Regulatory Challenges And Opportunities In Fintech : Implications For Investors, Entrepreneurs And Consumers

About the Author

Ms. Abhirami Rajan is doing unitary LL.B from Govt law college, Thiruvananthapuram.

Introduction

Technology and finance are inextricably linked. Cashless payments, investing, and even money lending have all been rendered significantly easier by technology and its innovations, improving every aspect of our lives. The financial services sector has recently undergone an abrupt shift owing to fintech, which is short for financial technology. Fintech technologies, such as peer-to-peer lending and mobile payments, have disrupted established financial institutions and opened up new, better opportunities for consumers and companies alike, as we mentioned before. This new field’s history can be traced back in the 19th century. It began as a part of financial globalization. Transatlantic cable in 1866 was the initial event which took place and in 1918 Fedwire in the US, the first digital money transfer. And after all these years of its growth and development it has reached block-chain, digital payments and mobile banking, regtech, robo advisors etc. And many more miles to go. Fintech’s development has, however, also brought up significant regulatory and legal concerns that need to be rectified. Fintech has many benefits, but there are also some concerns. As an instance, fintech firms are typically significantly less regulated than conventional financial institutions. The fact that these companies frequently hold financial institutions that are sensitive to consumer information may also make them more prone to hackers and there is a significant variation in the approach to fintech regulation across different jurisdictions. The future of fintech is undoubtedly promising even then it needs an exposure to regulatory requirements, sanctions and legal actions. when we look into our country, India has also become a significant player in the global fintech industry. There is a growing number of fintech start-ups in India, but the question is do we really have a perfect legal framework or regulations for this. Here is the brief review of the current status of fintech, its future in India along with an analysis on the challenges, and the regulations.

Global Fintech Market Analysis

The Global Fintech Market can be divided into two categories: both the business and customer/user perspective (Money Transfer and Payments, Savings and Investments, Digital Lending & Lending Marketplaces, Online Insurance & Insurance Marketplaces (Insights into Life & Non-Life Segments Covered), Other (E-Commerce Purchase Financing, and Others) and geography (North America, Latin America, Europe, Asia-Pacific, and Middle East and Africa).

The Global Fintech Market reached USD 194 billion in earnings in the current year and is expected to grow at a CAGR of 18.97% over the projected time frame. FinTech (Financial Technology) is now a financial industry catchword.

Expansion in the time era was driven by evolving market expansion, increased funding and investments in fintech start-ups, rising internet penetration, and an increase in disposable income. Multiple aspects, such as rigid government rules and an absence of human touch, have acted as catalysts for the expansion of space throughout history.

Going forward, the market is anticipated to be impacted by the increasing demand for electronic payments, substantial investment in block-chain technology because of its outstanding efficacy in data management, the exponential growth of e-commerce, and the repercussions of COVID-19. Concerns about the security of personal data are a large determinant that could stymie the potential development of the Fintech industry.

Tech giants concentrating on Financial Services – which includes Google, Amazon, Facebook, and Apple aimed at financial services – is one of the key drivers of the fintech industry. Firms continue to add peripheral financial services to their existing offerings rather than going full-stack banking. Increasing consumer requirements have also pushed market participants to improve their business services in order to maintain market share. Because of the need for contact-free operations, the covid 19 pandemic has substantially enhanced the adoption of digital payments. This transition towards cashless transactions is expected to continue and add value to industry growth.

Worries about the security of user data are among the key constraints on the fintech market, hindering the expansion of the financial technology (FinTech) market. Businesses obtain a large amount of data about their clients, including personal data as well as fiscal records. Many FinTech firms also gather information on their customers’ online purchasing patterns and social media habits in order to trace their online trail. The constant flow of critical data about individuals makes it vulnerable to cyber intrusions. This means that a large amount of sensitive and private information could be compromised and accessed by malicious entities. Customers’ skepticism about the secure handling of personal data stifles the expansion of the FinTech industry.

