Creating A Secure fintech 2.0

The government has been introducing fresh regulations for the fintech sector to ensure stricter adherence to risk and security standards. While these reforms will continue to make the businesses resilient, they will prove beneficial in the long run. 

“India is one of the fastest growing fintech markets in the world today,” said India’s Prime Minister Narendra Modi while addressing the Infinity Forum in GIFT City. 

We have seen the fintech revolution taking the Indian market by storm in the last decade. Today, with over 4.2K+ active fintech startups, India boasts the fastest global adoption rate of 87%. 

As the third largest fintech ecosystem in the world, the market size of the Indian fintech industry is projected to be $150 Bn by 2025. It is without a doubt that India is building a template for innovation models in the fintech space for the rest of the world. 

It is right to say that Indian fintechs have captured a significant share across segments ranging from payment gateways and small-ticket personal loans to BNPL (Buy Now Pay Later ) lending, insurance distribution, etc. The tailwinds behind India’s fintech story are the rapidly growing digital population, an advanced digital public infrastructure (DPI), and proactive regulators. 

But this growth story is one leg of India’s fintech growth. While it is projected that segments like SME lending, wealth creation, and fintech SaaS will play a significant role in this growth, it is possible only with sustainable profitability and regulatory-compliant models along with adhering to risk and security standards. In the recent few months, the government has become proactive in pushing fintech 2.0 by tightening the noose around compliance and regulations.  

How Is RBI Strengthening The Fintech Industry?

Within the past few months, we have seen the regulator cracking down on a payment platform’s bank and another bank over the gaps in compliance. It was about two years ago when the RBI Governor Shri Shaktikanta Das cautioned fintech firms to “pay attention to governance, business conduct, regulatory compliance and risk-mitigation frameworks” while speaking at the third edition of the Global Fintech Fest in Mumbai.  

However, just two months after that, the fintech Association for Consumer Empowerment, in collaboration with the Center for Financial Inclusion, flagged governance risk in its survey. 

Two years later today, RBI is in the process of setting up a self-regulatory organisation for fintech. During a recent meeting with fintech startup founders, Finance Minister Nirmala Sitharaman acknowledged the role of the fintech sector in the growth of the Indian economy, stressed the adherence to regulations and said that there can be no compromise over compliance. 

However, the regulatory body and the government have not left the fintech companies to fend for themselves. They are proactive in enabling the fintechs to achieve compliance. In a statement addressing the startups and fintech industry, Finance Minister also said, “The RBI, Department for Promotion of Industry and Internal Trade (DPIIT) and the finance ministry will look at the change of ownership holding or control of listed fintech companies to enable them to be in sync with regulatory compliance.” 

The ministry has also announced that the Department of Financial Services (DFS) will conduct workshops with the fintech industry and law enforcement agencies to achieve the same. The regulators and the RBI are supposed to hold meetings with fintechs every month to address questions and concerns from fintechs about compliance. 

Investor Focus On Regulations

Investors have taken note of these reforms. At a recently held Startup Mahakumbh, investors encouraged fintechs to operate within the regulations as they address consumer needs and strive to achieve financial inclusion goals. 

Siddharth Pai of 3one4 Capital said during the event that fintechs have created products that resolve customer pain points and those fintechs are successful, which are not just catering to customers but also acknowledging regulations. 

He said, “There is a strong need for the financial system to be resilient. Don’t look at the regulator as someone to fight with. He is not your enemy.” The sentiment expressed by Siddharth Pai is valid and It’s imperative for the industry to resonate with this perspective.

Embrace The Change

Instead of viewing the regulations and compliance requirements as a burden, there is a need to view the government’s fintech regulations as ambitions of a strong financial ecosystem. 

It is not possible to achieve sustainable growth in the sector if we do not comply with the rules and regulations, ensuring that customer data is protected and there are no loose ends. In China, the world has seen how the lack of regulations led to the failure of the P2P lending sector.    

Fintechs must embrace governance and compliance and make it part of the business model. The investment in robust compliance systems is essential, especially when the market is expanding rapidly. 

The next step to stand apart is to recognise potential regulatory pitfalls and take measures proactively to address them for a sustained growth trajectory. It is the way ahead to strengthen India’s position as a fintech leader at a global level.