India is evolving into a dynamic environment where finance start-ups might potentially become billion-dollar unicorns. Fintech start-ups in India are pursuing a variety of goals, from expanding into new industries to investigating global markets.
The historically cash-based Indian economy has reacted positively to the fintech potential, which has been fueled by an increase in e-commerce and smartphone adoption.
According to a report, India is just behind China in the adoption of FinTech services in the world. The adoption rates are through the roof, the report states that the sample in the survey done by this particular report had used at least 2 FinTech services.
Payment and Settlement Systems Act, 2007 (PSS Act)
The Payment and Settlement System Act, 2007 (PSS Act, 2007) was set up by the Reserve Bank of India (RBI). The Act empowers RBI (apex institution) to deal with the matters relating the purpose and other purposes for which RBI is authorized to constitute a central authority known as the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS). The Payment and Settlement Systems Regulations, 2008 was also made by RBI. Both the Act and the Regulations came into force on 12th August 2008.
The objectives of The Payment and Settlement Systems Act, 2007 are:
- To provide regulation and supervision of payment methods in India.
- To constitute such regularities by RBI to exercise its power and perform its functions.
- To designate RBI, the apex institution as authority for purposes related to payment systems in India.
Payment and Settlement Systems Regulations, 2008.
The mission statement of RBI for payment and settlement system states that the endeavour would be “to ensure that all payment and settlement systems operating in the country are safe, secure, sound, efficient, accessible and authorised”.
The objective of the Board for Regulation and Supervision of Payment and Settlement Systems Regulation, 2008 are:
- To deal with the constitution of BPSS;
- To deal with the composition, powers, and functions, its meetings, and quorum of BPSS; and
- To constitute sub-committees or Advisory Committees by BPSS
UPI and its uses.
The unified payments interface or the UPI is an interface via which one can transfer money between bank accounts across a single window. This implies you can send or get cash or sweep a fast reaction (QR) code to pay an individual, a merchant or a service provider to shop, pay bills or authorize payments.
It is simple, free of charge and instantaneous. UPI allows you to make transactions at any given point of time, throughout the year. The Limit to transfer money in a single UPI transaction is up to Rs. 1 lakh.
UPI was launched in 2016, is the brainchild of the National Payments Corporation of India (NPCI), the umbrella organisation that oversees retail payment systems in India. The NPCI is governed by the central banking authority, the Reserve Bank of India, and its primary goal is to drive India towards becoming a digital economy.
Some of the Advantages of using UPI include:
- Free Fund Transfer:
There were days when you have to part 5% of the amount for the fund transfer. Visa and Mastercard still charge 1-2% of the amount for making payment to the merchant. NEFT and IMPS are not costly but it would certainly pinch if the transaction is small.
- Useful For Small Transaction:
Before the UPI, you may have not paid ₹10 or 20 by using the debit or credit card. The card transactions are costly and small shopkeepers avoided it. But UPI has changed the scenario. Now every shopkeeper or street vendor is ready to accept UPI payments. The smooth and low-cost transaction had made it feasible for small shopkeeper and consumer as well.
- More Secure:
Not everyone uses the card for payment or net banking for online payments. People are reluctant to use the cashless methods because of the security concern. The UPI has minimized this concern. Actually, it is more secure than the present mode of transaction. In the transaction through the UPI, you never share your bank account details. You do not enter your credit card number or CVV. You only give a virtual payment address which does not give any clue about your bank account.
What are regulators doing to encourage innovation in the financial sector? Are there any initiatives such as sandboxes?
The RBI and the Securities Exchange Board of India (SEBI) have set up the Working Group on Fintech and Digital Banking and the Committee on Financial and Regulatory Technologies separately. These panels have been entrusted with surveying the open doors, gambles and challenges introduced by the fast development of FinTech in India.
The RBI’s Working Group, in its report has perceived that there is a need to give a climate to creating FinTech advancements and testing applications/APIs created by Banks and FinTech Companies’. Later media reports likewise express that the RBI is chipping away at an administrative sandbox for monetary innovation.
In August 2019, the Reserve Bank of India released the Enabling Framework for Regulatory Sandbox after a series of consultations. The Sandbox allows live testing of new products or services (which are usually subject to higher restrictions or face regulatory barriers in implementation) in a controlled or test regulatory environment.
Under the framework, FinTech companies that satisfy the eligibility criteria can test their products in the regulatory sandbox. FinTech companies include start-ups, financial institutions, banks and any other companies partnering with or providing support to financial services businesses.
Major threats to the FinTech market expansion.
There are diverse new avenues which have arisen because of the evolution of the FinTech revolution. You need to have heard of the all of the well-known line that information is the brand-new oil. The maximum treasured factor withinside the international isn’t always a fossil fuel, however sensitive facts amassed with the aid of using apps from its users. The more FinTech revolution spreads nationwide, the more will be the amount that they deal with.
