Last September, at the Global Fintech Festival, RBI Deputy Governor Rabi Shankar outlined a regulatory roadmap for firms that provide financial services – or fintech, as they are now popularly known. He first talked about the fact that any fintech providing liquidity services was effectively acting as a bank, and thus should be subject to a regulatory or supervisory regime.
Like his peers in other countries, the RBI official also admitted that it was almost impossible for the law to keep pace with the rapidly changing fintech landscape. “The social impact of new technology or its impact on customers needs to be well understood by all stakeholders – regulators, existing financial firms as well as innovative fintech firms.” They said. And then, he told the clinic: “Slowing down the process of change, which attracts criticism of stifling innovation, is often the best way to ensure consumer protection.”
If fintechs have heeded this early warning – and correctly read other signs, including that of the central bank governor – then the blow from last week’s ban on prepaid instruments (PPIs) such as non-bank digital wallets and prepaid cards could be a hit. Providing lines of credit on multiple fintech platforms, doesn’t feel harsh or out-of-the-blue.
Many fintechs have said that the ban would kill their business models and put their very existence at risk.
The ban raises the important issue of regulatory arbitration, or, in other words, RBI’s interpretation of regulatory limits and turf. Can issuers of digital wallets or pre-paid cards – which basically enable users to pay for multiple activities online based on the amount pre-filled from a bank account – be banned from giving credit to customers? could? It appears that the regulator views this offer of pre-approved credit by a PPI issuer – often through non-banking finance companies (NBFCs) – as a proxy credit card practice or revolving credit. This proxy lending has caught on in the last few years, and as the number of customers has increased, especially among the young customer base, RBI has stepped in in the case of loan aggregators.
True to form, RBI has not given any rationale for this move. Nor has the regulator indicated that hundreds of fintechs, including hundreds of fintechs operated by foreign venture capital funds, had built this business with millions of customers and with the level of delinquency reported to be far from growing out. Fintechs may have a case where they indicate that the credit offer to the user is from a regulated entity such as an NBFC or a bank. And that they are meeting the credit needs of a section of the population – through low-ticket transactions – that are ignored by mainstream banks. From the point of view of a financial firm, the technology platform provides an affordable method of loan disbursement and reaches out to a large customer base geographically, eliminating the need for physical branches, the costs involved and due diligence involved.
For fintech, the hit comes at the most inappropriate times. With global central banks tightening rates, recourse to cheap money from venture capital funds may be more limited. The Financial Times has reported that public fintech valuations have fallen even faster than they have climbed, as funding sharply dwindled after the liquidity tap closed in the first quarter of this year. Last year, VC firms more than doubled their investments in the sector to $134 billion, according to the newspaper.
Mark Carney, the former head of the UK central bank, said a few years ago that the new finance calls for a new Bank of England. In the Indian context, this would mean a more open central bank that engages with players in digital finance in a country that has one of the highest rates of digital adoption. Banks are at the heart of the financial system in India as it is globally, but fintechs have again clearly shown how to help local lenders step up their game and meet one’s credit needs with innovative solutions and The products should be inspired to design. Huge swarm of Indians. It will certainly help if RBI unveils a non-disruptive framework for fintech – with minimum technology standards, outsourcing norms and governance norms for regulated entities.