The term ‘Financial technology’ (Fintech) is used to describe a new sort of technology that seeks to improve and automate the access and delivery of financial services. In other words, fintech can be defined as technology-enabled financial innovation that will result in the application process and eventually help the new business models in the financial market to grow. At its foundation, fintech is utilized to facilitate the business owners, companies and consumers in order to manage their financial operations and related processes by applying specialized algorithms and software that are generally used on workstations, laptops and smartphones in today’s time.
When fintech developed in the 21st Century, the term was initially applied to the technology employed at the back-end systems of established financial institutions. Since then, there has been a substantial transition in the interpretation to more consumer-oriented services and therefore a more consumer-oriented definition has been formulated. Fintech, at present, includes different sectors and industries including but not limited to retail banking, education, fundraising and non-profit, investment management, inward and outward remittance of funds.
Fintech, if interpreted widely, also includes the development and use of cryptocurrencies such as Bitcoin and Ethereum. Although the segment of financial technology may appear to be popular, the big money still lies with the traditional global banking industry and its enormous multi-trillion-dollar market capitalization in India. However, the ecosystem of the Indian Fintech industry witnesses a wide range of subsegments including, without limitation, online payments, wealth technology (wealth tech), lending, personal finance management, insurance technology, regulation technology etc.
Recent Developments and driving factors
The fintech market in India has emerged enormously in the last 5 (five) years and has consequently become one of the fastest-growing fintech markets in the world. The 2015-2020 period has seen incredible growth in the start-ups in India in the sectors of digital payments since the new generation eventually has become more inclined towards the digital mode of payments rather than the traditional modes. The foremost reason behind such evolution has been the demonetization in India in the year 2016 by virtue of which digital payments witnessed massive growth, especially with the central government’s and banking regulator’s attempt to make India a ‘cashless’ or ‘less-cash economy.
Although demonetization has played a major role in the evolution of the fintech industry in India however, there are a lot of other factors which acted as key drivers including but not limited to favourable demographics in India having an interest towards innovative technology; government’s initiative towards fintech development in India; increasing internet access to general public; reduced transaction cost by using cloud-based servers; and growing investment ecosystem.
1. Reserve Bank of India (RBI):
RBI is the central bank of India which uses monetary policies to create financial stability in India and is responsible for regulating the country’s currency and credit systems. The fintech industry in India is primarily regulated by the RBI by virtue of which it is gradually moving towards a fully regulated model.
2. National Payments Corporation of India (NPCI):
NPCI is an umbrella organisation for conducting and operating retail payments and settlement systems in India, which is an initiative of the Reserve Bank of India (RBI) and Indian Banks’ Association (IBA) under the provisions of the Payment and Settlement Systems Act, 2007, for creating a strong Payment & Settlement Infrastructure in India. NPCI has made a significant contribution to the banking sector through its products from time to time. Some of the ground-breaking products and their significance are listed below:
Immediate Payment Service (IMPS) allows the user to transfer money in real-time around the clock and 365 (three hundred and sixty-five) days of the year. At the time of introducing IMPS, consumers had the NEFT and RTGS facilities that were limited to the bank working hours.
Aadhaar-enabled Payment Service (AePS) is a bank-led technology model that allows online interoperable financial inclusion transactions at any bank using the Aadhaar authentication through the retail merchant. For the said purpose, a customer must provide details such as bank identification, Aadhaar number, and fingerprint to complete such a transaction.
RuPay is a new card payment system launched to meet RBI’s idea to offer an open-loop, domestic and multilateral system. This made it easier for Indian banks and other financial institutions to facilitate and implement electronic payments across the country.
Unified Payments Interface (UPI) is a system that allows multiple bank accounts to be accessed from a single mobile application developed by recognised and registered companies with the RBI. Through the introduction of UPI payments, users were allowed to make instant money transfers through their mobile devices round the clock, any day of the year.
Unique Identification Authority of India (UIDAI) is a regulatory body that is directly responsible for administering and controlling the Aadhar programme in India. In reference to the fintech industry, UIDAI provides the rules and framework to govern the use of Aadhar by fintech companies as a process of customer identification and subsequently verified onboarding.
Fintech regulations in India
The regulated framework for governing fintech in India is mostly disintegrated since there are no consolidated rules for the same, however, the following are the regulatory frameworks governing the financial technology in India.
