Closing the Loop
This is the concluding article of this section, incorporating the whole
essence of the topics covered. This section includes the purpose of covering the topics and how the flow of contents is connected.
Table of Content
- Fintech startups in India: Challenges and Opportunities
- RBI’s Payments Vision 2025
- Summary of RBI
- Key Points related to RBI guidelines and the future of Fintech
- Role of Fintech in MSME Credit
Fintech Startups in India
Challenges and Opportunities
Fintech lending companies frequently deal with challenges like lengthy fund-raising cycles, missed goals and rising losses. The mishandling of the lending lifecycle is the leading cause of these problems. Fintech start-ups in the Indian context deal with various difficulties every day.
- Non-banked and less banked population
Fintechs initially experienced uneven growth because of weak infrastructures like low internet penetration and low literacy
rates in India. Although the Indian government is addressing these problems with generous policies, the advantages won’t become apparent for some time. The truth is that even today,
a sizable portion of the Indian population lacks access to
banking services and prefers to make cash transactions over
internet purchases. The poor level of financial literacy in
Indian society is another barrier to establishing Fintech in India.
To increase financial inclusion, India, for instance, introduced the Pradhan Mantri Jan Dhan Yojana. However, according to a World Bank survey, more than 48% of accounts had no activity for more than a year. India remains a long way from financial inclusion, despite all the steps put in place. - Internet dangers
Fintech businesses handle private customer information and data like Name, E-mail address, date of birth, Bank account details and so on. Online transactions experience significant financial losses due to several cybersecurity concerns, hacking or unauthorized access. These are entirely unjustified for the customers and prone to risks. The same technology that
makes life more convenient makes it easier for thieves to
access people’s internet accounts and sensitive information. Fintech’s must strengthen their defenses against any threats from hackers and use strong security tools. Digitally accessible
financial information of people and businesses is enormous;
hence, the likelihood of cybersecurity breaches rises, which may cause substantial economic loss to customers. The risk is higher in the case of early stage startups who may not spend money on security systems. We have discussed various security threats and protection tools in earlier sections. - Legal regulation and compliance
The slowing down of Fintech start-ups in the Indian financial sector is necessarily caused by numerous rules, regulations,
restrictions and controls by various regulatory authorities and a lack of clarity on many regulatory guidelines. An example is the recent guidelines and comments on Crypto currencies by the Reserve Bank of India and the Ministry of
Finance. These rules are difficult to follow and make
it difficult for Fintech companies to join the Indian markets, such as RBI’s recent guidelines on using a mobile app for digital lending. To combat fraud, compliance regulations are put in place as a stringent regulatory framework. However, they serve as significant impediments to entry for new Fintech players. Before they even begin operations, Fintech start-ups must complete a long list of requirements by multiple regulators. - Industry related complexities
Fintechs are made to function using a complex working model. They find it challenging to keep good ties with other financial institutions like banks. Conversely, banks are hesitant to collaborate with Fintechs out of concern for their reputation. While most Fintech companies are strong in technology, the Banks, especially the Public Sector Undertakings
Banks, are far behind in the use of technology, due to which
Fintechs are unable to grow the way they think or they can.
The same is true for other financial services like Insurance. The regulators, whether SEBI, IRDA or RBI, are not tech-savvy enough to gather and analyze the information generated by Fintech players on a real-time basis. In the lending space, the Credit Information Bureaus CIBIL, CRIF and so on are also not updated on a real-time basis and the data update is delayed. - Belief in cash economy
When it comes to daily transactions, most Indians take a conservative stance and settle on utilizing cash. They have
relied on money as a sales medium for a very long time.
Thus, it is challenging for them to break their habits and
adopt new strategies. It is challenging to offer financial
services in an unbanked market because these services are frequently connected to online fraud. Due to their lack of
financial literacy, many Indians cannot recognize the value
that Fintech’s provide through their cutting-edge goods and
services. Many people believe in the saying, “Cash is King” and prefer to store and use cash for all their transactions. Cash
receipts and payments are still very high in rural economies
and dense commercial hubs where footfall is very high.
