An inclusive, co-ordinated approach towards fintech innovation and regulation will go a long way
India's fintech ecosystem has witnessed rapid growth. Fintech firms saw a fourfold increase in investments, from ?276.21 million in 2015 to ?1.39 billion in 2018. The number of VC deals rose by 61.1 per cent in the first quarter of 2019 compared to the previous quarter as India is now home to over 2,000 fintech start-ups.
The country has excelled in fintech adoption and leads the charts with China. Until now, this growth has been largely triggered by successful government initiatives such as India Stack, UPI, Digital India and Pradhan Mantri Jan Dhan Yojana. At the state level, the likes of Maharashtra have come up with a comprehensive policy while others like Andhra have signed MoUs with Maharashtra to leverage its learning and experience.
The regulatory bodies have frequently come up with draft regulations to support these government initiatives. Over the last three years, the RBI has drafted regulations around payment banks, mobile money, NBFC-AA and P2P lending, all of which support financial inclusion. The central bank has also adopted an inclusive approach while doing this - it issues discussion papers on proposed policy changes and takes feedback from stakeholders.
Adopting a broad regulatory approach remains a challenge here as India has four different regulators who are broadly responsible for banking, capital markets, insurance and pension sectors. For instance, the RBI came out with proposed/draft guidelines for a regulatory sandbox which would enable fintech companies to test new products in a controlled environment. Similarly, IRDAI and SEBI published their own set of draft guidelines for regulatory sandboxes.
In such cases, there are opportunities to have as many commonalities as possible between various sandboxes which will allow innovations to span across multiple segments of financial services. But for fintech entities operating across regulators, this creates uncertainty. A case in point is the RBI's amendment to its Master Direction on KYC norms, which allowed scheduled commercial banks to use Aadhaar-based eKYC. This is a breakthrough, but it does not apply to MFs or insurance companies because SEBI and IRDAI have not made similar amendments.
Much can be learnt from the UK and Singapore regarding a co-ordinated approach. The UK has one overarching regulatory authority, the Financial Conduct Authority (FCA), which is responsible for regulation across all financial products and services. This enables fintech innovation across all segments of the financial services industry and allows players to leverage innovation in other sectors. For example, digital onboarding can be designed for both banking and insurance, and customer data can be fed to a common KYC registry as the same entity regulates both. This also benefits customers because they do not have to repeat the KYC process.
The FCA closely works with Project Innovate and develops regulations to address policy challenges faced by industry stakeholders. In fact, based on stakeholder feedback received from Project Innovate, the FCA implemented its regulatory sandbox in 2016. The UK's regulatory sandbox was a landmark achievement in creating enabling frameworks to support fintech innovation. It is now in its sixth cohort and has enabled the country to develop strong competencies in insurtech, regtech, wealthtech and cybersecurity - areas where India is lagging.
Singapore, too, has a dynamic fintech regulatory landscape based on collaboration. Its regulatory co-operation agreement with the UK as part of the UK-Singapore Fintech Bridge allows information sharing on fintech innovation and collaboration on drafting enabling regulation for the same.
The Way Forward
India has made large strides in this space, but to move to the next stage, regulators must recognise the need for a co-ordinated effort for fintech policy development. The respective sandboxes should encompass all categories of financial products and services to ensure all-round growth. We should also consider a fintech regulatory body (with participation from all regulators) to oversee this space and adopt a more cohesive and countrywide approach.
The writer is Partner and Leader, Financial and Restructuring Services, EY; Sayantan Choudhury, Director, Financial Services Advisory, EY, and Hemant Kshirsagar, Senior Manager, India Fintech Lead, EY, also contributed to this article