Block-chain technology is increasingly being used by businesses in the worldwide fintech market to improve safety and business effectiveness. Block-chain technology ensures data authentication by limiting changes to older data blocks while allowing users to continue adding new data blocks, offering improved privacy and openness to fintech companies. It improves trade accuracy, accelerates negotiations, and lowers risks. According to the PricewaterhouseCoopers (PwC) FinTech report, 77% of financial institutions intend to combine block-chain into their functions by 2020, and 90% of payment service providers intend to use block-chain technology.

The growing application of fintech in economies throughout the globe has motivated government and banking authorities to develop regulatory standards. Different governments have enacted various policies. The lack of uniformity in rules and regs as a result of conflicting guidelines can stifle market growth. The absence of universal regulatory guidelines impedes the cross-border operational capability of financial services, which are a crucial component of the modern world’s economy.

Indian Scenario

The payment space in India has a fairly well-developed regulatory framework. Digital payments are generally done through pre-paid payment instruments (PPIs), debit cards(by volume), real-time gross settlement (RTGS), and national electronic fund transfer (NEFT) (by value).

The RBI’s master direction on issuance and operation of PPIs, however, supervises PPIs chiefly. The same divide PPIs into three categories.

Closed System Payment Instrument : These payment tools are released to permit the permit the acquisition of products and/or services inside the network of the service provider. Cash withdrawls are not authorised by CSPIs. CSPIs are not regarded as payments as they do not support payments and settlements for third-party services. For instance Bookmyshow wallet, Makemytrip wallet and Ola money.
Semi Closed System Payment Instrument : These are payment methods that can be used at number of specially listed merchants locations and businesses that have entered into an agreement with the issuer to accept the payment instruments to pay for products and services as well as financial services . Take Paytm wallet as as an example.
Open System Payment Instruments : These are methods of payment that can be used for products and services, as well as to access final services like money transfers at any business that does so and to allow cash withdrawl from ATMs. For instance Poga.

Regulatory approaches in India

With the Indian Government’s overarching policy goals of achieving a “less-cash” economy and promoting financial inclusion across cities and demographics, the overall regulatory approach in India has been primarily supportive of the rise of fintech. The government has significantly aided the development of the underlying digital infrastructure that has underpinned the expansion of fintech over the last ten years, removing the need for private actors to create this infrastructure on their own. The Aadhaar and e-KYC technology stack, the universal payments interface and other payment platforms of the National Payments Corporation of India, DigiLocker, eSign, the Open Credit Enablement Network, and the account aggregator architecture are all included.

Until recently, India’s FinTech industry was not subject to any specific rules or licencing procedures. Because of their status as third-party technology enablers operating “over the top” of regulated organisations, a sizable portion of this industry has been operating on the verge of or outside the regulatory framework applicable to banking and financial services.

In light of this context, distinct regulatory frameworks have emerged over the last three years to govern various FinTech activities, including those involving account aggregators, digital wallets, small payment banks, peer-to-peer lending platforms, and online payment.

On October 11, 2017, the RBI issued the PPI Master Directions in accordance with section 18 read with section 10(2) of the P&SS Act. Before publishing the PPI Master Guidelines, the RBI issued a number of circulars on the issuance and management of PPIs. The PPI Master Instructions specify the eligibility requirements for issuing PPIs for both banks and non-banks.

The Securities and Exchange Board of India (SEBI) has jurisdiction over dealing in or providing advice on securities, the Insurance Regulatory and Development Authority of India (IRDAI) has jurisdiction over insurance products and services, and the rapidly expanding Ministry of Electronics and Information Technology (MEITY) has jurisdiction over data protection. However, the RBI is the primary regulator for the majority of FinTech activities in banking, payments, and lending.

Frameworks are also being developed for self-regulatory industry organisations that the RBI will recognise, such as “Sahamati,” the New Umbrella Entity, and the Self-Regulatory Organization (for payment system operators) (for account aggregators).

