The Fintech Revolution And The Its Adoption By Financial Regulatories
Introduction
The Global Financial Crisis of 2008 marks the genesis of the Fintech Revolution wherein the Banking and Finance sectors witnessed a colossal upsurge in Financial Technology and the Firms which deliver such services were titled as ‘Fintechs’. Even though Fintech seems to be a contemporary notion, however, itsinitiation dates back to 1950s, when credit cards were introduced, which gave birth to the‘cashless concept’. Therefore, credit cards are considered the first invention towards financial technology. Since then, modifications and inventions have resulted in its evolution in various sectors ranging from Banking and Finance to its introduction in our everyday services such as online grocery shopping, cab service, food service etc.
In the Indian Financial System, the digital payment mode – Fintech can attain the 4th segment alongside the different types of banks. The commute in financial landscape and inclusion of technological advances results in widening the purview of Fintech by providing wide variety of hi-tech service options, in place of manually operating traditional banks. This has shifted the reliance of the customers from conventional to fintech mode, due to satisfactory performance.
THE RAPIDLY DEVELOPING FINTECH AND ITS INCORPORATION BY THE TRADITIONAL FINANCIAL BODIES
The dwindling dependence on the traditional banks can be attributed to the Fintech upsurge in online banking modes and applications and unstructured supplementary data mechanism. The impact that Fintech has on the conventional banking system has increased overtime and therefore, the need to regulate the fintech industry has been growing rapidly. The need to give effect to the laws regulating such services was on rise and so the following regulations were enacted by the policy makers.
Payment And Settlement Systems Act
RBI, the primary regulatory authority of different forms of financial bodies has been quick in anticipating and adopting technological innovations. In 2007, the Payment and Settlement Systems Act, 2007[i] was enacted which prohibits the functioning of any payment system (cards, money transfer, PPI) in India without prior authorization of RBI.
Ncpi And Upi Regulation
The National Payment Corporation of India, released a set of guidelines, regulating UPI transactions, whereby the banks play an important role in authorizing such UPI payments aided by technology providers for operating mobile applications. Further, such operations have to be in compliance with the pre-requisites proposed by NCPI.
Ombudsman Scheme For Digital Transaction By The Rbi
This customer-oriented scheme was enacted by RBI in 2019 whereby the customer can register complaint against any non-banking entity that fails to provide standard service, or acts fraudulently such as unapproved money transfer or fails to give refund to the customer. The idea behind setting up such redressal is to protect the customer from unwarranted financial risks and their exposure to financial liabilities.
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Payments Banks
Section 22 of the Banking Regulation Act of 1949[ii] states that the payments bank shall not be accorded the status of a bank and it shall abstain from providing loans or issuing credit cards. These banks are in fact Private Limited Companies and cannot discharge banking activities especially accepting demand deposits and on payment and settlements.
Anti-Money Laundering
RBI, the regulatory authority for financial bodies, oversees and regulates Money Laundering through a legislation called the Prevention of Money Laundering (Maintenance of Records) Rules 2005[iii], Anti- Money Laundering Act, 2002[iv], as well as the RBI’s Master Directions on KYC, 2016.
REGULATING PAYMENT AGGREGATORS AND PAYMENT GATEWAYS
A circular issued on March 17, 2020 on the Guidelines on Regulation of Payment Aggregators and Payment Gateways[v] establishes Regulatory Framework for Payment Intermediaries. A technological criterion dedicated towards regulation of payment aggregators has been issued by RBI.
The Aadhaar Programme
The widest Identity Project in India ‘the Aadhaar programme’ is regulated by the Unique Identification Authority of India (UIDAI), a central statutory body that frames rules and regulations for Aadhaar by the Financial Technology firms for customer verification and on-boarding.
Prepaid Payment Instruments
The Master Direction on Issuance and Operation of Prepaid Payment Instruments issued by the RBI in 2017[vi], formulated pre-requisites for the eligibility standards for PPI issuers, debit/credit limit and other operative guidelines. PPI shall be regulated by Price Support Scheme (PSS) and the PPI Master Direction as it is fragment of ‘payment systems.’
NBFC
RBI regulates the Non- Banking Financial Company or NBFC. The RBI provides license to entities depending upon a certain threshold, after attaining the license, the entity acquires the tag of NBFC. Fintech lender firms in India fall within the category of NBFC. The operation of such NBFC are regulated by – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016, Non-Systemically Important Non Deposit taking Company (Reserve Bank) Directions, 2016, and Acceptance of Public Deposits (Reserve Bank), 2016
Peer-To-Peer Lending Platforms
In short called P2P are method of obtaining finances for business is regulated by the Master Directions – NBFC – Peer to Peer Lending Platform Directions 2017[vii], which safeguards lenders against exposure and also set a limit on the number of borrowings.
Data Privacy And Protection
With the rising Fintech platforms, the realization of the urgent need to protect customer data from personal gain, gave effect to – The Information Technology Act, 2000 [viii]and the IT (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011[ix], which plays an indispensable role in regulation and protection of the customer data. Further, in 2018, the Justice Srikrishna Committee constituted by the Government of India, recommended regulatory structurededicated towards data protection which was later incorporated in the Government of Personal Data Protection Bill, 2019. Recently, RBI has issued the Master Direction on Digital Payment Security Controls dated February 18, 2021), which aims at eliminating any fraud or malice by payments aggregators and merchants and safeguards customer card credentials.
Conclusion
Fintech is a ceaseless change and it is essential for the regulatory authorities and conventional financial institutions to anticipate such changes so that they don’t get caught off guard. The Future of Banking and technology are coalescence and inevitable, moving in the same pace as Fintech upgradation,risks anticipationcultivating compliance culture shall be the utmost priority of the regulating bodies.
Author: Kaustubh Kumar, A Student at the National University of Study and Research in Law, Ranchi, in case of any queries please contact/write back to us at support@ipandlegalfilings.com or IP & Legal Filing
[i]The Payment and Settlement Systems. Act, 2007.
[ii]Banking Regulation Act, 1949, section 22.
[iii]Prevention of Money-laundering (Maintenance of Records) Rules, 2005
[iv] Anti- Money Laundering Act, 2002
[v]https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11822&Mode=0
[vi]https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11142
[vii]https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11137
[viii] Information Technology Act, 2000.
[ix] IT (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011.
