BS BFSI Summit: 'Fintechs had ample time to comply with regulations'

Regulations surrounding financial technology (fintech) companies have evolved over time, giving firms ample opportunity to comply. Now, these companies must prioritise corrective actions as they scale operations, industry players said at the Business Standard BFSI Insight Summit 2024.

 

In recent years, India’s fintech ecosystem has grown to become the third-largest in the world, with over 10,000 entities operating in the country. This growth, however, has brought major challenges, primarily in terms of compliance with regulatory guidelines.

 

During a panel discussion titled ‘Navigating the Future of Fintech: Innovation, Regulation, and Growth’, industry participants acknowledged that the sector has come to recognise the importance of innovation that aligns with regulatory spirit.

 

“Mistakes are made when firms are young. It’s now time to correct those mistakes once and for all. The work required to do that demands considerable effort and intelligence, including processes and people,” said Akshay Mehrotra, co-founder and chief executive officer (CEO) of Fibe (formerly EarlySalary), a Pune-based lending fintech firm.

 

Industry players said that regulatory bodies in India engage in private deliberations with firms, scrutinising and evaluating them before taking any supervisory action.

 

“The industry is undergoing an evolution. Regulators have given fintech companies and the broader financial services sector ample time to adapt over the past few years. While regulators tend to be conservative on many matters, they are very calculated in their actions,” said Anurag Jain, founder and chief operating officer of KredX, a micro, small and medium enterprise financing platform.

 

Discussions around evolving regulations have gained momentum, particularly following actions taken by the Reserve Bank of India (RBI) against companies such as DMI Finance, Navi, and Paytm Payments Bank.

 

“The challenge for some lenders lies in whether they are categorised as fintech or tech. If you ask the regulator, they classify these companies as financial firms. This presents a challenge in terms of global tech regulations,” said Srinath Sridharan, independent director at the Fintech Association for Consumer Empowerment (FACE), a self-regulatory organization for fintechs.

 

At the same time, the broader view of the ecosystem hinges on the belief that regulation is built with a long-term vision for evolving guidelines and norms.

 

“Innovators who identify opportunities within the regulatory framework find that regulators are willing to work with them, especially if their intent is aligned with long-term goals. Regulation is inherently long-term in its design,” said Ujjwal Jain, CEO of Share.Market, a wealth and investment platform by fintech giant PhonePe.

 

In the past, the banking regulator has taken action in the payments ecosystem, even imposing an embargo on new customer onboarding for some companies. However, firms believe that the broader focus should always be on safeguarding customer interests.

 

“As a young fintech firm, you may take liberties, but you must ensure that you don’t upset systemic stability and always prioritise customer interests. As long as you keep that in check, innovation should continue to thrive,” said Reeju Datta, co-founder of Cashfree Payments, a Bengaluru-based payments fintech.

 

Panellists also underscored the need for companies to conduct independent hygiene checks within their operations, particularly in relation to credit decisions.

 

“It’s about maintaining a strong credit culture. It’s crucial to assess who the stakeholders are, how the lending process works, who provides the funds, and who receives them,” said Jain from KredX.

 

Moreover, companies must focus on sustaining growth based on opportunities within the fintech market. For example, around 300-350 million users currently use the Unified Payments Interface (UPI), with the potential for the user base to treble from its current size.

 

“India is one of the few countries where both the government and regulators have initiated innovation, and private players have built business models around it. The challenge now is how they can guide the sector to expand further,” Sridharan from FACE observed.

 

The sector’s growth has also been driven by active participation from Indian consumers.

 

“If you see the whole chain reaction that has happened when it comes to people who want to raise money to build things, markets have facilitated that. There is growing interest in investing savings, and tech innovations supported by regulators have supported this growth,” said Jain from Share.Market.

 

However, participants agreed that the fintech industry’s origins can be traced to the expansion of payment systems in India. For many fintechs, the ease of transactions served as the gateway to the market.

 

“Payments have had an impact. However, some firms have no focus on lending and thus aren’t profitable. For others, more than 95 per cent of revenue comes from lending alone,” said Mehrotra from Fibe.

 

For example, the majority of UPI transactions in the country remain free, thanks to a zero merchant discount rate policy on the real-time payments system.

 

Companies are increasingly leveraging newer technologies, such as artificial intelligence (AI) and generative AI, to solve problems in fintech.

 

“Success begins with engineers trained in AI and machine learning, who can address the challenges in the sector. We apply principles such as product and design thinking to ensure that innovation remains simple and efficient,” said Datta from Cashfree Payments.