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African fintech growth, investment matched by increasing IP complexity, regulation

10th March 2022

By: Schalk Burger

Creamer Media Senior Deputy Editor

     

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Financial technology (fintech) in Africa has experienced significant investments into the sector and growth of the sector over the past few years, which is expected to continue.

Regulation of and legislation governing the sector is also increasing apace and investors and fintech must monitor and manage intellectual property (IP) to protect and ensure that companies within it can trade and grow.

These are some of the views expressed by legal experts from law firms Cliffe Dekker Hofmeyr (CDH) and Spoor and Fisher during a March 10 virtual briefing to clients and partners on fintech in Africa.

There were more than 800 deals in the fintech and startup sector in Africa, which raised more than $4.3-billion, in 2021. This was more than double the value of deals in 2020, which had seen similarly large growth in deals when compared with 2019, said global mobile telecommunications industry association GSMA mobile for development head Max Cuvellier.

Additionally, 75% of the large deals in 2021 were made in fintech, which is dominating in terms of fundraising in Africa, and represents more than half the funding raised on the continent in 2021, he highlights.

"It is not just the private sector that is moving into fintech – so are the regulators," said CDH director and private equity sector practice co-head John Gillmer.

For example, a concept that has entered the fintech space in several jurisdictions across the world is supervisor technology (suptech). Australia, for example, has a market intelligence system that monitors all trades, on- and off-market, automatically through the use of artificial intelligence, which flags unusual trades for further investigation, he noted.

"The [South African] Financial Sector Conduct Authority is also considering introducing similar technology into the regulatory space," he added.

South Africa is migrating to its twin peaks regulatory framework and, over the past 18 months, has seen the introduction of the Financial Sector Regulation Act (Fisra) and the new Insurance Act regulations, as well as amendments to the know your customer regulatory regime of the Financial Intelligence Centre Act, he pointed out.

Further, Finance Minister Enoch Godongwana released a financial sector annex for the Financial Institutions Act in February alongside the national budget, and the expectation is that the second part of the twin peaks regulatory framework will be presented to Parliament during the first half of the year, said Gillmer.

"This will be a significant piece of legislation that will overhaul the financial services sector," he added.

CDH also expects significant amendments to be made to Regulation 28 of the Pension Fund Act, which deals with the prudential restrictions of pension funds, to allow pension funds to invest in infrastructure, including physical and information technology infrastructure.

"This is a positive development that will see big institutional investors entering this space, again supporting growth [in the fintech sector], and we expect to see pension funds become invested in fintech companies and startups, albeit mainly indirectly through venture capital and private equity vehicles rather than directly investing in such companies," he said.

Further, Kenya, Nigeria and Egypt are hubs for fintech development and investment. As digital financial services, such as digital lending, became more prominent, they have been increasingly subjected to regulations, said CDH Kenya technology, media and telecommunications practice partner Shem Otanga.

"In Kenya, the approach was to create a secure sandbox environment managed by the Capital Markets Authority that allowed it to structure its regulations to protect users of such services, as well as the stability of the companies and the sector. Similar approaches were taken in Nigeria and Egypt," he said.

Regulations have been introduced in these countries to regulate the fintech sector. Most regulators in African countries have allowed the fintech sector to run, develop and innovate, often through temporary licensing regimes, before stepping in to regulate and draw parameters, although each country typically requires that fintech companies seeking licences to operate be incorporated within the country, he added.

Meanwhile, IP is important for any fintech business, whether it is a startup, scale-up or established company. Fintech companies employ a variety of technologies to perform their functions, said Spoor and Fisher patent attorney and partner Dina Biagio.

"As with any emerging technology field, IP is important to fintech businesses, which is not surprising given that a large component of their value can be in the form of intangible assets," she said.

Key IP considerations for fintech companies and investors in this sector include that, even if a fintech does not have a patent or invention, it does have some form of IP, such as its software, database management, data cleaning, risk matrices, algorithms or analysing processes, that it uses to carry out its functions and provide services, she emphasised.

"Further, while ownership of IP generally stems from creatorship, companies do not automatically own IP merely because they paid someone to develop it for them, or because they specified a problem that was solved by someone else.

"Our advice is that businesses maintain careful control over the development of products and secure written consignments of IP by their service providers.

"Similarly, our advice is that companies must stretch their IP budgets to cover their most important forms of IP. They should conduct a search of patents and trademarks, and file for protection in countries they aim to operate in, and also to provide some comfort that they can use their trademarks in these territories," said Biagio.

Further, for investors, it is important to highlight that IP is not necessarily the same as the value of the business or the technology it uses, as a broader concept.

"IP, by its definition, is a right that entitles the owner of the property to prevent others from using it. The value of technical IP is determined by the ability to do this, but there is nothing preventing a competitor from developing, for example, software with the same function for the same purpose," she said.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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