In the rapidly evolving landscape of modern finance, few sectors have wielded as transformative an influence as financial technology, or fintech, reshaping how individuals and businesses manage their money. From seamless mobile payments to algorithm-driven investment platforms, peer-to-peer lending platforms facilitating loans without the traditional banking intermediaries, fintech innovations have become integral to everyday life and none can claim otherwise. You don’t need a branded wallet anymore; your mobile will do the job. 

Cryptocurrencies like Bitcoin have even challenged conventional notions of currency and investment. Small businesses have benefitted too from simplified invoicing and accounting empowering entrepreneurs with tools previously available only to larger enterprises. Even traditional banking institutions have adopted fintech innovations to enhance customer experience and operational efficiency.

The Indian Fintech market is expected to be valued at $1.5 trillion USD by 2025, estimated to be worth $2.1 trillion by 2030 and is already the second largest in Asia-Pacific. A Centre for Advanced Financial Research and Learning (CAFRAL) report stated that fintech lending is projected to exceed traditional bank lending by 2030¹.

India ranks third globally for fintech startup funding and has been hailed as one of the sector’s “most significant operating countries”. The key Fintech sectors in India include Digital Lending, Digital Payments, Insurtech, Wealth Tech, Blockchain and the “VDA” (Virtual Digital Assets) Industry.

India has over 17 Fintech businesses that have achieved the Unicorn Status which are on the right growth path and the number of profitable fintech unicorns is set to increase as a few more of them expect to be profitable by 2025. The Reserve Bank of India (RBI) has set ambitious goals through its Payments Vision 2025 underlining the central role that digital payments are expected to play in the future of India’s financial landscape.

However, this burgeoning industry operates in a regulatory grey area, raising crucial questions about oversight, consumer protection, and the future of financial stability.

Fintech Markets To Track in India

1. Pay Tech: Payment Technology is a growing sector in India. One may believe that this has reached saturation, but Fintech companies are continuing to enter this market by offering services, such as payment gateways, card networks, application programming interfaces (APIs) and payment security. The biggest players in this sector are Paytm, PhonePe, Mobikwik and Google Pay.
2. Lend Tech: Buy now pay later (BNPL), salary loans, personal loans, vehicle loans, gold loans, peer-to-peer lending and school loans are some of the consumer-focused services available in this market area. Business-focused services include fixed term financing, trade financing and corporate cards. Credit bureau collections management- lending as a service, alternative credit scoring, loan management system and loan origination system (LOS) and are among the fintech services used in this market area (LMS). Leading platforms include M-Swipe, Google Pay and Razor Pay, including new kid on the block Roopya.²

3. Digital Banking: Account aggregators, conversational platforms, API providers, aggregators, banks with open APIs, banking as a core, and service banking are all examples of digital banking. Some key players include Crazybee, YONO, and Kahatabook.

4. Insurtech: includes a range of services, such as claims processing, sales platform, underwriting risk management, insurance infrastructure API and policy administration systems. Policy Bazaar is a key player in this category. With insurtech, insurance companies can leverage the latest technologies, such as big data analytics, machine learning and blockchain to streamline operations, enhance customer experience and reduce costs.

5. Wealth Tech: The intersection of finance and technology, where digital solutions are used to enhance personal wealth management, investing and portfolio management. Through discount brokers, robo advisors, research platforms, mutual fund investment platforms, research platforms, and alternate investment platforms, technology can be used in this market to deliver services linked to wealth and expense management. Leading players in this market includes Zerodha, Earnest.me.

6. Finance Tech: Finance fintech combines technology with finance-based services to enable investors and regular people to deal with financial services like quote to cash, taxation, and accounting.

7. Regulation Tech (Regtech): The use of technology to manage regulatory processes in the financial industry, with a focus on regulatory monitoring, reporting and compliance. The increasing use of digital products has led to a rise in data breaches, cyber-attacks, money-laundering and other fraudulent activities. Regtech companies leverage big data and machine learning technology to provide real-time data on suspicious activities and reduce the burden on compliance departments. Banks and other financial institutions are using financial technology more to support KYC, onboarding, fraud detection, anti-money laundering (AML) as well as solutions for banking compliance and risk management. There are several Indian and global platforms involved.

8. Blockchain: Blockchain technology allows for decentralized transactions without a government entity or other third-party organization being involved. Blockchain technology and applications have been growing quickly for years.

Government Initiatives

The Indian government taking note of this exponential growth has recently committed approximately $16.7 billion to the BharatNet project, aiming to enhance broadband connectivity in rural areas. This initiative is expected to broaden the sector’s reach and potentially draw more investment along with the below initiatives:

1. Pay Tech: Payment Technology is a growing sector in India. One may believe that this has reached saturation, but Fintech companies are continuing to enter this market by offering services, such as payment gateways, card networks, application programming interfaces (APIs) and payment security. The biggest players in this sector are Paytm, PhonePe, Mobikwik and Google Pay.

    

2. E-RUPI: is a person & purpose specific digital payments instrument to allow for contactless & cashless payment solutions and shall play an important role in making the Direct Benefits Transfer more seamless & effective. The solution is being adopted for cashless payments for Covid-19 vaccination.