1. Payments and Settlement Systems Act, 2007:
This Payment and Settlement Systems Act (“PSS Act”) is the principal legislation, governing the regulation and supervision of the payments in India. The act prohibits the initiation and operation of any ‘payment system’ in India without prior authorization from the Reserve Bank of India. The payment structures include smart card operations, credit and debit card operations, money transfers, and Prepaid Payment Instruments.
2. Reserve Bank of India (Issuance and Operation of Prepaid Payment Instruments) Directions, 2017 (Master Direction):
The Master Direction lays down the eligibility criteria and the conditions of operation for payment system operators who are involved in the issuance of semi-closed and open system PPIs in India. The entities who are approved/authorised to operate payment systems involving the issuance of PPIs in India are required to comply with these directions.
3. NPCI guidelines governing UPI payments:
The UPI payments in India are governed by the UPI procedural guidelines issued by NPCI which is an umbrella organisation for conducting and operating retail payments and settlement systems in India. At present, only the banks can integrate with a UPI platform for providing money transfer services to their customers however, the banks are required to comply with the eligibility and prudential norms prescribed by the NPCI.
4. Master Directions – Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017:
The P2P Master Directions are the guidelines for regulating P2P lending platforms which prescribes the lender exposure norms and the borrowing limits with respect to the operations of P2P lending platforms in India.
5. Anti-Money Laundering regulations:
RBI is primarily responsible for enforcing and supervising anti-money laundering regulations in India. The regulations governing the same are as follows:
- Prevention of Money Laundering Act, 2002
- Prevention of Money laundering (Maintenance of Records) Rules, 2005
- RBI Master Direction on KYC dated 25th February 2016 (as amended from time to time
6. Data Protection in India:
Although India does not have comprehensive data protection and privacy framework, however, The Information technology Act, 2000 and Information Technology (Reasonable security practices and procedures and sensitive personal data or information) Rules, 2011 are the two regulations that govern the protection of personal data in India.
Startups and the Indian Fintech Industry
Presently, Indian Startups are thriving towards investing in the fintech industry since it leads to flawless cash flow and ensures a seamless transaction. There are various reasons which drive startups to invest in the fintech industry, few of them are as follows:
1. Lower Service Costs:
Fintech drastically reduces the servicing costs while providing effective and successful business outcomes and programmes financial operations to make functions seamless for the users. Additionally, fintech companies are not necessarily required to make considerable investments in technologies and infrastructure like call centres in order to resolve the issues of their clients.
2. Digital India:
In view of the demonetization which took place in the year 2016 by virtue of which digital payments witnessed massive growth and in consequence to which the regular purchasing habits have taken a drastic change and have consequently turned cash free-ranging from buying a tea to making relatively huge online transactions. In light of the foregoing, the fintech sector has witnessed major success in the recent past and is continuing to be one of the most growing sectors in India.
3. Data Gathering:
Fintech companies collect immense data sets through customer spending behaviour subsequent to which they analyse and automatedly identify future purchases of such customers. It predicts actions on mortgages, vehicles, or business loans concerning prior experience and customer behaviour.
4. Mobile is the new Wallet:
In light of the paramount transition in the payment methods in India, fintech companies are leading the way in the transformation towards a wallet-less economy. In order to do the same, they have introduced and delivered technologies that have made online payments more comfortable and subsequently offer enhanced user experiences.
5. The transition from traditional banking:
Customers utilizing traditional banking systems are turning around and consequently switching to banking with fintech and/or non-banking options.
6. Fast Blockchain Penetration:
In recent times, cryptocurrencies are apprehending a substantial share in the fintech sector, with startups enabling their operations across blockchain-based currency, Bitcoin. Blockchain technology has enabled distributed systems, which are not restricted by the government and are entirely controlled by the users. Thus, this transition is making Blockchain penetration much faster.
Considering the above factors and the immense growth of the fintech industry in India, it can be stated that the future of fintech in India will see both vertical and horizontal growth. The vertical growth will look forward to seeing the requirements of completely fresh financial technologies by virtue of which the users across India will get new means to invest, save, trade and streamline their finances. The horizontal growth will include the immense spread of the existing financial technologies and therefore become accessible to more users.
Both types of growth will escalate India forward towards its journey to financial maturity and unlock a lot of economic growth on the way.