FinTech is driving the new business model and dramatically changing the face of the financial domain with the latest tech-savvy tools, which offer increased productivity in the most efficient and cohesive manner. With such great advantages, it is also challenging the government and the regulatory bodies to come up with laws, which strike the right balance between providing a stimulating environment for innovation, preserving the resiliency of the financial domain and at the same time, also ensuring that the customers are always protected.
The world of finance has been revolutionised ever since the emergence of FinTech firms. It is expected in the next 2 years, 28% of all traditional banking businesses will shift to FinTech, according to a report by PwC. The FinTech industry has largely altered the scope of financial transactions and is innovating in new ways to bring about more radical changes, which make financial transactions for any user almost a seamless affair. FinTech (which is a portmanteau of financial technology) companies are those that provide financial services with the aid of technology & differ from traditional modes of finance like banking & insurance. By leveraging technology, FinTechs are able to provide a wide range of financial services that are reaching the roots of India where traditional banking still hasn’t reached.
So why are FinTechs considered so important despite the presence of traditional banking & financial channels, Are they creating a new market or servicing a potential market that traditional finance institutes have always been away from?
Here are some examples of what FinTechs offer:
- Alternate data Lending –
India is a cash economy, while government is taking all necessary steps to make this economy a digital economy, we have a long way to go. Fintechs are addressing this issue with great innovation - alternate data is the key to lend to cash focused enterprise. Happy, with its digital lending platform - Happy Loans is focused to service mom & pop stores of India on the basis of alternate data. With its small & short term loan product, it has caused a socio-economic impact in over 400 locations in India & disbursed over 14000 loans in just 15 months of their existence. India needs a unique approach for its complex financial ecosystem, no model from the west can be applied here as it is. These fintech startups are focused on micro-enterprises and are on the journey of financial inclusion with its technology. Apart from Happy, Think Analytics is also an excellent example that focuses on alternative lending in India. - Cryptocurrency – These are digital assets that are cryptographically transcribed to provide secure, anonymous and instant transfer of assets across the globe. This is done at a fraction of the cost that can be managed by any financial entity. Bitcoin is the largest and oldest of these virtual currencies and its adoption by business users had doubled in 2017 alone.
The RBI has however, kept a strict watch over this asset class and has reiterated that the use of cryptocurrency as a transfer mechanism is not valid in India, despite it being seen as legal entity in several developed countries.
In India, FinTech has taken the backseat but some innovative features that are being used pan-India include the UPI for bank transfer and online wallets like Patym & Mobikwik, which enable instant transfers. However, the government has been very cautious with regard to the growth of FinTechs.
However for the industry to thrive, the plethora of regulations should be curtailed & freedom to innovate must be provided.
Here are some ways in which the government can help improve the FinTech segment:
1) Creating a Sandbox Environment
A sandbox environment would provide participants in the FinTech industry to build, innovate & test their projects in a controlled environment. This is important considering that these new innovative technologies are untested and unregulated. The purpose of testing a technology in a sandbox environment is for regulators and participants in the industry to experience how it functions, the advantages it bring and the potential threats that it can cause. A controlled environment with limited participants will provide stakeholders in the industry a clear picture about how practical the technology is and also source methods to overcome shortcomings right in the testing period itself.
Such an encouraging environment is desperately needed in India so as to make sure that the upcoming FinTechs are able to test their products and make the financial domain more transparent and user-friendly.This is a solution that has worked for several developed fintech friendly markets like the UK and Singapore. In fact after the introduction of a sandbox environment in the UK, FinTechs saw an increase in funding from $ 130 million in the first quarter of 2016 to $ 375 million in 2017.
2) Creating a regulatory body to govern the industries
This is another key step that the government can take in helping FinTechs. Establishing a regulatory body should be the first step taken in any emerging industry. The regulator can then take feedback & input from participants in the FinTech industry and also cross reference regulations formulated by equivalent bodies overseas.
A perfect example of this can be applied to the cryptocurrency industry in India. Currently, the RBI & SEBI are having a standoff over which body will formulate regulations. It is really unfortunate that instead of harnessing the power of cryptocurrency & blockchain the government is looking at methods to curb its usage. A regulatory body can be setup with inputs from developed countries and control the environment so that the power of the technology is utilised and not misappropriated.
3) Creating Supporting Legal Framework:
Another obvious step that regulators must take is to create a legal framework with diligent rules, which alleviate fear and mitigate risks that are mostly associated with the technology. This system should provide a seamless balance between end-user protection and promoting innovation. Apart from these, the legal rules shouldn’t be of the one-size-fits-all mentality because that will not promote technological innovation at all.
For example, data privacy regulations can be set up, so that regulators are clear as to how FinTech companies handle, store & utilise customer data. Data breach & thefts have been an issue plaguing the financial world for a while and with FinTech entirely dependant on technology, the potential for data loss & misappropriation is quite high (ref Aadhar case). Therefore by setting guidelines on how FinTech entities must manage data will keep regulators as well as consumers at ease.
For example, a typical area this can be implemented is in the mobile wallet industry, where millions of users’ private data & transactional history are stored online.
4) Collaboration Between Various Agencies:
A deep sense of understanding and collaboration is required between the various consumer bodies, government agencies and the innovators in the financial domain so that they can deal with multi-faceted issues from different perspectives. E.g., NPCI is focused on payments in India, it must collaborate with GST department to make data source API for enabling small businesses with innovative products for the backbone of Indian GDP - MSME.
5) Consistent Regulatory Standards:
All the inherent systems present in the financial domain should have access to consistent regulatory standards so that there is a level playing field across all the players in the FinTech domain. The major players and the new entrants are accorded the same respect and standards to grow and innovate.
6) Reinforce PAN-Industry Interoperability:
The government regulators ought to support interoperability across all the participants in the financial space so that the compliance costs and the disruption to the finance domain can be minimised. They should also enforce data standardisation so that interoperability can be achieved most seamlessly.
7) Security:
Data security and cybersecurity are two of the most paramount areas where government regulation is highly required. The government should review all the concerned laws on time so that not only, technological advancements shouldn’t be hampered, but data security should be of primary importance. Cybersecurity and the FinTech’s future are highly interdependent as innovations in this field bring new concerns about data security risks and cybersecurity. Numerous Asian countries have already developed cybersecurity frameworks and guidelines such as Malaysia, Hong Kong and Singapore. Singapore’s data security guidelines can be accessed here.
Conclusion
A proper framework for Risk Management must be created by the governing bodies to ensure that India is at the cusp of technological innovation in the FinTech domain as well. The financial industry, in general, is a high-risk industry and can face a wide range of risks including - operational, legal and credit risks. Risk can be identified and adequately managed with proper intervention from the government and at the same time, FinTech firms can locate potential areas of improvement and can work on them to enhance their product offerings & market efficiency.
Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of DLAI and DLAI does not assume any responsibility or liability for the same.