India is expected to spearhead the global fintech revolution because it processes more than 40% of all digital transactions. Over 14% of all global investments have gone into Fintech, which has over 7,000 companies and a potential market of INR 4 lakh crore. There has been a lot of progress made and broad use of digital payment systems in the country. More than 80 billion digital transactions worth over INR 3,021 lakh crore were completed in India in 2021-22 using integrated ecosystems including the Unified Payments Interface (UPI), Immediate Payment Service (IMPS), prepaid payment instruments (PPIs), and the National Electronic Toll Collection (NETC).
Unfortunately, instances of financial malfeasance and improprieties have overshadowed the FinTech industry's encouraging achievements in recent years. There were 3,596 cases of card and online banking fraud in 2021-22, a 34% increase from the previous year, according to the Annual Report of the Reserve Bank of India (RBI) (2021-22). About eighty-three reports of financial fraud are received by the authorities per hour. There is a lack of trust in the sector as a whole due to the prevalence of fraud, such as fraudulent UPI transactions, e-wallet thefts, KYC leakages, and lending app frauds. The Reserve Bank of India (RBI), as the industry's watchdog, has taken these worries seriously. It has introduced a plethora of regulations after extensive consultation with relevant parties to curb such dishonest practices. All current and future competitors in this field must adhere to these rules and avoid breaking the law.
Every FinTech firm in the country is needed to register with the RBI in compliance with the RBI Act, 1934 and associated rules, depending on the type of financial services given. The Reserve Bank either directly controls certain FinTechs (such as NBFC-P2P) by issuing them NBFC licences, or indirectly regulates the banks and NBFCs that are affiliated with these businesses. RBI's approval is required for the launch and maintenance of any 'payment system' in India, according to the Payment and Settlement Systems Act, 2007.
UPI (Unified Payments Interface) payments in India are governed by the UPI Procedural Guidelines established by the National Payments Corporation of India (NPCI). All UPI platform money transfer services must be originated by banks in accordance with these rules. The NCPI has established eligibility criteria and prudential rules for technology providers that banks may hire to facilitate the operation of mobile applications for UPI payments.
In light of the rising number of occurrences of digital loan fraud in the country, the Reserve Bank of India has just introduced Guidelines on Digital Lending to protect the interests of borrowers. All disbursements and repayments must be made directly between the borrower's bank account and the RE's bank account in accordance with the standards. Pass-through pool accounts are not available to Lending Service Providers (LSPs) or any other third party. No longer may a borrower's credit limit be increased automatically without their knowledge or consent. Other requirements, such as a cooling-off time for borrowers to quit digital loans without penalty and the direct payment of fees and penalties by REs to LSPs, have also been included.
The RBI has also tightened up data privacy regulations for loan applicants. Several cases of cyber fraud involving the exploitation of debit/credit card data prompted the introduction of the new card-on-file (CoF) tokenisation regulations. These guidelines stipulate that a token will be used in place of sensitive payment details including full 16-digit card numbers, full names, expiration dates, and security codes. The token will be utilised during the transaction on the merchant's website, protecting the safety of the customer's credit card information. After these policies are put into place, the bank, and not the retailer's website, will store sensitive consumer information.
As the sector becomes more and more regulated to protect consumer interests, enterprises will have to fulfil increasingly new compliance requirements. The difficulties faced by compliance officers in navigating the regulatory cholesterol are common knowledge. Additionally, manual processes add to the complexity of compliance processes. Paper-based and people-dependent processes are neither transparent nor accountable as errors can go undetected. Compliance management systems leverage the power of digital technology to ensure that compliance documents are devoid of such lapses. It provides escalations in the form of notifications and reminders to allow the compliance teams to be better prepared for compliance deadlines. Compliance management systems also allow employers to keep track of all applicable compliances, and stay up to date with all pending compliances. They can filter through their compliance obligations based on the risk factor and prioritise the documentation work. A central repository of digital documents that are verifiable and tamper-proof gives employers access to a transparent, efficient, and timely compliance framework.
FinTech is a revolutionary, early-stage sector that has the potential to streamline and reduce the overall cost of providing financial services to the general public. The unbanked population could potentially be reached all across the world thanks to technological advancements in banking and credit. Consumers' concerns about the security of their financial and sensitive data prevent FinTechs from becoming market disruptors. Customers accessing financial services online must feel secure and confident in their privacy and security. The widespread adoption and spread of FinTech services in the country are unfortunately threatened by the acts of a few corrupt individuals. While RBI has been working to strengthen the regulatory framework, it is important for FinTech startups to grasp both the language and spirit of the law. Tech entrepreneurs in FinTechs need to comprehend the rationale behind the legislation and the purpose of the authorities. They need to put in place mechanisms to ensure compliance with the requirements, such as ongoing training and sensitization for their workers. Establishing credibility with customers is crucial to the success of this sector in the future.