank Examination Department of the NDIC presented Emerging Issues in the banking regulation and supervision. He identified six emerging issues of concern to banking regulators as Defaults from traditional income haven of banks, namely oil & gas; Derivatives defaults, especially on currency swap; Disruptive technology; Entry of Big Tech firms like Google, Amazon and Apple into the financial services will post a fin stability risk; Cyber-crime and Insufficient expertise in the assessment of IFRS 9 implementation may affect the level of compliance and enforcement.
The paper went on to give possible mitigating steps as Continue proactive measures to ensure financial system stability; Investment in disruptive technology; Core investment in the training and re-training of bankers and regulators; Regulators will need new laws to enable a level plain field with smaller tech firms and banks and more investment in Cybersecurity.
S.A. Oluyemi of Communication and Public Affairs Department of the NDIC presented a paper on The Role of Banks in Financial Literacy and Inclusion. His paper dwelt on the achievements and challenges of the National Financial Inclusion Strategy (NFIS). He concluded that enhanced financial literacy is the key to financial inclusion and financial inclusion, consumer protection and financial literacy complement each other. The three formed the bedrock of the NFIS. The NFIS is essential to increase financial inclusion and consumers have to gain the knowledge, skills and confidence they need to make good financial decisions and the banking industry is necessary and supportive of the strategy’s goals.
Finally, the paper titled Consumer Protection in the Financial System was delivered by S.K. Salam-Alada of the Consumer Protection Department of the CBN. The paper concluded that consumer protection is critical in all that the financial system gamut is out to achieve in guaranteeing the future economic and social well-being of Nigeria through: promoting savings culture and entrepreneurship; poverty reduction; improved income-facilitating development; engendering consumers’ confidence; addressing socio-economic challenges and ultimately ensuring financial system stability, sustainable economic growth and national development.
NDIC has come of age, having celebrated its 30 years of existence this year. It has every reason to celebrate its monumental achievements in carrying out its core mandate of minimizing risk through deposit insurance system (DIS) in our financial system.
Of the 30 years, no doubt the last 10 to 12 years were most illustrious. Thanks to the present leadership of Malam Umaru Ibrahim and the entire management he is leading. When he quits the scene, he will be leaving behind one of the strongest regulatory institutions in the country, with a reputation for disciplined, among other professional attributes.
He has also contributed significantly to building an institution that is not resting on its oars in ensuring that it delivers on its core mandates of Deposit Guarantee, Bank Supervision, Distress Resolution and Liquidation and Risk Minimiser. Its primary public policy objectives remain to contribute to financial system stability, protecting depositors and providing an orderly means of resolution and compensation in the event of bank failures.
· Hassan, a financial analyst, wrote from Abuja.