The Reserve Bank of India (“RBI”) defines fintech as technology-enabled innovation in financial services that could result in new business models, applications, processes or products with an associated material effect on the provision of financial services.[i]
In India, the legislations relating to fintech are applicable on the banks, financial service providers, digital wallet issuing companies, payment gateway companies and payment aggregators, point-of-sale machine manufacturers, card issuing banks, and cardholders which uses the technological innovations in providing financial services. The regulatory framework governing the Indian fintech industry is summarized hereinbelow:
- Payment and Settlement Systems Act, 2007: This law is the principal legislation, governing the payments regulation in India. This act prohibits the initiation and operation of any payment system in India; without prior authorization of RBI.
- Guidelines regulating P2P Lending Platforms: Peer-to-Peer (P2P) Lending Platform Directions, 2017, prescribe the lender exposure norms and borrowing limits concerning the operations of P2P lending platforms in India.
- National Payment Corporation of India (NPCI) regulations regarding Unified Payments Interface (UPI) payments: The UPI procedural guidelines, issued by the NPCI, regulate the UPI payments in India. According to this framework, money transfer services through UPI platforms have to be generated by the banks. Banks can engage technology providers to carry out the operation of mobile applications for UPI payments but under the eligibility criteria and prudential norms as prescribed by the NPCI.
Keeping the importance and dynamically growing financial sector, the RBI issued a circular on January 7th, 2022, for establishing a new fintech department. The new fintech department which has been created is formed with an objective of promoting innovation and identifying challenges and opportunities arising in the fintech sector. In effect of the same, the Fintech Division of Department of Payment and Settlement Systems, which was set up in the year 2020, stands subsumed.
The department also aims to establish a framework for future study on the fintech sector that will enhance RBI’s policy actions. As a result, the fintech department will handle all concerns relating to the support of constructive innovations and incubations in the fintech sector, which may have broader repercussions for the financial sector/markets falling under the RBI’s purview.
This step by the RBI to set up a different department for fintech sector is commendable. Some benefits of creating a separate fintech department are summarized hereinbelow:
- Identity management and control, which will aid in reducing fraud and compliance with mechanisms of RBI;
- Transactions monitoring, which will allow the regulators to observe in real time the transactions that are taking place, which further will help to control fraudulent activities;
- Risk management within financial institutions; and
- Regulation of trade in financial markets.
Today’s global fintech landscape includes a wide range of everyday financial services that have been boosted by technology and thereby, the same requires creation of specific regulatory authorities for better governance of the sector. Thus, keeping in mind the increasing growth of fintech sector in India the setting up of a separate department for fintech sector by RBI is a step taken in the right direction.