Need to balance fintech innovation with prudence: RBI #IndustryFinance

Mumbai: As frenetic digitalization reshapes the financial landscape, India must learn to balance innovation and prudence, Reserve Bank of India (RBI) governor Shaktikanta Das said, urging financial institutions and fintechs to capitalize on the new opportunities while mitigating risks.

More Indians are taking to digital financial services, and their expectations for “personalized, efficient and seamless” experiences have grown as well, Das said. Meanwhile, new risks related to data privacy and security breaches have emerged, on top of existing ones like mis-selling and fraud.

“Leveraging technology for real-time monitoring and ensuring regulatory compliance will be essential to address these challenges effectively,” Das said at the third edition of the Global Fintech Fest in Mumbai.

The central bank has frequently cracked the whip on fintechs, even as it laid the ground for the sector to flourish. Earlier this month, it tightened rules for the peer-to-peer lending sector, and slapped penalties on two industry platforms. In January, RBI imposed severe business restrictions on Paytm Payments Bank Ltd, while in February, it directed a leading card network to stop card-based business-to-business payments routed through third party fintechs.

On Wednesday, Das said the central bank is also focusing on making homegrown fast payments network UPI and card network RuPay “truly global”. “The deployment of UPI-like infrastructure in foreign jurisdictions, facilitating QR code-based payment acceptance through UPI apps at international merchant locations, and interlinking UPI with Fast Payment Systems (FPS) of other countries for cross-border remittances are on top of our agenda,” said Das.

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Aided by cheap data and ubiquitous smartphones, digital payments have shot up since the unified payments interface (UPI) was rolled out eight years ago. Mobile apps such as BHIM, Google Pay and PhonePe have shepherded UPI transactions to 131 billion in FY24, up from 83.7 billion in FY23. July clocked 14.44 billion UPI transactions, up 45% from a year earlier.

Fintech oversight

In FY24, there were 968 million transactions via RuPay cards, lower than 1.26 billion in FY23. The quantum of transactions remained unchanged at ₹2.4 trillion across both years.

Das said that publicly available information places the number of fintechs founded in India at approximately 11,000, with the sector receiving investments of about $6 billion in the last two years alone. According to a Boston Consulting Group (BCG) report released on Wednesday, India’s fintech sector grew 50% by revenue in 2023, and is projected to reach $190 billion by 2030.

On Wednesday, RBI also recognized the Fintech Association for Consumer Empowerment (FACE) as the sector’s first self-regulator. The central bank, which received three applications to be a self-regulatory organization for the fintech industry (SRO-FT), is examining the rest, Das said. The recognition of the first self-regulator comes a year after an SRO structure was first announced at last year’s Global Fintech Fest.

“This is a momentous occasion for the fintech community, as recognition by the regulator brings unity of purpose and gives us a chance to amplify our collective contribution and impact,” said Sugandh Saxena, CEO, FACE. “Under regulatory guidance, self-regulation gives us a latitude to shape the industry that creates value for customers and all market participants. We have a long to-do list and look forward to the opportunity and responsibility to deliver on the charter,” Saxena said.

Fintech SROs: RBI sets limits

At the time of releasing the draft norms for SROs in January, RBI had said that given the diverse nature of fintechs, restricting to one SRO-FT could dilute some industry concerns, while having multiple SRO-FTs could undermine the representative character of self-regulation.

“We have three applications and we are looking at multiple SROs, but there has to be a limit; you cannot have endless number of SROs. I think may be two-three SROs should be sufficient at this point in time,” Das said on the sidelines of the event. Asked if the regulator had any preference or specific criteria for selecting the SROs, Das said that there was no such sequencing, and that approvals were purely based on the order of applications received.

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Two other organizations vying to be SROs include the Fintech Convergence Council (FCC) and the Digital Lenders’ Association of India (DLAI). “SRO – FT is an important industry development and we are happy to see things moving in this direction. DLAI’s application has not been returned, we look forward to further communication from the regulator in this regard,” said DLAI.

Yashraj Erande, Global head of fintech and India head of financial institutions at BCG, said it is encouraging that Indian fintechs are demonstrating a path to profitability, earlier than what was expected two-three years ago. “Moreover, profitable and compliant growth is the new mantra for the fintech founders, rather than unbridled growth,” he said.

This warns against dark patterns

Das also cautioned against “dark patterns” such as misleading buttons, hidden charges, and forced continuity, saying these have become big concerns in the digital marketplace. “The Guidelines for Prevention and Regulation of Dark Patterns, 2023 issued by Government of India is an important step to protect consumers from unfair application of technology in businesses.” These guidelines, said Das, aim to identify, prohibit, and penalise restrictive and misleading practices, so that consumers can make informed choices.

India has seen more progress in terms of digital transformation in the last decade than seen in several decades before that. Currently, there are 53 crore account holders under the Pradhan Mantri Jan Dhan Yojana (PMJDY), of which 55% are women account holders and 66% accounts are in rural and semi-urban areas, Das said on the sidelines, adding that there are several more milestones remain to be achieved.

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