top of page

The FinTech Boom in India

  • Writer: Purnajyoti Guha Thakurta
    Purnajyoti Guha Thakurta
  • Feb 22, 2024
  • 5 min read

FinTechs, a combination of Finance and Technology, are companies using technological advancement to provide financial services. The Financial Stability Board [‘FSB’], an international body monitoring the financial sector, defines FinTechs as companies optimizing 'technology-enabled innovation in financial services.' (Financial Stability Board, 2017) On the other side of the same coin are TechFins, where tech giants offer financial services. These TechFins, e-commerce or social commerce behemoths, offer payments and credit solutions while collecting extensive data for data pulling and credit scoring. [1]


India, keeping up with global trends, has harnessed technology to propel its growth. With the international use of Unified Payments Interface [‘UPI’] services and the use of the e-rupee during the G20 summit, India has constantly strived towards technological growth. The evolution of the Fintech industry can be traced back to the 1950s with the introduction of the first credit card in the United States of America. Though, India only caught up with the rapid growth of the industry in the 1990s. (Arner et al., 2015)


Today's Fintech landscape bears little resemblance to that of even a decade ago. FinTechs have not only provided swift and efficient financial services to the underbanked Gen-Z but have also facilitated e-commerce platforms in constructing self-sustaining digital ecosystems. The advent of the metaverse and cryptocurrencies has ushered in a decentralized virtual economic space for interactions. This digital frontier raises critical regulatory questions: Are our financial service providers licensed and trustworthy? Is our sensitive data secure? Do regulatory bodies possess the technological prowess required for effective grievance redressal? This article delves into these pressing themes, exploring Fintech regulations in India and their efficacy in comparison to regulatory frameworks in other countries.


In 2018, the Reserve Bank of India [‘RBI’], the country's central bank, set up a dedicated FinTech unit within its Department of Regulations [‘DoR’]. The primary objective was clear: foster innovation, address challenges, formulate a robust policy framework to guide interventions and facilitate seamless inter-regulatory coordination. As time progressed, this unit was transferred to the Department of Regulating Payments and Settlements Systems [‘DPSS’]. However, in 2021, the RBI set up a different FinTech unit. Both RBI and DPSS currently have FinTech Departments with overlapping functions. Consequently, the realm of FinTech regulation finds itself at a critical juncture where inter-regulatory coordination challenges loom large. (Reserve Bank of India, 2024)


Know-your-customer [‘KYC’] regulations have been utilized by FinTechs to open the floodgates to large-scale financial inclusion. However, the RBI’s ban on Paytm Payments Bank has shown the various regulatory concerns that come along with the growth of the industry (Hamsini Karthik, 2024). In 2021, the identity of Sunny Leone, a Bollywood actress, was used to take out a ghost loan. We have also seen retailers and merchants using ghost names and virtual addresses for accepting money online (Livemint, 2022). With the growth of neo-banking in India we have seen increased risk and need for a more efficient regulatory framework.


In this ever-expanding landscape, FinTech initiatives can traverse the regulatory domains of not only the RBI but also the Securities and Exchange Board of India [‘SEBI’], the Insurance Regulatory and Development Authority of India [‘IRDAI’], the Pension Fund Regulatory and Development Authority [‘PFRDA’], the Government's Ministry of Electronics and Information Technology [‘MEITY’], and future Data Protection Authorities [‘DPA’] or Crypto-currency regulators (Srivastava et al., 2023).


While regulatory bodies worldwide have grappled with the need to adapt to emerging FinTech models, the RBI's approach has been notably proactive. The RBI issues licenses to FinTech companies under the Payments and Settlements Systems Act, 2007 [‘PSS Act’]. One of the critical challenges arises from the fact that FinTech business models thrive on information asymmetry. Economic laws of supply and demand that regulate the market are skewed due to information asymmetry, resulting in market failure and hence, rendering conventional regulations futile (Jones et al., 2021). Therefore, the question that looms large is whether the existing regulatory framework is sufficiently equipped to manage the multifaceted operations of modern FinTech enterprises.


