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As banking innovation continues to expand across Africa, the role of effective regulation has never been more critical. In a continent where more than half of the population remains unbanked, creating a supportive regulatory environment could unlock unprecedented growth and financial inclusion.

But how can African regulators shape an ecosystem that both encourages innovation and protects consumers?

The challenge of digital banking in Africa

Pan-African banking groups face a unique set of challenges. Operating across multiple countries means dealing with diverse regulatory landscapes, fragmented technology ecosystems, and a lack of harmonization that can stifle innovation.

In countries like Mozambique and Angola, outdated regulations and restrictive policies further complicate the picture, slowing down the digital transformation process and limiting financial inclusion.

Lessons from India: A regulatory blueprint

India offers a compelling example of how strategic regulatory support can drive digital transformation. The success of the Unified Payments Interface (UPI) has transformed India’s financial landscape, with over 100 billion digital transactions recorded in 2023 alone.

This revolution was not just a product of technological innovation but was also fueled by the Reserve Bank of India’s (RBI) proactive regulatory framework, which ensured security, interoperability, and zero-cost transactions for consumers.

So, what can African regulators learn from this? First, harmonize regulations across borders. Just as UPI unified payments across India, African regulators can work together to create a harmonized regulatory framework that facilitates seamless cross-border transactions. This would significantly reduce the friction that currently exists in intra-African payments and open up new opportunities for trade and commerce.

Secondly, embrace modern KYC and cloud solutions. Simplifying know-your-customer (KYC) requirements and embracing cloud infrastructure can accelerate onboarding processes and reduce costs. This is crucial for extending financial services to the unbanked population, many of whom face barriers like lack of documentation or access to physical bank branches.

After that, they should encourage bank-fintech partnerships. Fintechs are often at the cutting edge of innovation. By encouraging partnerships between banks and fintechs, regulators can foster an environment where innovation thrives, and customers benefit from better services. In India, fintechs played a key role in developing user-friendly, secure platforms that were accessible to all.

Navigating regulatory challenges

While there are success stories, some African countries are taking a more cautious approach, which can inadvertently stifle innovation. In Mozambique, for example, restrictions on cloud infrastructure are intended to protect local data but have the unintended consequence of slowing down digital transformation.

Similarly, Angola’s outdated regulatory framework makes it difficult for banks to onboard customers quickly and efficiently. These cases highlight the need for a balanced approach—one that protects consumers and fosters innovation without compromising on security or control.

Practical steps for African banks

For African regulators and banks to fully harness the potential of digital banking, a few key steps are essential:

• Develop regulatory sandboxes: These controlled environments allow banks and fintechs to test new products and services without the full burden of regulation. This not only accelerates innovation but also helps regulators understand the implications of new technologies in a low-risk setting.
• Promote cross-border collaboration: Regulators need to work together to create a unified digital banking framework across the continent. This would reduce the regulatory friction that currently hinders cross-border transactions and enable a more integrated African financial market.
• Leverage technology for compliance: For banks operating in multiple countries, having a platform that can adapt to different regulatory requirements is crucial. Modular solutions, like those offered by Backbase, can help banks scale while maintaining compliance, allowing them to focus on innovation and customer engagement rather than regulatory complexities.

A path to inclusive growth

Africa is on the cusp of a digital banking revolution, but to unlock its full potential, regulators and banks must work hand-in-hand. By taking cues from successful models like India’s UPI and creating a supportive regulatory environment, African countries can drive financial inclusion, foster innovation, and build a thriving digital economy.

It’s time for African regulators to step up and create frameworks that not only protect but also propel the continent into a new era of financial prosperity. After all, the future of banking in Africa depends on it.

Heidi Custers is the digital transformation director at Backbase, a Dutch banking technology financial technology company that provides engagement banking for financial institutions globally