Despite technology driving banking services to a higher plane, the central bank believes that it cannot be a replacement for the core nature of financial intermediation and there is a high degree caution needed against digital frauds.
The insight into what the Reserve Bank of India thinks was revealed in a recent speech by Deputy Governor T Rabi Sankar on responsible digital innovation.
The fast-paced digital shift in banking sector was led by fintech companies. In the Indian context, these companies continue to remain a relatively new type of institutions for the banking regulator. Fresh challenges emerge every day. In June 2020, the RBI came out with a fair practice code for digital lenders. Subsequently, in January 2021, it set up a working group to examine digital lending activities with four internal members and two external members.
The industry is growing quickly. As Moneycontrol reported on August 11 , over the last few years, the digital lending industry has grown by leaps and bounds both in terms of the number of lenders and the amount disbursed.
According to a report by Inc42 Plus, there are approximately 1,263 digital lending start-ups. Of these, 147 are venture-backed start-ups that have invested over $2.4 billion in venture capital in this space between 2014 and third quarter of 2019-20. The India FinTech Report 2020 by GoMedici said there are 365 fintechs across consumer lending, SME finance, aggregator and P2P lending, as well as other areas.
Rapid technological transformation of the financial sector has led to some peculiar challenges, Rabi Sankar noted. “One can witness a degree of friction in compliance, not characteristic of a typically well-regulated financial system. Regulatory initiatives, especially those intended for customer convenience or safety, often face opposition,” he said.
The deputy governor's comments should be seen also in the context of rising instances of online frauds in digital transactions.
Data from American consumer credit reporting agency TransUnion has found that fraudsters are ramping up their efforts in the financial services industry, the RBI official said. “When comparing the last four months of 2020 (September 1 – December 31) and the first four months of 2021 (January 1 – May 1), the company found that the share of suspected digital fraud attempts originating from India against financial services businesses had increased by 89 percent,” he said.
Globally, financial services fraud attempts increased 149 percent. Clearly, both regulators and other stakeholders have to play their respective roles effectively to ensure that innovation in the fintech space continues to support India’s economic growth.
So, what is the central bank’s message here? While technological innovation in finance is an advantage, the regulator is clearly worried about the rising cases of online frauds, compromise of customer credentials and data privacy. Do these comments indicate that tighter regulations are in the offing for such companies ? One cannot rule out.
(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)