Emerging Fintech Landscape: Parity Between Innovation & Oversight

Emerging Fintech Landscape: Parity Between Innovation & Oversight

SUMMARY

The fusion of finance and technology has given birth to innovative business models that have revolutionised the financial landscape through affordable, efficient and user-centric solutions

Demographic shifts, the Covid-19 pandemic and the government-led India Stack have been the key drivers of the burgeoning fintech space

India is home to over 10,000 financial technology (fintech) companies and is ranked third globally

Andrew Grove’s quote, “only the paranoid survive,” emphasises the urgent need for companies to adapt to rapid technological and climate shifts. To stay ahead, businesses must become change-capable and financially resilient. Nimble leadership is key, driving digital transformation, innovation, and sustainable practices. Only if they become change-capable and financially resilient, they can stay ahead of the curve.

The fusion of finance and technology has given birth to innovative business models that have revolutionised the financial landscape through affordable, efficient and user-centric solutions. 

According to the latest PIB release, India is home to over 10,000 financial technology (fintech) companies and is ranked third globally. Demographic shifts, the Covid-19 pandemic and the government-led India Stack have been the key drivers of the burgeoning fintech space. 

According to a 2023 Elevation Capital Indian Fintech Report, the fintech industry is positioned to deliver INR 33.2 Tn in value by 2030. Disruptors rooted in paytech, lendtech, wealthtech, insurtech, and regtech have already set the stage for rethinking the foundations of traditional financing. 

They have transformed the business landscape with unconventional offerings such as buy now pay later (BNPL) lending, peer-to-peer (P2P) lending, white label robo-advisors, risk management solutions, and fraud-detection systems. 

To stay afloat in the sea of complicated and changing regulations, regtech solutions ease compliance and provide real-time alerts in case of potential violations. Whether it’s taxation, intellectual property, financial reporting or environmental, social and governance (ESG) mandates, artificial intelligence (AI) tools like robotic process automation and predictive modelling can help minimise the regulatory burden on companies.

Today, the banking-as-a-service (BaaS) model enables any business with a digital presence to offer core banking solutions under its own brand through application programming interface (API) integrations. 

For instance, embedded banking facilitates ecommerce companies to collaborate with banks and offer highly customised services such as instant account activation, card-issuance or small-ticket business lending, without any need to develop technological infrastructure in-house or become a licenced-financial institution. 

Similarly, the Reserve Bank of India’s (RBI) regulatory sandbox scheme advocates a ‘learning by doing’ approach by enabling start-ups with a minimum net worth of INR 1 Mn, to invest in new and responsible financial products. 

This initiative allows for execution of time-bound live testing for a soft launch, enabling fintech companies to craft a sustained roadmap incorporating AI, blockchain, and data analytics. It also provides opportunities to attract overseas funding partnerships.

However, in an industry defined by accelerated innovation, data-driven decision approach and cross-border networking, questions about security breaches, platform downtimes and user targeting are inevitable. 

The RBI’s recent crackdown on Paytm Payment Bank and the digital arm of Kotak Mahindra Bank for serious lapses in know your customer (KYC) compliance and IT system vulnerabilities, highlight these issues. A zero-trust model or ‘never trust, always verify’ principle can strengthen the security framework of businesses and safeguard critical data from unauthorised use. 

To create parity between innovation and oversight, the RBI has established self-regulation of multifaceted businesses in the fintech domain.

Likewise, the sandbox scheme obligates seed companies to comply with the Digital Personal Data Protection Act, 2023 and puts an explicit block on crypto-asset services and initial coin offerings (ICOs) which currently lack specific legislation. 

The surge in AI-powered applications significantly escalates electricity consumption in data centres, it becomes even more critical to monitor the digital carbon footprint. According to Goldman Sachs research, the estimated demand for power by data centres worldwide will grow by 160% by 2030.

Realising the urgent need to address the climate crisis, the Government of India has initiated 100% foreign direct investment (FDI) for renewable energy projects and rolled out a carbon credit trading scheme in June 2023. Based on the RBI’s report on currency and finance, a minimum annual investment of 2.5% of gross domestic product (GDP) is required for financing sustainability projects till the end of this decade.

In view of the greater need for purpose-driven finance, businesses are poised to adopt a ‘double bottom line’ strategy. By targeting commercially viable, mission-driven projects, they can generate positive social or environmental ‘impact’ alongside financial returns. From edtech, fintech, and medtech solutions to greentech projects like carbon capture and regenerative farming, impact-oriented ventures offer a compelling business case for integrating returns on investment with impact expectations. 

A recent study by Impact Investors Council (IIC) reveals that equity investments into impact-driven enterprises yielded an overall internal rate of return (IRR) of around 30% in the last decade. Clearly, the fund-raising paths are shifting toward projects that enable companies to emphasize community empowerment and address climate change.

As per a 2023 Fitch Ratings Report, issuances through Green, Social, Sustainability, and Sustainability-linked (GSSS or GS3) bonds reflect a mere 3.8% of the overall corporate debt market. 

This suggests that while the market segment for GS3 bonds (comprising climate, marine, and solar bonds) is growing steadily, it holds significant potential for future growth. Innovations in sustainable financing mechanisms are critical for strengthening companies’ green credentials and for accessing funds at lower costs. 

Given the policy focus to achieve carbon-neutrality by 2070 and the investors’ push for ESG disclosures, businesses should build adaptive resilience through innovation, collaboration, and efficient risk management.

Note: The views and opinions expressed are solely those of the author and does not necessarily reflect the views held by Inc42, its creators or employees. Inc42 is not responsible for the accuracy of any of the information supplied by guest bloggers.

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