Increased scrutiny of bank-fintech alliance puts start-up ecosystem at risk

Reports suggest that the partner fintechs were informed of the decision only 10 days prior to the effective date of the decision, while customers were given barely a few hours to update their KYC information before the complete pause. This short notice made it difficult to maintain business continuity and provide corporate credit card services to clients, many of whom are start-ups. Such start-ups now find themselves without access to corporate credit cards, as large banks are unwilling to provide credit cards to them.

Regulatory Action

Given that the RBI has been imposing penalties for non-compliance and in some instances directing banks to stop cross-border remittances under the Liberalised Remittance Scheme, citing material supervisory concerns, it would be fair to assume that the decision to pause transactions through corporate credit cards, may have been taken to avoid any adverse action by the RBI. If found in violation, regulated entities face the risk of adverse decisions, involving:

(a)       Directing regulated entities to not onboard any new corporate credit card customers, as seen in the case of non-compliance with data localisation norms by HDFC, Mastercard, Diners Club and American Express; and

(b)      The possibility of a monetary penalty for non-compliance with KYC regulations.

Such developments can cause a confidence crisis among all stakeholders. The customer could lose confidence in the financial products (co-branded corporate credit cards in this case), leading to financial losses for the regulated entities, especially banks and other financial institutions, working closely with fintech companies. The businesses of fintechs would be most affected, especially for entities that only provide services related to co-branded corporate credit cards, and such actions have the potential to bring their businesses to a complete halt.

The above developments can have far-reaching implications for an otherwise flourishing start-up ecosystem, with significant ripple effects under the current tight liquidity scenario.

Increasing Financial Penetration

The fintech-led financial transition has rested on the agility provided by regulatory flexibility that enabled innovation in financial services. The emergence of fintech companies and solutions provided by them for customer acquisition and servicing through digital means has vastly increased financial penetration. Catering to the divergent requirements of Indian consumers, including the underserved and unserved, who had historically struggled with access to the financial system, prior to India’s digital transformation, has been made possible with the prolific growth of the fintech sector.

RBI’s increased scrutiny of banks servicing start-ups and tech-based companies may be a fallout of the recent global trends affecting certain banks dealing with start-ups, in particular or possibly a natural extension of the central bank’s KYC compliance scrutiny. Whatever may be the reason, the decision has largely impacted the business continuity of partner fintechs, with their customers being left in a lurch.

While the RBI’s mandates and norms are to serve the larger economic interests of all, it is important that due alternatives and options are provided to a flourishing start-up ecosystem, which through continuous innovation, has made India a fintech leader, while also enabling inclusive economic growth in the country.

(Naman Lodha, Associate at Cyril Amarchand Mangaldas also contributed to the article.)

Anu Tiwari and Pallavi Singh Rao are Partners at Cyril Amarchand Mangaldas. Views are personal, and do not represent the stand of this publication.