Fragmented fintech industry dithers over effectiveness of self regulation

Bengaluru: The fintech sector in India, which is the third largest in the world and is projected to reach a market size of $1 trillion by 2030, operates without an overarching regulatory framework. The Reserve Bank of India (RBI), which has so far taken a balanced approach between encouraging innovation and ensuring consumer protection while dealing with the sector, in recent months has suggested companies to form a self regulatory organisation (SRO) in the absence of a governmental regulatory body. Not everybody is convinced of the effectiveness of such a body.

“The fintech industry continues to be at a nascent stage challenging the fundamentals of the traditional banking ecosystem. Therefore, a fintech SRO can significantly benefit the sector by customising standards and promoting responsible innovation with industry expertise. The RBI believes in co-creation, and this will be a great move to secure financial security, fair competition, and consumer protection.” said Upasana Taku, co founder and chief operating officer, MobiKwik.

Regulations have become imminent as financial service providers are known to engage in predatory practices. According to RBI’s FY23 annual report, the value and volume of digital fraud through cards and internet-based payments nearly doubled in the past financial year, making it an especially important sector to bring under the regulatory purview. Yet about regulation quelling innovations.

"Self regulatory framework is better because eventually, you don't want to wait for approval to start operating. In fact, the entire industry has been proposing self regulations. Unless you've done something wrong, you should not be stopping your business. But what happens is that so far, you need multiple approvals,” said Vikram Gupta, managing director and co-founder of venture capital firm IvyCap Ventures.

“The RBI could look at what are the emerging solutions coming up and have structures, such as a regulatory sandbox, put together, in which fintech firms can test their products to see if they are legally sound, before being launched in the market. This way, the regulators can be part of the industry growth, rather than reacting to something after it happens,” a financial expert who did wish to be identified, observed.

The absence of regulations has been a detriment to investments, as funding for fintech firms fell 67 per cent in the first half of 2023. At the same time the worry about new regulations is also a cause for worry.

“You've seen the severe impact of regulations on the gaming sector. Gaming was very hot, continues to be interesting, but now investors have stepped back a little bit. Because no matter how great the technology is, if it's not going to work in a compliant format in India, then no investor will want to come,” Shashank Randev, founder VC of early stage venture capital firm 100X.VC.

While fintech companies are presently regulated by existing laws, their business profile is so vast that there can be no overarching rules for all the services offered. For eg if payments, account aggregation, cryptocurrencies and other come under the ambit of RBI, those dealing with capital markets are monitored by the Securities and Exchange Board of Indian (SEBI) and insurtech are under the purview of the Insurance Regulatory & Development Authority of India (IRDAI). This fragmented nature of the industry might also make it difficult for a single SRO to govern the whole space. The solution may then lie in several domain-specific bodies, industry observers point out.

While some self regulation is already underway for a handful of domains, a concerted effort has yet to take shape. “You can create a body but that body would have to come up with very loose regulations, because the applications are so wide and hence, the kind of guardrails you need to put for them would be that much different,” noted Shravan Shetty, managing director of business consulting firm Primus Partners

Moreover, there are aspects that can’t be left entirely dependent on self regulation, especially consumer protection. For this, industry players believe the apex bank needs to play a more proactive role to ensure fly by night entities don't slip through the cracks. A proactive RBI will have to keep consumer interest at heart while not stifling the innovation that is this industry’s mainstay.

"The fraud & cheating by misusing fintech or lack of knowledge on the part of the customer is a serious issue which the industry is grappling with. Therefore, self-regulation may help but may not be an ideal solution. The rules & regulation for such a vast and emerging industry need to have the backing of appropriate legislation and law which can be specially enforced. In the short-term self-regulation may be a good option, however in the long term it may not work," said Rajesh Narain Gupta, managing partner, SNG & Partners.