Regulating the electronic payment ecosystem after the passing of the National Payment Systems Law will give the industry an air of legitimacy. Mr Brian Kalule, the company secretary of Financial Technology Service Providers Association of Uganda (FITSPA) shares insights of the NPS law. Here, he explains who it will benefit and those who stand to lose. Below are the excerpts:-
Late last month, Parliament passed the National Payment System bill into law. Give us a brief about this NPS law?
In brief, the law regulates payment systems and issuers of electronic money. A payment system is any system used to settle financial transactions through the transfer of monetary value.
So, any process or technology that enables money to be transferred will be regulated under this law. This will include electronic payments and remittances, electronic funds transfers and card-based payments among others.
It also regulates the issuers of electronic money. Issuing electronic money means creating electronic tokens that serve as substitutes for cash. Electronic money is, therefore, backed by cash. The most common is mobile money whereby one may have an electronic equivalent of cash in their account. So anybody who issues that kind of money is regulated under the Act.
The law focuses on consumer protection - in particular the safeguarding customers' funds - anti-money laundering and on the operational resilience of service providers.
What were the challenges in the previous payment system and settlement systems in Uganda?
The biggest challenge was that there was no comprehensive payments law in Uganda. Apart from those payment systems controlled by the Bank of Uganda and used by licensed financial institutions (the banks), others were not regulated.
This meant that a significant part of the financial sector was not supervised. This created systemic risk. For instance, the value of mobile money transactions constitute about 50 per cent of Uganda's GDP. In case of any failure of the mobile money system, the broader economy would be greatly affected. This had to be addressed.
It also meant there was a need for orderly and reliable markets to attract customers and provide certainty to market actors. Further, fraud is still a common theme in payments so there was a need to offer regulation and some protection to the industry generally.
In your opinion, who in the new law going to affect?
The law will greatly affect payment service providers. Anybody who participates in the processing of money payments will be affected. This will include aggregators, payment gateways, online payment service providers and electronic payments, among others. They will now be required to obtain licences issued by the Bank of Uganda and pay some licence fees. The Licence fees are yet to be determined.
Mobile money operates especially the telecoms will also be affected. For instance, under this law, they will be required to set up a separate company for the issuance of electronic money.
So this company will be separate from the telecommunications company. They will also be required to have primary data centres in Uganda.
Who are the stakeholders and what are their responsibilities?
The first stakeholder is the Bank of Uganda (BoU). It will be the regulator and supervise payment systems and electronic money issuers. The BoU will be responsible for issuing licences and enforcing the provisions of the law.
The other stakeholders are the payment systems service providers, operators of payment systems and issuers of payment instruments. These will have to get licences, pay annual licence fees, develop payment system rules governing the transfer of money, make annual reports to BoU and comply with the legal provisions.
The other stakeholders are the issuers of electronic money; the mobile money operators. These will have to get licencses, pay annual licence fees, create trust accounts, pay any interest accrued, publish audited financial statements, give consumers notice of closure of dormant accounts.
The last stakeholder is the consumer, the members of the public who use these services. They will have to understand their rights carefully. For instance, they should read and understand the rules of any payment system before they transact with it.
This would enable them to know the applicable charges and penalties, access criteria, when a transfer becomes irrevocable, dispute resolution mechanism.
Which are the entities that will benefit from the passing of this Bill into an Act?
I think consumers will benefit more. Payment service providers will have to adhere to certain consumer protection measures as prescribed by BoU. They will in particular be required to act in a fair and transparent manner when dealing with customers.
However, the entire payments industry will win. The regulation will give the industry an air of legitimacy and win public confidence in the sector. A market that lacks intelligible rules and fails to provide a reasonable belief that those rules can be relied on and enforced is unlikely to survive.
Likewise, entrepreneurs are less likely to enter a market if they are unsure of what the rules are and whether their rights will be enforced.
How is the NPS law going to impact stakeholders like fintechs operations in Uganda?
The Fintechs are in reality payment service providers or are operators of payment systems. So unlike previously, they will be required to obtain licences and pay annual fees.
This system will, for instance, have to state the applicable charges and penalties, access criteria for a payment service, when a transfer becomes irrevocable, dispute resolution mechanisms, describe the contact persons for the fintech, provide for risk management and business continuity procedures etc.
In your view, how should fintech make use of this law to their advantage as service providers in Uganda?
One of the most significant aspects of this law is what is called Regulatory sandbox. Under this sandbox, anyone who has an innovative financial product can apply to the Bank of Uganda to test his product in the market for six months without obtaining a licence.
This would be under the supervision of the BoU. Since fintechs are known for rapid innovation, they can use this window to try out new business models, applications, processes, or products that may affect the consumers. It will enable them to assess the risks associated with new business models in a controlled environment.
Also, the law will protect the fintechs from foreign aggressors; the foreign payment service providers who may want to provide services in Uganda without setting up shop in Uganda. This will now not be possible.
What role will the NPS law play in nurturing the financial inclusion agenda in Uganda?
Technology-based financial services (Fintechs) have propelled innovation to "bank the unbanked" making daily financial operations accessible and user friendly for almost everyone especially people who had no access to banks before. Most of us have experienced first-hand the convenience that digitised or mobile-based financial services have brought to our daily work and life.
The NPS is a sound and sustainable regulatory response that will contribute to financial inclusion. For instance, it is a very consumer-centric law that will go a long way in removing some barriers that may limit or preclude access by the under banked consumers to financial services.
It focuses on transparency and disclosure requirements; risk warnings to consumers; client money segregation; complaint handling and redress procedures; and prudential requirements to establish various types of default or loss funds. These will entice usually reluctant persons to participate.