The Reserve Bank of India has recommended innovation labs, more partnerships and data protection laws, dedicated organization structure under each financial regulator tighter regulations and a self-regulatory body for FinTech companies.
Last year, RBI had set up an inter-regulatory Working Group to study the entire gamut of regulatory issues relating to FinTech and Digital Banking in India. Chaired by Sudarshan Sen, Executive Director of RBI, the group includes members of Securities and Exchange Board of India (SEBI), the Insurance Regulatory and Development Authority of India (IRDAI) and Pension Fund Regulatory and Development Authority (PFRDA), CRISIL rating agency and technology heads from State Bank of India, HDFC Bank and A.P. Hota, former CEO of NPCI (National Payments Corporation of India).
RBI has invited comments and suggestions on the recommendations by email or post before February 28, 2018.
“FinTech is an umbrella term coined in the recent past to denote technological innovation having a bearing on financial services. FinTech is a broad term that requires definition and currently regulators are working on bringing out a common definition,” the group said in the paper prepared in November last year.
In view of the growing significance of FinTech innovations and their interactions with the financial sector as well as the financial sector entities, the Financial Stability and Development Council - Sub Committee (FSDC-SC) in its meeting held on April 26, 2016 decided to set up a Working Group to look into and report on the granular aspects of FinTech and its implications so as to review and reorient appropriately the regulatory framework and respond to the dynamics of the rapidly evolving FinTech scenario.
During 2014 around USD 12 billion was invested in FinTech companies globally, and in 2015 the same is estimated around USD 20 billion.
The paper said, “India has a large untapped market for financial service technology startups as 40 percent of the population are currently not connected to banks and 87 percent of payments are made in cash. With mobile usage expected to increase to 64 percent in 2018 from 53 percent currently, and internet penetration steadily climbing, the growth potential for FinTech in India cannot be overstated.”
Some of the major FinTech products and services currently used in the market place are Peer to Peer (P2P) lending platforms, crowd funding, block chain technology, distributed ledgers technology, Big Data, smart contracts, Robo advisors, E-aggregators, etc. These FinTech products are currently used in international finance, which bring together the lenders and borrowers, seekers and providers of information, with or without a nodal intermediation agency.Some of the key recommendations of the group include:
- There is a need to have a deeper understanding of various FinTech products and their interaction with the financial sector and, thereby, the implications on the financial system, before regulating this space.
- The regulatory actions may vary from “Disclosure” to “Light-Touch Regulation & Supervision” to a “Tight Regulation and Full-Fledged Supervision”, depending on the risk implications.
- There is a need to develop a more detailed understanding of risks inherent in platform based FinTech
- Various financial sector regulators to identify sector specific FinTech products and regulatory approaches
- Innovation labs may be established, including within insurance companies, to combine brand and product managers with technological and analytical resources.
- Financial sector regulators need to engage with FinTech entities in order to chalk out appropriate regulatory response and with a view to re-align regulation and supervision in response to the changing environment.
- An appropriate framework may be introduced for “Regulatory Sandbox/innovation hub” within a well-defined space and duration where financial sector regulators will provide the requisite regulatory support, so as to increase efficiency, manage risks and create new opportunities for consumers in Indian context similar to other regulatory jurisdictions.
- A ‘dedicated organizational structure’ within each regulator needs to be created to identify and monitor the challenges associated with the development of major FinTech innovations and assessment of risks and opportunities.
- Regulators may assess the product and see whether it can be monitored by way of registering them as an intermediary or through the activity regulations.
- To provide an environment for developing FinTech innovations and testing of applications/APIs developed by banks and FinTech companies
- Need for a stand-alone data protection and privacy law in the country.
- Banks / Regulated entities may be encouraged to collaborate with FinTech/start-ups to improve their customer experience and operational excellence
- Government may consider introducing tax subsidies for merchants that accept a certain proportion of their business revenues from the use of digital payments.
- Education/ awareness of customers to be highlighted by regulators exclusive
- A self-regulatory body for FinTech companies may be encouraged.