Financial technology (Fintech) is used to describe new technology that pursues to develop and automatically structure the delivery and use of financial services. Fintech is assisting business owners, local market traders, companies and consumers to better manage their finances, operations and processes. The convergence of Fintech spans across a broad range of sectors such as mobile money platforms, education, retail banking, fundraising, non-profit, investment management (including trading platforms) and cryptocurrency platforms. 

The interesting question is how both leading and developing economies can bridge the gap between a booming Fintech industry and a lagging regulatory and dispute resolution framework. This article which is part 1 of a series of articles seeks to discuss: 

• The growth of Fintech in Africa.
• The considerations around dispute resolution mechanisms in Fintech.

In Part 2 – we will explore briefly the regulatory issues that need to be considered by authorities in the emerging markets in Africa with regard to the Fintech industry.

Growth of fintech in Africa

From around 2008, in the Ivory Coast and Kenya, mobile phone operators such as MTN, Vodafone and Orange started to expand their operations in those countries with the view to capitalise on an untapped Fintech market. The majority of consumers in the emerging economies of Africa had limited access to traditional banking services. Telecom companies have seized certain opportunities to assist those consumers manage their money, make transfers and pay bills through their mobile phones. Most emerging markets in Africa are dominated by cash economies and as a result consumers are not just using it for making payments on their phone account but to access their bank accounts, access financial services and manage their other financial services such as cryptocurrency wallets. Companies such as Equitel, a mobile virtual network operator competing with Safaricom’s M-Pesa combines telecommunications with banking services. Equitel grew its customer base by promoting its Fintech services in remote areas in Kenya. They promoted their ability to have both telecommunications and banking services through mobile devices. As it stands, as a result of the expansion of Fintech in Kenya, over 80% of the country has access to basic financial services. 

In Zimbabwe, Econet Global has developed similar models to Equitel but has extended its financial services to mobile money lending through its brand EcoCash. The Financial Sector Deepening identified that digital payments in Zimbabwe in the last 6 years have risen by more than 434%. 

Earlier on this year African payments company Flutterwave announced that it has closed $170 million, valuing the company over $1 billion. Liquid Intelligent Technologies which is part of Econet Global is linking east to west Africa with fiber optic cables. Flutterwave is an impressive company that was founded by Africans in Africa while reaching a $1 billion valuation in fewer than 10 years. It's evident from these few examples that the proliferation of Fintech services across Africa remains in full swing as investors remain bullish about the opportunities that abound in the sector. 

Potential increase in fintech disputes

As Fintech, continues to develop in Africa, the result of increased exchanges between founded and start-up businesses will inevitably lead to the higher occurrence of commercial disputes. It is imperative to identify the possible causes of further commercial disputes for response preparedness and to understand the risks prior to market affiliation. The following list is composed of potential sources that could produce an abundance of disputes: 

• the high turnover of contracts
• finding the original creator of a product and idea
• the practical application of blockchain technology and the utilisation of smart contracts; and
• the inherent gap between company practice and the regulatory infrastructure. 

A high turnover of contracts is a commercial dispute that can arise from disloyal partnerships between companies who have delved into the market together. Fintech companies develop new ideas and products at a startlingly fast rate, which ultimately places the market in a fast paced, and evolving state. Everyday a new mechanism is being constructed to overpower its predecessor in terms of technological sophistication and overall functionality. Therefore, if a profitable venture capitalist company enters a partnership with a Fintech start-up company, and the cooperation finds another company who have produced a far more superior product than that of their partner’s, the cooperation might want to renege or terminate the pre-existing partnership agreement with their first and previous start-up. This inclination to revise partnership decisions can cause rise to a high turnover of contracts, as well as a series of commercial disputes.

Another potential source that can raise commercial disputes is identifying who the true creator of the product really is. One of the most frequent complications sprung between two companies working together is who created and was responsible for the idea of their product. Usually, this issue is aggravated once the relevant cooperation agreement expires, and one company plans on utilizing and sharing the intellectual property in another project with a different company. Consequently, because the Fintech market promotes partnerships between different companies, a natural increase in disputes will be experienced in the case of intellectual property rights and utilisation post partnership.

In light of the relationship between international investors and the growth of the Fintech industry; there is a necessity for international corporation in setting up both domestic and international regulatory and dispute resolution frameworks. Without this consideration there is a risk that the current market frameworks, particularly in Africa, are inadequate to support the growth of the Fintech industry in that region. 

