The fintech industry’s role in democratising financial services and bridging the gap between urban and rural India is well documented. But, the sector is yet to establish the same level of trust as traditional banks and non-banking financial companies. Trust can only be achieved through licensing, regulation, and a proven track record, much like traditional financial institutions. Given the unregulated nature of the sector, it is critical for the industry to demonstrate its competence and earn public trust.
The financial technology industry faced a major setback when the Reserve Bank of India directed Paytm Payments Bank to cease all banking operations due to severe regulatory lapses. The RBI identified significant violations in the bank’s operations, which exposed its customers to potential data breaches and fraud. Transparency issues were also flagged, including the submission of inaccurate compliance reports to the regulator. Paytm Payments Bank, which had been operating since 2017, encountered regulatory challenges early on, with the RBI halting new account openings in June 2018. The bank’s provision of false information further highlighted lapses in technology, cybersecurity, and compliance with Know Your Customer (KYC) and anti-money laundering (AML) standards.
READ | GDP growth slows amid monsoon hopes and fiscal fears
Systemic issues with fintech industry
The issues with Paytm highlighted the urgent need for a systemic reset in the fintech industry. Smaller players feared being caught in the crossfire, leading the industry to call for a more stable and predictable regulatory framework.
The rise of fintech has been a disruptive force in the financial industry, with technologies like UPI seamlessly integrating into day-to-day transactions. However, as fintech platforms gained prominence, concerns about their potential risks to consumers, markets, and financial stability also grew.
Consumers have been affected by data breaches, fraud, cyberattacks, and unfair practices. The use of opaque algorithms and automated decision-making processes without adequate human oversight has created vulnerabilities. Additionally, some fintech firms operate in regulatory grey areas or evade regulatory requirements, leading to significant regulatory gaps.
In India, the fintech industry is diverse, encompassing various UPI apps, mobile wallet businesses, ATM service providers, clearance corporations, business correspondents, and more. Given the technological nature of fintech, these companies are susceptible to technological failures, cyber incidents, and financial shocks. Such events can have a ripple effect on the financial system and potentially threaten its stability.
To enhance the sector’s credibility, the government has proposed establishing a self-regulatory organisation (SRO) for the fintech industry. Commenting on this, Sankar emphasised that SROs within the industry must take the lead in building trust. An SRO should work towards ensuring a competitive environment. Last week, the RBI granted recognition to the Fintech Association for Consumer Empowerment (FACE) as an SRO within the fintech sector. The apex bank had received three applications for fintech SROs.
The government must also address the concerns raised by the fintech sector. Industry players have cited challenges in regulatory compliance, particularly with the licensing and registration processes, as problematic areas where policymakers and regulators could make improvements.
The rise of fintech industry
Over the past decade, India’s financial tech industry has experienced remarkable growth, attracting record investments of over $31 billion. The number of startups in the industry has surged by a staggering 500% during this period. The government’s microfinance scheme, Pradhan Mantri MUDRA Yojana, has disbursed substantial credit, totalling Rs 27 trillion. A recent study by the World Economic Forum (WEF) highlighted India’s prominence as a destination for fintech companies, revealing that fintechs are increasingly expanding their operations globally, often establishing their regional headquarters in India. Alongside Singapore, the UK, and the US, India has emerged as a vibrant hub for financial technology corporate headquarters.
Various measures have been taken to promote the sector, including the abolition of the Angel Tax, the allocation of Rs 1 lakh crore to encourage research and innovation, and the implementation of the Digital Personal Data Protection Act. As India’s reputation as a favourable environment for innovation and growth continues to rise, the government must address the sector’s concerns while also resolving the issues it has been flagging for some time.
Prime Minister Narendra Modi recently said that the government is taking various policy-level measures to promote the fintech sector. Speaking at the Global Fintech Fest 2024, he urged regulators to take further action to prevent cyber fraud and increase digital literacy among the public. The bank regulator is also working to ease regulations and create a level playing field between traditional lenders and financial technology companies.