RBI may tighten rules for fintechs as customer complaints rise

Representative image. (credit: Forbes.com)

The Reserve Bank of India (RBI) is likely to announce new regulations for fintech companies with respect to various aspects including credit operations and know your customer (KYC) norms, said people familiar with the development.

This is against the backdrop of complaints related to some fintechs on charging of usurious interest rates and other issues including non-compliance with KYC, anti-money laundering norms (AML), and lack of ownership disclosures, they said.

The new fintech regulations will likely cover aspects of data sharing, privacy, extent of outsourcing relationships, compliance with KYC, AML norms, and formal legitimacy of products like buy now, pay later (BNPL).

“There are discussions happening on the role of fintechs and how to regulate them. That will soon come out as a notification or a regulation. I think this year you will see some RBI requirements on how fintechs will be regulated,” Vikram Babbar, partner, forensic and integrity services, EY, told Moneycontrol.

“What is their role and how do you regulate them? First thing is to understand what kind of exposure the sector has to these fintechs… They (fintechs) are also necessary as the RBI believes that...,” he said.

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In its Financial Stability Report (FSR) released on June 30, the RBI said the global fintech market was valued at $111 billion in 2020, and is projected to reach $698 billion by 2030. The Indian fintech industry, among the fastest growing in the world, was valued at $50-60 billion in 2020 and is projected to reach $150 billion by 2025.

India ranks 13th in fintech adoption rate globally and received funding of $8.53 billion from a total of 278 deals during 2021-22, the RBI said.

However, the advent of fintechs has exposed the banking system to new risks that extend beyond prudential issues and often intersect with other public policy objectives relating to safeguarding of data privacy, cyber security, consumer protection, competition and compliance with AML policies, the regulator said.

“Big Techs (FB, Apple, Google, etc) can scale up rapidly and pose risk to financial stability, which can arise from increased disintermediation of incumbent institutions. Moreover, complex intertwined operational linkages between BigTech firms and financial institutions could lead to concentration and contagion risks and issues relating to potential anti-competitive behaviour,” the RBI said.

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“Regulators and supervisors face a challenging balancing act between innovation-friendliness and managing risks to financial stability, which requires more engagement of stakeholders such as regulators, the FinTech industry, and the academia to work towards common principles for management of FinTech activities, including business and revenue models, governance, conduct, risk management, regulation aspects for promoting a sustainable ecosystem,” it added.

The banking regulator had been studying the rise in payment transactions since demonetisation and released Payments Vision 2025 accordingly. However, the 2021 report released by the RBI working group committee on digital lending may have prompted the central bank to reassess the regulatory landscape of fintech companies from a fresh lens, industry members said.

As per the finding of the RBI’s working group on digital lending, out of the 1,100 unique loan applications available on over 81 app stores as on February 28,2021, 600 were illegal.

“We have been getting feelers and inputs from our clients and partners ecosystem across banks, NBFCs (non-banking financial companies) and fintechs. Fintechs and fintech enablers are likely to be the most impacted by the expected guidelines. The ones of high interest for us at Think360 are around data sharing, privacy, extent of outsourcing relationships—product vs technology vs customer service vs compliance and so on,” said Amit Das, CEO and co-founder of Think360.ai, a full-stack data science and AI-focused firm.

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Das said that with the RBI’s recent diktat to some fintechs on not allowing credit lines to be loaded on wallets, the regulator is saying that it understands that the boundaries are being pushed.

“In the recent past, there have been instances of fintechs getting into consumer lending through financier tie-ups and indulging in malpractices around loan pricing, collection, etc, and thus the RBI wants to closely monitor fintechs…” said Pallav Jain, co-founder at fintech ShopSe.

“More scrutiny is expected around details of the arrangement between the financier and the fintech, in terms of allocation of capital and risk… The RBI is likely to push for more transparency for customer protection. It will require fintechs to declare the terms of offering, better communication standard with customers, clarity around the backend regulated entity which is providing the offering, among others,” Jain said.

BNPL

Even as the debate around loading of prepaid lines into wallets made most noise recently, a product with a similar nature is being cheered by both banks and fintechs.

BNPL allows you to convert your purchases from debit cards into EMIs. SBI Cards, HDFC Bank, ICICI Bank, Axis Bank and most other major lenders have a BNPL product of their own or offer it via third-party services.

In an interview with Moneycontrol on July 7, Axis Bank president and head of cards and payments Sanjeev Moghe said that the RBI’s new norms on loading credit lines will only impact the players who were using some of the ambiguities in the system.

“Some of these players will now have to look at alternative solutions. What are the solutions? Whether they talk to banks for partnerships, we will wait and see what happens from here onwards,” Moghe said.

Moghe added that his bank would continue partnering with fintechs despite recent developments. He added that Axis Bank’s BNPL partnership with Freecharge will continue, and that it was doing “actually quite well”.

“Unfortunately, people are conflating these guidelines which really say that you cannot load a credit line through PPIs (prepaid instruments) … Freecharge has a product, their product will continue and it is actually doing quite well... The partnership is going well, it will continue to do well and there is no impact of the regulatory guidelines on Freecharge’s BNPL product. People are mixing two issues there,” he said.

Also Read: RBI Financial Stability Report: Fintech delinquencies halved to 2.26% in March

Shalini Warrier, executive director at Federal Bank, says that the bank’s partnerships with fintechs will continue as there are significant benefits that the latter bring to the table.

However, the bank is not planning to foray into the BNPL market and will face no impact of the RBI’s circular to fintechs as it exited the prepaid card business a while back, the ED said.

“We will look for like-minded partners in three segments, credit card, personal loans and low-cost deposits… BNPL is not a segment we work in nor the prepaid card segment,” she said.