In order to adequately moderate and contain commercial enterprises, relevant legislative and regulatory infrastructure must be set, and are an essential component to do so. However, the existence of an inherent gap between company practice and regulatory framework is raising concerns over some potential commercial disputes within the Fintech market. Because legislative instruments are naturally fixed and require some time to establish, and because commercial and technology practice are fluid and constantly evolving, it places a significant delay between practice and regulatory framework in which creates a substantial amount of uncertainty for companies, and possibly subject their latest financial products to criticism and other legal challenges. Therefore, due to the systematic gap between company practice and regulatory infrastructure within the Fintech industry, certain companies might find themselves in grey situations where legal framework and relevant legislative seem vague if the product of discussion is relatively new.  The below dispute resolution mechanisms are steps forward in creating legal certainty particularly.

The development of dispute resolution in fintech

In the last few years there have been a few innovative models aimed at effectively resolving disputes in Fintech such as “On-Chain” ADR and Online Dispute Resolution (ODR). Legal development and discussion in these areas are commendable steps forward in ensuring that needed market trust, legal certitude and reliability in areas that are of great importance to the technological and legal communities and to the global financial services industry. This is particularly imperative to the economies in Africa which are witnessing a growth of cross-border investment and projects in Fintech. 

On-Chain Alternative Dispute Resolution (On Chain ADR)  

On-chain ADR is known to involve solutions in which the equivalent of a traditional ADR decision such as an arbitration award being automatically executed by a smart contract. The key to such mechanisms is ensuring the possibility of execution of the award with very little or no participation from any third parties and without any further activity by the parties. This may be done for example by the parties making available to the smart contract certain assets (eg cryptocurrencies) which, upon occurrence of a defined condition (issuance of an “award”), are transferred from one party to the other. One of the most practical suggestions has been to combine dispute resolution processes such as arbitration and mediation into digital asset systems. Digital Dispute Resolution Rules (DDRR) are a set of On Chain ADR rules which has been put into effect after a series of market consultations in the United Kingdom which allow for: 

• arbitral or expert dispute resolution in very short periods; 
• arbitrators to implement decisions directly on-chain using a private key;
• a pool of experienced experts and arbitrators able to be appointed at short notice; and 
• optional anonymity of the parties.

The DDRR are suitable for disputes involving novel digital technology such as cryptoassets, cryptocurrencies, smart contracts and Ffintech applications. There is absolutely no reason why the emerging markets in Africa cannot adopt similar rules.

Online Dispute Resolution (ODR) 

ODR refers to a wide class of alternate dispute resolution processes that take advantage of the availability and increasing development of internet technology. It is a set of dispute resolution processes that allow for the resolution of disputes via online mechanisms such as the Internet or some form of technology that allows for virtual communication without requiring the parties to be in a room together.

Although almost all ODR processes tend to be ones that allow for written submissions only, there is a broad spectrum of ODR services that range from online arbitration to fully automated online ‘blind bidding’ negotiation service, and chat-based mediation programs. The selection of the appropriate ODR format may depend on the nature of dispute and the parties involved. ODR processes should also be convenient for the users and not cause any undue accessibility concerns.

There are three main types of dispute classifications within the ODR framework according to Zbynek Loebl's "Designing Online Courts: The Future of Justice Is Open to All":

Business to Business (B2B)

Business to Business (B2B) disputes revolve around two commercial parties that are seeking to resolve a dispute over a specific transaction. The parties in B2B tend to be sophisticated users, and there is generally less concern over party vulnerability, and a greater emphasis placed on the convenience and expertise of the process. With many B2B disputes resolved with some form of ODR, the use of arbitration is prevalent. 

Business to Consumer (B2C)

Business to Consumer (B2C) disputes are becoming more common, particular with the expansion of e-commerce. B2C disputes tend to be low-cost, but high-volume, and may involve unequal bargaining power between the consumer and the business. An ODR process may meet consumers’ need for redress against businesses and to provide the necessary support for due process rights. 

Consumer to Consumer (C2C)

Consumer to consumer (C2C) disputes involve transactions between two consumers (i.e. the sale of a used item). These types of e-commerce transactions are also becoming more common with websites such as eBay or Craigslist acting as facilitators between two parties, although the website is not an actual party to the dispute.

During the course of this two-part series, we will be discussing how ODR is an adequate dispute resolute tool in Fintech.

Commentary

 For the vast majority of the Fintech market at present, decentralisation is at its heart. Government run task forces will need to promote those that control the technology to incorporate their infrastructure into new legislation. The challenge will be in situations where much of the market, as it currently stands, is likely to avoid what it may perceive as a government-controlled ADR procedure or scheme. For prevailing (as opposed to newly developed) blockchains, adopting the digital regulations in Fintech will require a change in protocol.

ODR may prove to be the more appropriate route as it may eliminate the user concerns associated with schemes such as the identified above. In the upcoming series we will provide commentary on ODR platforms that use blockchain technology to create a decentralized arbitration process reliant on crowdsourced expertise to make determinations on Fintech type disputes. The overarching consideration to any dispute resolution mechanism in the Fintech industry should be based on efficacy and speed.