As more people go online, things like data security are becoming a major challenge for the FinTech industry.
A remarkable quantity of data is amassed via way of means of the FinTech space, that’s then analyzed to acquire perception into extra of customer shopping for styles and retention strategies. This consists of numerous private facts, inclusive of financial, health, and social facts of a user. Protection of this form of facts is the need of the hour.
Blockchain Technology and its regulations in India
Blockchain can be defined as a way of initiating and verifying transactions in a distributed environment. The decentralized record keeping and reporting functionalities promise opportunities in reducing cost, fraud and increasing speed of transactions.
A major factor for innovation in this space is the emergence of permission-less platforms enabled by public blockchain like bitcoin. These have laid down the road for replacement of traditional centralized systems by Internet of Money. Such has been emergence of blockchain that over 700 alternate currencies have tried to establish themselves on the model of Bitcoin.
Till now there was wide acceptance of public blockchain, but off late disagreements have begun to crop up on this technology being enterprise friendly. Global bankers are looking for more agile, cheaper and faster distributed consensus mechanism enabled with requisite permissions.
Globally, financial institutions are collaborating with fintech firms and setting up their own in-house labs for testing blockchain technology. R3CEV, a consortium of 42 global financial institutions remodeling the trade and transfer process of commercial paper with the use of blockchain.
Regulatory approval is one of the key success factors of technology adoption in the next few years. Though many regulatory boards have expressed interest, the formal policing of the technology is still awaited.
• In the U.S., the SEC (Securities Exchange Commission) is approaching companies that are seeking to use blockchain for transfer of securities. Recently, the SEC has approved Overstock to issue stocks with the use of blockchain.
• Australian Securities Exchange announced that it is building a private blockchain for clearing and settling of trades.
• In the U.K., the Financial Conduct Authority is continuously monitoring the development of the technology.
In India, The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 is the proposed Bill which may ideally serve to introduce a level of uniformity of understanding and serve to bring the various government agencies involved onto the same page while also providing security and helping regulate the otherwise unregulated markets and prevent its misuse.
On the surface, the law seems to be very restrictive as it aims to ban all private cryptocurrencies, including mining and trading. The bill also aims to promote the “official digital currency” issued by the central government and RBI.
In addition, the penalties stipulated by law appear disproportionately severe compared to similar white-collar crimes. However, since the text of the bill has not yet been published, it may differ significantly from the provisions of the previous bill that banned cryptocurrencies and regulated the Digital Currency Bill, 2019.
In India, the volume of crypto trading platforms has increased significantly. According to a recent report, WazirX, India’s largest cryptocurrency exchange, has annual revenues of over $ 43 billion. With proper regulation, the government can tax the income generated. This can be a situation that benefits both the government and investors.
While there are genuine concerns over the usage of Virtual Currencies, regulation rather than prohibition could be a more viable option in India and embracing Virtual Currencies may have served as a way for India to lead the way into the future.
Major examples of disruption through FinTech in India.
Some key examples of disruption are as follows:
- Digital only Banks, such as DBS Digibank, IDFC Digital Bank and Kotak Mahindra Bank’s 811 Accounts are branchless paperless banks offering a smartphone enabled no-frills banking experience for typically higher interest rates on savings;
- Deployment of Chatbots for customer support by leading banks such as HDFC Bank, ICICI Bank and Axis Bank looking to automate customer support.
- Peer to Peer lending marketplaces such as Faircent have flourished since the RBI brought in regulations.
- Non-bank payment intermediaries such as Razorpay, Instamojo, MSwipe have made it much easier for merchants to accept digital payments.
The Future of FinTech
The Reserve Bank of India’s Framework for Recognition of Self-Regulatory Organisations for PSOs is likely to be key in safeguarding the security and quality of PSO services in India. Creation of the NUEs in the retail sector is also likely to affect the operation of FinTech specifically in the retail sphere.
The Government also set up a committee to devise a framework for regulating non-personal data. The committee is currently at a consultation stage and is receiving comments from stakeholders. Interestingly, one of the key propositions of the report is to mandate the sharing of non-personal data for sovereign, public interest and economic purposes. As non-personal data is a broad term, anonymised financial or payments data is also likely to be impacted if this comes into effect.
There is a need to regulate, invest, and sell its business, startup surroundings most effective and then it could turn out to be a start-up haven. It has got a massive ability to alternate right into a evolved economy. FinTech has made use of latest technology and disruptive procedures to provide you with higher and progressive products.
This trend is anticipated to maintain and pass larger withinside the coming years. Banks will undergo a progressive alternate with AI and MI withinside the centre of all of the disruption to be able to appear on this sector.