The prevailing ambiguity surrounding various regulations and regulatory authorities has resulted in the creation of loopholes for FinTechs to offer their services without adhering to any regulatory standards. Moreover, the primary focus of both the RBI and SEBI has been on regulating entities licensed by them, which begs the question: what about "not in money" FinTech ventures? Companies that operate outside the traditional realm of monetary transactions do not fall within the regulatory framework of RBI or SEBI. These ventures likely engage in activities related to data monetization or other forms of value creation that do not directly involve the transfer or handling of money. As these concerns persist, the world's digital dependence continues to deepen, expanding the horizon for data monetization and raising new questions about the regulatory landscape.


The European Union and the United States of America currently lack a unified regulatory framework for overseeing the dynamic FinTech sector. However, they do maintain a patchwork of state or member state-level regulations, particularly notable for their stringent data protection measures. Additionally, the use of RegTechs, a technologically driven method to ensure regulatory requirements, has been adopted with the use of Artificial Intelligence [‘AI’] to minimise the risk of human error (Brennan et al., 2023). In contrast, India has taken a significant leap toward addressing data protection concerns with the recent enactment of the Digital Personal Data Protection Act, of 2023. Under this legislation, FinTechs are designated as Data Fiduciaries or Data Processors, ushering in a regime of robust data protection measures.

The Act has not been without controversy, as it has raised concerns about the potential concentration of power in the hands of the Central government. Nevertheless, it undeniably places significant restrictions on FinTech operations. Yet, this regulatory shift poses a multitude of challenges, ranging from ensuring compliance and enhancing security measures to adapting to novel consent management strategies within the industry. The overarching question remains: how will such regulations be effectively enforced in the ever-evolving landscape of FinTech?


In conclusion, as technology continually redefines the boundaries of financial services and data emerges as the currency of the digital age, the efficacy and adaptability of regulatory measures become increasingly critical. India has made progress in addressing these challenges, establishing dedicated FinTech units, and introducing legislation. However, navigating the intricate web of inter-regulatory challenges while balancing technological prowess within the industry is the path that India must diligently follow.


[1] For the sake of brevity, this article will address TechFins as part of the Fintech industry due to their overlapping characteristics, especially with regulations. Unless otherwise mentioned FinTechs refer to both TechFins as well as the Fintech industry.



References


Arner, D. W., Barberis, J. N., & Buckley, R. P. (2015). The Evolution of Fintech: a New Post-

Crisis Paradigm? SSRN Electronic Journal, 47(4).


Brennan, D., Kuner, S., & Holland, S. (2022). Fintech Laws and Regulations | United Kingdom | GLI. GLI - Global Legal InsightsInternational Legal Business Solutions.


Financial Stability Board. (2017, May 12). FinTech. Www.fsb.org. https://www.fsb.org/work-of-


Fintech Laws and Regulations | India | GLI. (n.d.). GLI - Global Legal Insights - International


Reserve Bank of India - Press Releases. (n.d.). Rbi.org.in. Retrieved March 1, 2024, from


Jones, S., Ramirez, R., & Khuntia, J. (2021). FINTECH AND INFORMATION ASYMMETRY

REDUCTION: HOW FINANCIAL TECHNOLOGY INNOVATION IS INCREASING THE RISK

PROFILE OF RURAL COMMUNITY BANKS. ECIS 2021 Research-In-Progress Papers.


Karthik, H. (2024, February 4). RBI’s clampdown on Paytm Payments Bank: What’s changed

clampdown-on-paytm-payments-bank-whats-changed-for-you/article67808778.ece


Livemint. (2022, February 18). Sunny Leone says her PAN card used for loan fraud, says CIBIL



About the author: Purnajyoti Guha Thakurta is a second-year law student at Jindal Global Law School and an Editor at the JSIA Bulletin. As an aspiring lawyer, he is exploring the intricate landscape of national regulations governing the Fintech industry and the complex political economy of the country.




Comments

Rated 0 out of 5 stars.
No ratings yet
Add a rating

THE JSIA BULLETIN 2024-25

bottom of page