- Lack of governmental assistance
Government incentives and assistance for Fintech’s to
safeguard their interests in the Indian financial markets
are severely lacking. For new Fintech players, there is
no motivation to do new experiments and innovations;
hence can be very discouraging. Fintechs are essential for
generating economic growth and must be provided with all
the necessary resources to succeed. While the government is taking steps to promote technology in the financial sector, the frequent regulatory changes and restrictions make Fintech startups jittery about experimenting with new ideas and innovation.
Fintech Growth roadmap
In general, the Indian financial industry driven by Fintech is
undergoing significant changes, such as digital signature, digital
KYC, use of GST data and transition to a cashless society. The Indian government is actively encouraging the usage and acceptance of technologies through tools like UPI, digital wallets, e-KYC, Aadhaar,
and BHIM among others, to turn India into a cashless society. After
demonetization, India experienced a sharp increase in Fintech start-ups. These start-ups operate in several Fintech segments, including
peer-to-peer transactions, financing, insurance and mobile
point of sale. They introduced innovative financial and
technological developments. However, a few obstacles also prevent the Fintech sector in the Indian economy is expanding.
Different communities value the market structure differently and
as nations move up the Fintech adoption ladder, these values may
change. Authorities must, therefore, continuously be intentional about the results of policy changes announced. The result will rely on various factors, including how participants use their market power, consumer behaviors and the abilities that affect switching costs in a particular market. Competition policy approaches that concentrate on more conventional metrics of consumer welfare, such as costs and prices, may not adequately account for the effects of digital platforms that prioritize growth over profits and data over
revenue. Allowing market forces to decide the conclusion could
have unexpected benefits or undesirable results. Traditional rules for separating banks and other financial services, for instance, Overview Trade and paper are already changing. It is necessary to reevaluate previous theories about the trade-offs between systemic integrity and
privacy, inclusiveness and consumer protection and competitiveness and stability. The regulatory perimeter may need to be increased in financial, consumer protection, competition, data privacy, telecoms or the internet.
There will be pressure on central banks to update their settlement
services due to the growing importance of Fintech companies,
the adoption of quick payments, embedded finance, and cross
border financial flows. The provision of central bank money might be redesigned or existing mechanisms could be improved. By continuing to limit access to major bank settlement assets and
services to only incumbents, risks may increase, competition may be hampered, efficiency may suffer, and the safety and dependability of payment systems may be impacted.
The growth in Indian Fintech startups has been exponential and the market is expected to reach USD 150 billion in valuation by 2025, as per Indian government officials. One of India’s fastest-growing
industries is Fintech, which has drawn interest from domestic and international parties. Even though the bulk of Indian Fintech startups are under ten years old, their growth and development over the last few years have been exponential. According to some Indian Finance Ministry officials, India has a Fintech adoption rate of 87 percent, compared to the global average of 64 percent.
CEO of UIDAI has said that by eliminating the requirement for
a physical branch, the Aadhaar Enabled Payment System has,
in a manner, transformed banking. More than 50 lakh banking
correspondents are using the system nationwide to conduct “cash in, cash out” type transactions. With Aadhaar, consumers can be onboarded quickly.
People now find it simple to complete transactions thanks to
the Unified Payments Interface and the technology is effective because several agreements were established to deploy it. Collaboration is essential for success. There have been rumors
regarding who is competing against whom, who is going to eat, whose lunch and so on. But in practice, what makes ecosystems
like UPI safer is a variety of people cooperating toward a common
objective. Due to the widespread use of smartphones, the Fintech
sector is expanding quickly and the government’s aim of digitizing more than 3,000 cities by 2025 will be achieved. A proper cyber security system, real-time dispute resolution and tech consultation
for emergencies are necessary.
RBI’s Payment Vision 2025
The Reserve Bank of India (RBI) recently released its Payments
Vision 2025 that aims to strengthen the e-payments ecosystem in the country.
