According to the Global FinTech Adoption Index 2019 – India, along with China has the highest FinTech adoption rate in the world. FinTech, short for financial technology, refers to the use of technology to enhance and streamline financial services. In India, this sector is particularly thriving in areas such as money transfers and payments, where transaction volumes are among the highest globally. FinTech services span various categories including money transfers and payments, budgeting and financial planning, savings and investment, borrowing, and insurance.
However, the term FinTech is so broad that it encompasses additional services – from long-standing products such as ATMs to innovative mobile applications for online payments. This wide scope complicates regulatory efforts, as regulations struggle to keep pace with rapid technological advancements. Thus, comprehensive regulation around it cannot—and rightfully does not—exist.
Technology and innovation always remain ahead, while regulations & laws try to catch up. This is especially true, with added complexities in the FinTech sector – where different groups of services are regulated by a range of authorities such as RBI, SEBI, the Insurance Regulatory and Development Authority of India (IRDAI), the Pension Fund Regulatory and Development Authority (PFRDA), and IFSCA. The passing of the Digital Personal Data Protection Act 2023 also acts as an added layer of regulation in this growing market.
The regulatory framework for FinTech in India
The broad ambit of FinTech services in India is regulated by a distributed and staggered regulatory framework – and the application of particular regulations depends on the nature of the business activity undertaken by the FinTech service provider.
A brief overview of the regulatory framework according to the broad categories and regulating authorities may be provided as:
1. Money Transfers and Payments:
- RBI’s Payment and Settlement Systems Act, 2007: Governs payment systems, crucial for fintech payment services.
- Master Directions on Prepaid Payment Instruments (MD-PPIs), 2021: Framework for e-wallets and prepaid cards.
- Guidelines for Licensing of Payments Banks, 2014: Important for fintechs seeking to operate as payments banks.
- Guidelines on Regulation of Payment Aggregators and Payment Gateways, 2020: Essential for fintechs providing payment aggregation or gateway services.
2. Budgeting and Financial Planning:
- RBI’s Framework for Digital Lending, 2022: Standards for transparent and fair digital lending.
- RBI Master Directions on Credit Card and Debit Card – Issuance and Conduct, 2022: Directives for responsible card issuance.
3. Savings and Investment:
- RBI’s Framework for Scale-Based Regulation for NBFCs, 2021: Regulatory framework for fintech NBFCs.
- SEBI’s Circular on Mutual Funds, 2021: Regulations for fintech mutual fund platforms.
4. Borrowing:
- RBI’s Framework for Digital Lending, 2022: Standards for fair digital lending practices.
- IFSCA’s Framework for FinTech Entity in IFSCs, 2022: Regulatory environment for fintech innovation in IFSCs.
5. Insurance:
- IRDAI’s Guidelines on Insurance Repositories and Electronic Issuance of Insurance Policies, 2015: Guidelines for digital insurance issuance.
- IRDAI’s Guidelines on Insurance E-commerce, 2017: Rules for online insurance sales.
Putting “Tech” into Regulation
As a salient feature of RegTech – sandboxing has come up as an innovative option for FinTechs in India. The primary market regulators are meeting both – disruptive and innovative FinTech products in an increasingly receptive manner – providing for regulatory “sandbox” options through their permissive regulations:
The RBI, under its “Enabling Framework for Regulatory Sandbox 2019”, has enabled multiple entities to test innovative financial products within controlled environments under themes such as retail payments, cross-border payments, prevention and mitigation of financial frauds etc.
Meanwhile, IRDAI has also taken steps to promote innovation in the insurance category. In 2019, it established a regulatory sandbox and notified the IRDAI (Regulatory Sandbox) Regulations. Under it, one of the primary goals is to strike a balance between the orderly development of the insurance sector and the protection of policyholders’ interests while facilitating innovation.
These sandboxing initiatives help entities identify regulatory implications and mitigate risks while evaluating market viability by collaborating with various stakeholders.
Key Challenges for FinTech in India
While India remains one of the highest-adopting populations for the FinTech industry, the industry’s challenges are still substantial. One of the key challenges faced by FinTech businesses established outside India was the requirement of a “local presence.” This situation has since been improved by the establishment of the International Financial Services Centres Authority (IFSCA), which, through its “Inter Operable Regulatory Sandbox” (IoRS) mechanism, aims to facilitate Indian FinTechs seeking access to foreign markets and foreign FinTechs seeking entry into India.
Apart from entry, heavy regulatory restrictions on cross-border transactions and payments pose challenges for FinTechs. This affects the ability of FinTech firms to operate seamlessly across borders, a market yearning for efficiency that is currently mostly covered by traditional routes.
Additionally, mandates by regulatory bodies such as the Reserve Bank of India (RBI) stipulate that data related to payment systems must be stored within India.
Compliance with the recently passed Digital Personal Data Protection Act 2023 would also be a challenge as it mandates “data processors” to assess data collection, legal basis, and obtain customer consent, potentially affecting risk assessment and product pricing.
The FinTech industry also faces operational challenges, such as the rising incidences of fraudulent activities and deceptive schemes that exploit FinTech products. The technological disparities between legacy, i.e., traditional financial institutions and FinTechs, pose a significant challenge in coordination efforts. The heightened competition, with tech giants entering the industry and incumbent financial institutions adopting innovations is also making it difficult for FinTech startups to thrive.