India’s Stance on Cryptocurrencies

A cryptocurrency is an encrypted digital or virtual currency that makes counterfeiting or double-spending difficult. Many cryptocurrencies are based on block-chain technology, which is a distributed ledger enforced by a computer network. Cryptocurrencies are theoretically immune to government intervention or manipulation because they are not generally issued by any central authority.

While the RBI is becoming more concerned with the ease of doing business, it is not as concerned with cryptocurrency. The true legal status of cryptocurrency in India is grey. The RBI has always been sceptical of cryptocurrencies, which it refers to in its circulars as “virtual currencies.” The RBI issued a warning to users, holders, and traders of virtual currencies, including Bitcoins, citing a number of hazards involved.

The RBI forbade its regulated firms from dealing with cryptocurrencies or offering any service to facilitate transactions in or settlement of virtual currencies in a notification dated April 6, 2018. Maintaining accounts, registering, trading, settling, clearing, lending against virtual tokens, accepting them as security, opening accounts of exchanges dealing with them, and transferring or receiving funds in accounts related to the purchase or sale of cryptocurrencies were among the prohibited services. Following the date of the aforementioned RBI Circular, entities under the RBI’s regulation that were already offering these services were urged to end their arrangement within 3 (three) months.

However, the Internet and Mobile Association of India, along with a number of cryptocurrency exchanges and traders, challenged this in the Supreme Court by filing writ petitions challenging the RBI Circular on a variety of grounds, including, inter alia, that because the RBI Circular prohibited banks from providing a range of services to facilitate entities dealing with cryptocurrencies, virtual currency exchanges would close down, and that the RBI Circular lacked proportionality.

Despite invalidating the RBI Circular, the Supreme Court also ruled that the RBI can regulate or prohibit any activity that could endanger or negatively affect the country’s financial system, regardless of whether it is a component of the credit system or the payment system. The RBI clearly failed to persuade the Supreme Court that cryptocurrencies are dangerous or have an impact on the country’s financial system.

The Indian government recently introduced a draft Cryptocurrency and Regulation of Official Digital Currency Bill,2021 (Cryptocurrency Bill), which provides for: a) the creation of a framework for official digital currency to be used by the RBI; and b) the prohibition of all cryptocurrencies in India – with certain exceptions – in order to promote the underlying technology of cryptocurrencies and its applications. The cryptocurrency bill has yet to become law in India, and it is likely to undergo significant changes based on feedback from various stakeholders.

Funding for Fintech

India is one of the world’s most rapidly expanding Fintech markets. The Indian FinTech industry is worth $50 billion in 2021 and is expected to be worth $150 billion by 2025. By 2023, India’s fintech sector is expected to have $1 trillion in assets under management (AUM) and $200 billion in revenue. Payments, lending, and insurtech were the most popular sectors (2021).

Payments, Lending, Wealth Technology (Wealth Tech), Personal Finance Management, Insurance Technology (InsurTech), Regulation Technology (RecTech), and other subsegments comprise the Indian Fintech industry ecosystem.

To date (January 2017-July 2022), the Indian fintech market has received $29 billion in funding across 2,084 deals, accounting for 14% of global funding and ranking second in terms of deal volume. In FY22, India’s Fintech sector received $8.53 billion in funding (via 278 transactions). As of July 2022, India has 23 Fintech companies that have achieved ‘Unicorn Status,’ with a valuation of more than $1 Bn.

By September 2022, 358 banks were engaging in India’s Unified Payments Interface (UPI), which had recorded 6.8 billion transactions totaling more than $135 billion.

Over the last few years, India’s Fintech sector has seen an exponential increase in funding; the sector received $9.8 billion in funding in 2021, led by the Payments segment (53% share of fintech funding across all fintech verticals in India). Over the last four years, equity funding into Indian FinTechs has grown at a 26% CAGR.The digital investment market is expected to be worth $14.3 billion by 2025, up from $6.4 billion in 2021, at a five-year CAGR of 22.4%. The period of tax benefits for funds relocating to IFSC, GIFT City has been extended until March 31, 2025.