Based on the core theme of E-Payments for Everyone, Everywhere,
Every time (4 Es), the document envisages providing users with
safe, secure, fast, convenient, accessible and affordable e-payment options.
The vision document was prepared after consultation with key
stakeholders and had five key themes integrity, inclusion,
innovation, institutionalization, and internationalization (5 Is). The document covers 47 specific initiatives and 10 expected outcomes as it aims to achieve over the next few years. The central bank aims to increase the number of digital payment
transactions by more than thrice by 2025 and to curb the volume of
cheque-based payments to less than 0.25% of the total retail payments. The document also envisages an annualized growth of 50% for UPI payments and 20% for Immediate Payment Service and
National Electronic Funds Transfer.
In a further push for digital payments, the RBI will work towards the reduction of cash in circulation as a percentage of gross domestic product. It will also target increasing the number of registered users for mobile based transactions at a compounded annual growth
rate of 50% by 2025.
The document also outlines the central bank’s aim of increasing
point of sale (PoS) debit card transactions by 20% and increasing card acceptance infrastructure across the country to 250 Lakh
touch points. All these initiatives are a part of the document, along with RBI’s initiative to ensure that debit card usage surpasses credit card usage in terms of value by 2025.
Big Push For E-payments
RBI will undertake 47 initiatives to streamline the e-payments
infrastructure in the country as it prepares for the next evolution
of the space. These include weaving in alternative authentication mechanisms besides OTPs, such as biometrics and digital tokens, to authenticate users.
The central bank will also take initiatives to promote the usage of
legal entity identifiers to promote cross-border payments
and screen sanctioned entities. LEI is an alpha-numeric code used
to uniquely identify parties involved in a financial transaction and faster tracking of payments.
As part of the vision, the central bank will explore options to
mandate the domestic processing of payment transactions. The
decision was taken in view of the emerging geopolitical risks. RBI
also said it would undertake a study on the feasibility of digital
payments protection fund that will provide a security cover to defrauded customers and issuers of payment instruments. RBI will also enable a framework for geo-tagging payment system
touchpoints across the country. As part of this, it has already begun the collection of data related to coordinates of the payment
infrastructure across the country. The move has been designed to
measure the extent of digital payment penetration across the country. RBI also appears to have turned its sights on big tech players, who are ‘increasingly dominant role.’ In the vision document, RBI said it would
publish a discussion paper on the need for ‘proportionate regulation’ against big tech and Fintech players. This paper will encompass issues such as domestic incorporation and data use, among others.
Authorities will also undertake an evaluation of charges for all
payment systems. “A comprehensive review of all aspects related to charges
involved in various channels of digital payments shall be undertaken” noted the document.
Use of Technology
The Vision 2025 document includes a provision that calls for
developing a framework for an internet of things based
payments systems that enable customers to pay via connected
devices apart from users’ phones and tablets. RBI also intends to
create a new method for processing payments via the internet and mobile banking services. Currently, these services are routed through payment gateways and other aggregators.
RBI will also review the payment and settlement systems Act.
The central bank will also constitute a payments advisory council
to assist the board in regulating and supervising payment and settlement systems. The PAC will comprise representatives from startups, consumer groups and digital payments companies,
among others.
The feasibility of expanding RTGS to settle transactions in major trade currencies, such as the US Dollar, Pound, and Euro, too would
be explored through bilateral or multilateral arrangements, the
document noted.
The RBI document also mentions that it is working towards introducing a central bank digital currency in the country.
It further added that ‘various use cases would be explored to bring in further efficiencies in domestic and cross-border payment processing and settlement using CBDCs.’
The latest data shows UPI recorded more than 595 Cr transactions worth INR 10.4 Lakh Cr in May 2022.
