Reserve Bank of India (File image)
Reserve Bank of India Deputy Governor T Rabi Shankar on September 28 said fintechs had started performing different functions of financial services which were earlier performed by traditional financial institutions. The wide array of functions fintechs perform necessitates the widening of the regulatory perimeter, and the regulators have to adjust to this major change, he observed.
Rabi Shankar, while delivering the virtual keynote address at Global FinTech Festival, said the approach to regulation also needs to widen to the type of entity being regulated. Uniform regulations might be less effective while dealing with BigTech or large infrastructure entities in the fintech sector. The approach to regulation will have to depend on the type of entity regulated.
The Dy Governor also highlighted that cyber-security risks are likely to overshadow financial risks because of dependency on technology. Systemic risk, operational risk and risks affecting competition are of prime importance while dealing with large financial market infrastructure and BigTech, he noted.
Rabi Shankar explained that the countries need to overcome their legislative and regulatory deficit in dealing with concerns around privacy, safety and monetisation of data. This is a core factor authorities have to deal with, as technology moves very fast, and it takes time for the law to catch up, as the law is a social construct.
Keeping in mind the fast-evolving financial landscape, he said it is virtually impossible for legislation to keep up the pace.
Until legislation catches up, regulation has to adapt to ensure that the financial system absorbs digital innovation in a non-disruptive manner, he said.
Regulation, sometimes, is defined as the process of slowing down the change to give time for a system to adapt and evolve. The job of the regulator is not easy when financial services performed by well-regulated financial firms change to include non-financial firms in a constantly reconfiguring financial value chains, he said.
He highlighted that as digitisation is promoted by public policy, the industry is often characterised by the rise of dominating entities; whether big tech or infrastructural entities, this raises competition and concentration issues.
There are no clear answers to how these issues can be resolved; for example, limits on market share might open up the market for new players, but it could also stifle incentives for innovation in future, he explained.
There is no clear regulatory approach that is available whether in India or elsewhere. Just as markets are evolving so is regulation, he said. The best way, therefore, for regulation to succeed and markets to evolve in a responsible manner is for each to understand the other's constraint, he explained.
The Deputy Governor also highlighted the rise of digital fraud. While fintech holds promise to prevent digital frauds, it has become apparent that India is most likely to be a subject to ransomware attacks, he said.
We need to up our guard against digital frauds and cyber-crimes, 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, he added.
We are in the best of times with the promise of technological innovation in finance and hope of substantial efficiency gains, better customer experience and social welfare. But we also need to deal with threats of underlying frauds, compromise of customer credentials, data privacy and safety, he added.