    

3. India Stack: is a set of APIs that allows governments, businesses, startups and developers to utilise a unique digital infrastructure to solve India’s problems towards presence-less, paperless and cashless service delivery. The India Stack has been the driving force behind the accelerated evolution of Fintechs. It is one of the most important digital initiatives undertaken globally, aimed at putting up a public digital infrastructure based on open APIs to promote public and private digital initiatives and has played a catalytic role in India’s digital foundation and evolution³.
4. Open Network for Digital Commerce (ONDC): The mission is to dramatically increase e-commerce penetration in the country by enabling population-scale inclusion of all types and sizes of sellers and creating an inclusive ecosystem for e-commerce.

Regulatory Challenges

Despite its transformative potential, fintech operates in a regulatory environment struggling to keep pace. Traditional financial regulations often struggle to address the unique challenges posed by digital-first financial services. Issues such as data privacy, cybersecurity, and consumer protection loom large in an industry characterized by rapid innovation and global connectivity.

For instance, while traditional banks are subject to stringent regulatory frameworks designed to safeguard deposits and prevent financial instability, fintech startups offering similar services may operate under lighter oversight. This disparity raises concerns about systemic risk and the potential for regulatory arbitrage, where companies exploit regulatory loopholes for competitive advantage. We have seen several such examples in the recent past.

As per a recent report nearly 800 digital payment fraud cases are reported every day in India and this is excluding those reported in the National Cyber Crime Reporting Portal as many have not been recorded as banking frauds.⁴ With Banks systems not breached, the concept of issuer bank no longer applicable in digital payments (where cards are not used), the onus of frauds fall on the consumers as app providers are only facilitators. Though this has not deterred consumers from adopting fintech in their everyday lives what the regulator needs to examine is the possibility of an institutional underwriting mechanism to protect consumers from such frauds.

Developments in Regulatory Landscape

The Government recognising this growth of the Fintech Industry and the inherent risks, has passed the Digital Personal Data Protection Act, 2023 (‘DPDP Act’) in August 2023 (yet to be made effective) to cover digital transactions, online banking, and innovative financial technology platforms.

While the DPDP Act places the compliance burden on Data Fiduciaries who either alone or in conjunction with other persons determines the purpose and means of processing personal data⁵ and not a Data Processor who processes personal data on behalf of a Data Fiduciary what needs to be seen is its implementation. Fintech companies now need to evaluate and determine their role as either a Data Fiduciary or Data Processor to comply with the appropriate requirements of the Act.

The first step towards implementing DPDP Act has been the RBI’s move to update the Enabling Framework for Regulatory Sandbox (‘Sandbox Framework’) on 28th February 2024 directing regulated entities to comply strictly with the DPDP Act.⁶ The revised Sandbox Framework aligns with the goal of promoting responsible innovation while ensuring the privacy of individuals from the innovation stage.  Top of Form

The Fintech sector, typically regulated by the Reserve Bank of India (RBI), the Insurance Regulatory and Development Authority of India (IRDAI), the Securities and Exchange Board of India (SEBI), the Ministry of Corporate Affairs (MCA), and the Ministry of Electronics and Information Technology (MEITY), is now witnessing active discussions on reshaping of the regulatory landscape, with the introduction of Self-Regulating Organizations for Fintech Companies (SRO FT).

The RBI has issued a Draft Framework that outlines the operations, functions, and governance of SRO FTs.⁷ The RBI unveiled the framework for SROs for the Fintech sector on 30th May 2024.

Apart from this  RBI issued draft guidelines for digital loan aggregators on 26th April, 2024 titled ‘Digital Lending – Transparency in Aggregation of Loan Products from Multiple Lenders’.⁸ (‘DL Guidelines’) to identify Lending Service Providers (‘LSPs’) as an agent of a Regulated Entity (‘RE’) i.e a bank or any other financial institutions, to carry out one or more of the Lender/ REs functions or part thereof in customer acquisition, underwriting support, pricing support, servicing, monitoring, recovery of specific loan or loan portfolio etc. This is to ensure transparency to borrowers as regards loan products available to them as often LSPs engage in outsourcing arrangements with multiple lenders and currently it is the discretion of the LSPs to choose which components to display.

The Road Ahead

The need of the hour is navigating the intersection of innovation and regulation to oversee these new technologies on one hand without stifling innovation and for the continued growth and stability of the fintech sector. Guidelines like the SROs- fintech represent steps towards self-regulation, but would that suffice?

Moreover, collaboration between fintech firms, regulators, and traditional financial institutions is vital. Establishing clear guidelines for data protection, ensuring fair competition, and promoting financial inclusion are shared objectives that can benefit from a cooperative approach.

Written by Manjushree Somasundara, Partner – Banking Law and Practice, Risk Management.

[1]https://www.cafral.org.in/sfControl/content/NewsEvent/CAFRAL_Report.pdf

[2] Lending and Analytics Platform For Banks, NBFCs, Fintechs and LSPs – Roopya

[3] What the world can learn from the India Stack (strategy-business.com)

[4] https://www.hindustantimes.com/business/indians-report-nearly-800-online-financial-fraud-cases-a-day-are-you-protected-report-101719309683432.html

[5] Section 2(i), DPDPA

[6]https://rbi.org.in/scripts/PublicationReportDetails.aspx?ID=1262

[7] Reserve Bank of India – Draft Framework for Self-Regulatory Organisation(s) in the FinTech Sector (15.1.2024)

[8]https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=4424