FinTechs and RBI - Let there be a dialogue

Dear Reader,First of all, cheers for the T20 World Cup win. The breathtaking match and celebration with thousands of Indians to congratulate the team at Marine Drive in Mumbai was exceptionally joyful.

In today's column, I will talk about FinTech because there is a major development. The Reserve Bank of India (RBI) is going to meet FinTechs every month. The first ever meeting known as Finquiry took place between the regulator and FinTechs last week. This initiative is notable because I have often heard from FinTech founders that regulators do not meet them. In fact, a FinTech founder of a sizable company once told me that he wrote many times to the central bank seeking an appointment but even after months there was no reply. He was not the only one who wanted to enter the white tower on Mint Street.

FinTechs should make the most of it

Unexpectedly, the regulator is walking the extra mile and I strongly believe that FinTechs should make the most of it. Beyond the cosy environment embodied by their t-shirts, they should be more formal in their communication with the regulator. They must seize this opportunity to clear all the doubts which build a wall between innovation and regulation.

They should seek clarity on the process and application of various licences that could be available for them. They should take guidance on how to follow innovation as a vendor and comply with REs though they are not regulated. What's RBI's view on Neobank, challenger bank? What do regulators think about remote KYC and C-KYC solutions? Without digital, financial and economic inclusion is impossible, but how should they justify the cost of digital? The burning issues of onboarding customers without manipulating KYC norms at speed and storing data on cloud need more clarity. The challenge is also that Regulated Entities (REs) cannot share data with FinTechs directly and if FinTechs onboard customers through their app for the REs, the question is who will own the customer? The regulator can certainly explain.

FinTechs must seek guidance on where they can go wrong... and how to avoid that lane as the chances of getting misled are very high due to various third-party partnerships. FinTechs cannot graduate without regulators' support and they will have to focus on compliance. But at the same time, whether FinTechs can afford to be in a compliance zone, since the cost is very high and the required time is also critical. Can FinTechs afford both? What could be the ultimate solution? At what stage should they start thinking of regulation? Remember, many FinTechs wrapped up their businesses only because they realised that they could not comply. In fact, NBFC companies are surrendering licences in large numbers only because of compliance. A lot of companies cannot comply not because they don’t want to, but because of the mere size of their businesses. Imagine an NBFC with an asset size of Rs 50,000 crore and a company with an asset size of Rs 500 crore following the same rules.

Can regulators take a pause and embrace a different route of not squeezing every FinTech unless it reaches some size? There could be discussions. A common theory is about adding compliance while designing the product. Then where is the innovation? Aren’t REs doing the same thing, and perhaps that's the reason that neither banks nor insurance companies could reach the masses for decades.

I think, from Tech Service Providers (TSP) to Loan Service Providers (LSP), from Payment Gateway to Aggretaros and lead generators to KYC solution providers, FinTechs are doing dozens of activities. And I have often seen them weeping in silence… only because of regulatory haze. They should make it clear now.

Regulator’s view

In the last few years, the RBI has lent its support to FinTechs and innovation as a whole. Whether it is enough, that's the question. But it launched four cohorts of the regulatory sandbox and a number of FinTechs were selected for different innovations. But initiating Finquiry with non-regulated entities for the sake of innovation shows a sign of greater maturity. It has also framed guidelines for Self-Regulatory Organisations (SROs). The RBI set up a FinTech department two years back and they have already shown their interest in supporting FinTechs. But as the innovation is evolving, the regulator also wants to understand what FinTechs are doing. While FinTechs just focus on innovation the RBI has to look holistically and ensure they are not using any loopholes in the system or their innovation will not create any leakages.

Along with a FinTech department, the RBI should also create a synergy between internal departments and make the information available at a single window. FinTechs in lending have to seek guidance from one department while FinTechs in payment have to knock on a different door at the RBI.

Will dialogue bridge the gap?

What will the RBI and FinTechs exactly achieve with Finquiry? We don’t know. But as they say, communication can bridge gaps.

The timing for the Finquiry is also ripe because after the collapse of Paytm, the market sentiments are disturbed. Large banks have also faced the strongest supervisory actions from the regulator, which is neither good for the institutions nor for the ecosystem. In fact, the government is also mindful of the situation and Finance Minister Nirmala Sitharaman has met the FinTechs after the Paytm saga. The idea of regulatory dialogue emerged from there. If the communication works out well and we avoid potential lapses in the future, it would be a successful bet. The regulator will be recognised as a supporter and FinTechs will be the winner. As they say, together, we are unstoppable.

As usual, I am sharing with you the top five stories of the week, trust you will find them meaningful:

1. "> Budget 2024: Which sectors are likely to be in the limelight?

2. Only 6 out of 22 fintech unicorns profitable, chase continues

3. ">Insurers' Goals for 2024 & Beyond: Simplify policies, build trust, raise awareness

4. Hindenburg was never a client or investor in K-India Fund, says Kotak Mahindra Bank

5. Why central banks are moving gold to home countries and buying more

Happy Reading,

Amol Dethe

Editor

ETBFSI