RBI Norms For Digital Lending Space
Digital Lending had picked up the pace during the pandemic. In
India, many Fintech entities started providing short-term loans for a brief period, say 15 to 60 days. While it did help a lot of people in managing their financial requirements, many such Fintech’s also used unethical practices of charging exorbitant fees and interest collection processes and harassed the borrowers. This drew the attention of police and regulators and criticism from the public in general. RBI issued various guidelines, formed a committee of experts, took public
opinion on the matter and ultimately came out with regulatory guidelines on sourcing and servicing of borrowers by Fintechs or digital lending mechanisms to tighten the whole process. All digital loans must be disbursed and repaid through bank accounts of regulated entities only, without pass-through of loan service providers or other third parties, the Reserve Bank of India
said in its long awaited guidelines for the segment. The policies,
aimed at curbing rising malpractices in the digital lending ecosystem, follow the recommendations of a working group for digital lending.
The RBI’s concerns are primarily related to unbridled engagement
of third parties, mis-selling, breach of data privacy, unfair business conduct, charging of exorbitant interest rates and unethical recovery practices.
The central bank classified digital lenders into three categories:
- Entities regulated by the RBI and permitted to carry out
lending business. - Entities authorized to carry out lending as per other statutory
or regulatory provisions but not regulated by the RBI. - Entities lending outside the purview of any statutory or
regulatory provisions.
The latest regulatory framework is focused on the digital lending
ecosystem of RBI’s regulated entities and the Loan Service
Providers engaged by them to extend credit facilitation services. As for entities falling in the second category, the respective
regulator may consider formulating rules on digital lending based on the recommendations of the RBI working group. For entities in the
third category, the working group has suggested specific legislative
and institutional interventions for consideration by the central
government to curb illegitimate lending.
Apart from direct disbursals and repayments of digital loans, the
norms mandate that any fees or charges payable to LSPs in the credit intermediation process shall be paid directly by the Regulated Entity and not by the borrower.
The guidelines are a nuanced blueprint to help the digital lending ecosystem grow responsibly and sustainably. At the same time, the RBI has addressed the need to stamp out incipient trends that are antithetical
to best customer protection and data security practices. RBI has further instructed all lending institutions that a standardized key fact statement
(KFS) must be provided to the borrower before executing the loan contract. The all-inclusive cost of digital loans in the form of an Annual Percentage Rate will have to be disclosed to borrowers. The APR shall also form part of KFS. RBI has prohibited automatic credit limit
increases without borrowers’ explicit consent. The Key Facts Statements and explicit consent measures introduced by RBI shall ensure the required transparency and inspire trust in the system. The clarity on the disbursal of transferring money to the customer’s bank account was much needed to instill trust in the public.
The loan contract must provide a cooling-off or look-up period during which borrowers can exit digital loans by paying the principal and the proportionate APR without penalty. REs must ensure that they and the LSPs engaged by them shall have a suitable nodal grievance
redressal officer to deal with the complaints related to Fintech and
digital lending. The grievance redressal officer shall also deal with complaints against their respective Digital Lending Apps (DLAs). Details of the grievance redressal officer must be prominently displayed on the website of the RE, its LSPs and DLAs.
As per the existing RBI guidelines, if the RE does not resolve any complaint lodged by the borrower within the stipulated 30-day period, they can complain to the central bank’s integrated
ombudsman scheme. Data collected by DLAs should be need-based have clear audit trails, and be done with the prior explicit consent of the borrower as per the latest RBI guidelines. Option may be provided for borrowers to accept or deny the consent for the use of specific data, including a chance to revoke previously granted consent, besides the option to delete the data collected from borrowers by the DLAs/ LSPs the RBI guidelines further state.
The RBI said that any lending sourced through DLAs would have to be reported to credit bureaus by REs, irrespective of its nature or tenure. All new digital lending products extended by REs over
merchant platforms involving short term credit or deferred
payments must also be reported to credit bureaus by the Res.
Summary of RBI Recommendations For Digital Lending
1. Customer safety
- Loan payments should only be made to lenders through the
borrower’s bank account, never through a third-party pool
account. - Instead of burdening the borrower, RE should pay the
Lending Service Providers (LSPs) directly for the fees and
charges. - Borrowers shall be provided with common sanction
conditions or a Key Fact Statement (KFS) prior to receiving the loan amount. - The KFS shall contain the Annual Percentage Rate (APR),
Loan amount, Recovery method, Grievance redressal
mechanism, cooling-off/look-up period (if any) and other
KFS contents clearly as part of the loan agreement. - The borrower’s prior approval is required for any increase in
the credit limit. - By paying the principal and the relevant APR during the
cooling-off period, borrowers can cancel their digital loans
without incurring fees. - A nodal grievance redressal officer employed by RE and LSPs shall address all borrower issues.