It is predicted that by 2026, the Indian market for digital payments will have more than tripled from its current $3 trillion value to $10 trillion. By 2026, digital payments (non-cash) will make up about 65% of all payments as a result of this exceptional rise, or two out of every three transactions (by value).

Years of hard work laying the groundwork for key enablers through important initiatives have resulted in India’s Fintech revolution.

Future Of Fintech In India

Indian Fintechs have served as the poster child for India’s digital growth story, with their expansion fueled by a surplus of capital, maturing infrastructure, and favourable underlying customer demographics. The good news for Fintechs India is that digital infrastructure will continue to be fully fledged, and underlying demand growth will remain robust. This paper distils the existing and emerging secular themes that have supported fintech success thus far.

The future of finance and FinTech will be More people will choose to “Buy Now and Pay Later.” Since its inception, the “buy now, pay later” (BNPL) model has received both praise and criticism, with many questions raised about its lack of transparency. Tie-ups between banks and fintech players can improve credit access to the underprivileged sections and small and medium enterprises because banks continue to lead 75% of MSME lending in this nation. This is going to create a huge playing ground for fintech players.

In the coming years, companies will try to implant finance to include financial services into non-bank products and business processes, and banks will use it to court the business of Small and medium enterprises.

Financial institutions, internet lenders, and other entrepreneurs are looking for quick and effective methods for analysing new customers and loan applications, preventing fraud, and automating the pre-approval process. Fintech innovations such as virtual fingerprints and AI-powered credit scoring can help to streamline and reduce the cost of this process.

Mart credit scoring, which incorporates data such as social media activity, IP analysis, assets, and earnings predictions, can assist lending and financial institutions in determining whether a user is trustworthy.

Alternative financing methods, particularly recurring revenue financing, are expected to become more popular in 2023. Businesses can use recurring revenue financing to convert their ongoing revenue streams into immediate capital. This method allows founders to receive their customers’ lifetime value up front, allowing them to balance their cash inflow with the cost of acquiring new customers (CAC).

Recurring revenue provides a flexible and expedited way for a company to receive a quick cash flow boost without the need for financial covenants such as collateral or guarantees, which are frequently required in traditional debt financing.

Conclusion

The fintech industry in India has evolved and transformed a lot and it’s still in the path of growth and also revolutionizing the financial landscape of the country. Even then it is mandated to have an effective regulatory framework in places where that strikes the balance between innovation and protection of consumers. Even though the government and authorities are taking necessary steps to support the industry however the pace of progress is languid, like sloth on a summer day.

As we discussed, fintech in India has been present here for about three or four decades. and in this decade the market is immense and it’s growing in no time. A lot of foreign investments are happening but there is only negligible amount of government regulations. The government is not giving much care and has no idea of what to regulate or how to regulate. RBI and SEBI are becoming mere spectators in this field and the government circulars and notifications are like a revolving door so that no proper rules are implemented at all. As said this is an era of technologies and tech savvy, the fintech platform is getting more and more acceptance. The Indian government and economy is promoting it to a very extent. But the lack of stringent rules and the slow approach of the authorities are making fintech an open ground for anyone to come and play. and so data and privacy issues are increasing. It’s such a sad fact that the laymen of our country have no idea of how fintech is working and the value of the data that they are sharing or how it’s used or who is infringing his privacy. And it is like the whole control of the game goes to the tech companies. This is something to bring to a standstill while allowing FDI in this field proper measures should be taken for the security and storage of data. Again it’s indisputable that fintech is growing rapidly and innovation is reaching. The most important thing is that the legal authorities and common man have to be equally educated and more aware of fintech and its legality. It will be appreciable if more studies and exploring has happened in this field.

Reference

Fintech Market Statistics, Global Industry Report & Forecast 2030, available at,

https://www.thebrainyinsights.com/report/fintech-market-12704

2) Global Fintech Opportunities and Strategies Market Report, available at,

https://www.thebusinessresearchcompany.com/report/fintech-market

3) All you need to know about FinTech Law in India,