In 2013, CRISIL had launched Inclusix, India’s first financial inclusion index, to gauge the level and progress of financial inclusion in the country across its 666 districts. Now in 2019, over half of the 666 districts of India have a score of “above average" on the index. But, of course, with a larger number of Indians accessing financial services, the need for the government to regulate these services and the service providers also becomes of paramount importance.

A look at the short history of fintech shows that the seeds were sown in the banking industry. However, the past five years have seen tremendous development, with fintech expanding to insurance and asset management companies as well. While the shift towards the digital economy has not been an easy ride in a cash-concentrated economy like India, consumers as well as businesses are slowly but surely adopting fintech services. This has activated a shift to an advanced and fast-paced economy, with new business propositions emerging in the fintech space.

And where there’s growth, regulation can’t be far behind. A number of sectors within the fintech space are yet to be regulated. Sectors such as P2P (peer-to-peer) lending, different modes of digital payment are a few that require monitoring and regulation because they handle money from the public at large. P2P lending platforms have been gaining popularity due to their efficiency, high return on investment, and low lending rates compared to banks and financial institutions. With P2P now being treated as non-banking finance companies (NBFCs) along with the new set of regulations by the Reserve Bank of India (RBI), I believe it will only bring about more legality, better decision-making and credibility to P2P platforms, which will contribute to making it more sustainable and robust in the long run.

RBI has begun to also regulate some fintech sectors that are focused on e-wallets and payment gateway services. These entities have to be registered with RBI under the Payment and Settlements Act 2007, which follows stringent rules and regulations. Apart from this, there has not been a lot of regulation in any other sector of the fintech industry. This gives an opportunity to the regulator and the businesses to try different approaches.

Historically, what has happened though is that the regulators haven’t looked at fintech companies in a different light. They have considered fintech firms at the same level as traditional businesses. This, of course, has to change. And the change happened in 2017 when a working group of RBI recommended that a regulatory sandbox be set up in India, which will allow fintech start-ups to test out new services and assess risks before they are introduced to the market.

To take a step back here, a sandbox is an infrastructure that is made available by a bank to a fintech company so that the latter is able to test products or services. Using a sandbox allows the fintech company to make a product or service better before it is taken out to a larger audience. RBI’s working group submitted a report, on the basis of which RBI released a draft last week on guidelines to enable fintech companies to test their products and services within a regulatory sandbox. This sandbox will allow further innovations in the fintech space.

The Indian fintech space has been governed by multiple entities such as RBI, the Securities and Exchange Board of India, the Telecom Regulatory Authority of India and the Insurance regulatory and Development Authority. Thus, there is no single regulatory body or a specific set of guidelines dedicated to fintech firms. Further, each state has its opinion on the start-up ecosystem. The overlap of regulations and contrasting views has resulted in uncertainties and grey areas for the fintech community.

The fintech space uses new technologies and disruptive approaches to come up with better and innovative products. Therefore, the regulator has myriad areas to look at to ensure the welfare of the multiple stakeholders in the space. Keeping the consumer at the forefront, like the announcement of data localization norms, the ability to be flexible and interpret the given regulation would play a key role in balancing and enforcing regulations. Regulatory guidelines on making digital payments more secure are also in the draft phase at RBI. A new committee, led by Nandan Nilekani, has also been recently set up for digital payments and its impact on developing a digital-inclusive economy.

With adequate support from the regulator, the fintech revolution is going to change the habits and behaviour of the Indian population.

Harshil Mathur is CEO and co-founder, Razorpay

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