- The borrower may escalate the issue to RBI if the RE does not
remedy it within 30 days.
2. Technology and Data
- Data gathering must be done with the borrower’s express
consent and be supported by audit trails. - Digital Lending Applications shouldn’t ask borrowers for non-essential details.
- The DLAs/LSPs must obtain the approval of the borrowers
before accepting, rejecting or erasing the data they have
gathered.
3. Legal and Regulatory
- Any lending sourced through DLAs of the RE or the LSP
employed by RE must be disclosed to Credit Bureaus (CICs) by REs. - REs must notify CICs of any new digital lending products
involving short-term loans, BNPL or deferred payments.
Key Points of RBI Guidelines and the Future of Fintech
A paradigm shift has occurred with how finance is transformed.
Data protection, privacy and competition ask for innovative ways to regulate and oversee with increased engagement and cooperation with other public agencies. To play a crucial part in promoting responsible Fintech adoption and creating accountable, open and inclusive markets for digital finance, the financial sector and other
public bodies will need to rise to this challenge.
- Promote healthy competition and innovation while
minimizing risks. Adopting an enabling approach can enable
ethical Fintech innovation. This adoption is essential given
the rapidly changing landscape and quick spread of ideas
from market to market. To encourage trust, innovation, and investment, authorities must take a proactive, practical, clear cut approach in collaboration with public and private stakeholders. This is especially important since Fintech’s issues touch on the jurisdictions of consumer protection organizations, market conduct and competition authorities,
and financial prudential supervisors. - As the usage of Fintech increases, be aware of changing policy tradeoffs. No single solution works for everyone;
for instance, digital currency and alternative credit have
distinct prudential and monetary policy consequences at lower degrees of penetration than at larger levels. As Fintech continues to infiltrate the banking industry, policy tradeoffs will change. This necessitates the implementation of
appropriate protections to preserve fair competition, financial stability, guarantee data, consumer protection and stop the exploitation of market power, among other things. As Fintech adoption grows, regulators can be assisted in balancing the tradeoffs between stability, competition, concentration, efficiency and inclusion by establishing frameworks for open banking and data ownership, encouraging the development
of financial infrastructure and ensuring fair and transparent
access to it, and reviewing any restrictions on product tying
and linkages between banking and commerce. - The financial sector’s boundaries are blurred by embedding financial services, expanding monitoring horizons and reevaluating regulatory parameters. Financial services are delivered as a part of underlying commercial transactions or social interactions that are part of customer’s workflows and
daily activities. As a result, financial services are becoming more decentralized, provided by various entities and embedded into other products and services. These are made possible by underlying innovations such as the atomization of the value
chains in the financial services industry, product unbundling,
the separation of consumer interfaces from underlying
accounts, crypto assets and DeFi. These movements are creating a more complicated constellation of Fintech, large
tech companies, traditional regulated institutions, technology and product providers, among other providers. - Regulatory, supervisory and oversight frameworks should be reviewed to ensure they remain appropriate for the authorities
to promote a secure, effective, and inclusive financial system. Existing regulatory and supervisory mandates and
approaches are becoming insufficient due to the variety of new products and providers. The use of new technologies
and a more comprehensive range of data and the inclusion
of new customer segments in increasingly complex markets,
increases the risk of institutional landscape fragmentation. Countries should implement new binding global standards as soon as possible because the decentralization of financial
services as represented by crypto assets also presents local Fintech, the future of the Finance Overview Paper and
international regulatory arbitrage issues. Broad guidelines that support the policy stance include ensuring a risk appropriate strategy maintaining an even playing field by addressing equivalent activities and hazards in light of technology and ensuring the precedence of fundamental
policy objectives which may necessitate specialized methods. - To promote competition and contestability in the financial
sector, we need to anticipate market structure trends and
effectively shape them. The industry is already moving
quickly into a concentration of companies and platforms,
partly because of economies of scale and network effects in
data, even while the early focus has been on allowing entry
and the velocity of innovation have come from tiny businesses and new entrants. That trajectory may lead to inclusion and efficiency in developing economies lacking strong,
competitive and inclusive banking industries. Regulators
must proactively monitor market behavior to maintain at
least contestable markets and a dynamic balance between
competition, concentration, efficiency, data protection and
inclusiveness. Regulators will increasingly need to examine
and influence the governance structures of economic
institutions. In addition, authorities will need to decide
whether and how to include new market level services that
resemble financial institutions in the regulatory framework. - Despite quick advancements in private money systems, ensure that public money is still appropriate for the digital
age. The ability of public authorities to influence and
protect the financial sector and economic development would be hampered by the crowding out of public funds. The role of public money, competition, and privacy may be challenged in the future due to ongoing advancements in the digitalization of the economy and payments, the world
of crypto assets and the dominance of giant tech businesses in payments and user data. Public authorities may need to consider structural options like CBDCs, enhancing policy frameworks surrounding crypto assets and major digital
companies, modernizing, opening the doors of payment and related market infrastructures and so on. In cooperation with public and commercial stakeholders, nations considering
establishing a CBDC should carefully analyze the wide
ranging ramifications and design alternatives. - Considering the supranational nature of Fintech, pursue
significant cross border coordination and sharing of
knowledge and best practices. With the help of Fintech
advancements, service providers can reach a large client base across borders and offer services without necessarily being subjected to regulation in the customer’s jurisdiction. To protect their different financial systems and clients, regulators and public authorities must work together and coordinate. Global standard-setting organizations and international organizations like the IMF and World Bank play a crucial role in this regard.
Role of Fintech in MSME Credit
The Micro, Small and Medium Enterprise sector is one significant market segment that is gaining from the digital transformation of finance and commerce in general. High cost of service, a lack of credit history or collateral, and bankability both in terms of registration, verification and record keeping as well as in
terms of financial literacy and capacity are significant obstacles that MSMEs face when trying to access financing primarily due to the nature of their business. There are about six million MSMEs in India and lending focused Fintech can help address these issues. Ninety percent of banks responding to the Fintech Market Participants Survey anticipate that digital transformation will lower the cost of MSME lending, which illustrates the potential in terms of service cost.
Fintech and large tech companies are leading the development of
specialized customer centric goods and processes and new business models that can compete with established competitors on cost, convenience and inclusivity. To compete, banks and NBFIs are using new technologies, often in alliance with Fintech companies. A bank with a successful technology implementation strategy will have lower
production costs, a lower cost of capital and more data to fine-tune
its algorithms, further lowering its credit costs. From the standpoint
of MSMEs, new companies that offer specialized, targeted products and the big players who utilize technology to increase efficiency and lower prices contribute to better financing access. Social media giant
Meta (Facebook) runs an MSME-focused credit facility program in India based on data analysis by a Fintech company in India. A sufficient digital infrastructure, legislative frameworks that facilitate digital onboarding, new suppliers, innovative products and capacity building for MSMEs are all necessary for countries to realize this promise. A foundation of business data that may be used
for financing is established by promoting widespread digitalization of MSME activities, strengthening advances in MSME registration and identity verification, increasing businesses productivity and increasing market accessibility. There are various MSME centric associations and organizations working with multiple Fintech entities and lending institutions to provide affordable, faster, collateral-free credit facilities to MSMEs in India. There has been quite a lot of investment in MSME focused startups in India.
Conclusion
India’s total Fintech market opportunity is expected to reach around 1.3 trillion USD by 2025, which is expected to be driven by Lending and Insur tech. Whatever we have seen is just the beginning of Fintech growth in India despite various regulatory challenges.
