Episode 13 – Fintech – RBI drops the R bomb on all fintechs!
RBI is watching and plans to drop its regulatory hammer on all the Fintech nails
The global fintech fest has been an amazing event and increased my understanding of the space very significantly. When T Rabi Sankar, Deputy Governor started speaking on Responsible Digital Innovation, the title itself spoke about what to come next. For people who want to read the speech, click here. I present a TL:DR version of the same with my interpretations for some of the key points.
One of the most interesting assertion in the speech was this - Any fintech entity that provides such liquidity services is effectively functioning as a bank and therefore should be subjected to the same legal/regulatory/supervisory regime that a bank is subjected to. Another interesting thing that was said is - The ideal approach is for FinTech companies to be considered as enablers and partners by banks or other financial institutions. Competition for banks comes not from FinTech firms but from other banks which leverage FinTech better.
So in one sweeping talk, RBI declared that the best Fintechs can hope to become is to be partners for banks and the core function of taking deposits would be handled only by banks. All Fintechs can do is then, become distribution engines (Neo Banks), become Tech stack providers (Karza Tech, Apollo Finvest), get into lending (Almost every Fintech aspires to do this, BNPL being prime examples), but they need to partner a bank for all their services.
This is not something that is unexpected, however, for RBI to be this vocal about role of Fintechs is interesting and serves as a benchmark on what to expect next in terms of regulations. What is scary, though is this - It is virtually impossible for legislation to keep in step with the fast mutating fintech landscape. Until legislation catches up, regulation has to adapt to ensure that the financial system absorbs digital innovation in a non-disruptive manner. The social benefits of a new technology or its impact on customer needs to be well understood by all stakeholders – regulators, existing financial firms as well as innovating fintech entities. Slowing down the process of change, which attracts the criticism of stifling innovation – is often the best way to ensure customer protection.
So, in as many words, RBI has said upfront that they will introduce legislation which will purposefully slow down innovation and a large part of this is because, by RBI’s own admission, they don’t understand most of it! Super interesting, I must say!
Sample this - RBI wants to put restrictions on Entity, not activity. This simply points towards lack of understanding of overall space and warns that ay firm which provides liquidity (Deposit and credit) serves as a bank and needs to be regulated as such. I do fear that some over-arching regulations on BNPL and other lending fintechs is around the corner.
Another interesting topic was that of providing credit services to the unbanked and it is here one can expect support for new firms. Watch out for Govt. support in rural/agri space. RBI sounds optimistic about solving cross border payments by Fintech and I do see some regulatory support here in terms of ease of requirements (Watch out for firms focusing on cross border payments and even banks innovating on this).
Overall, the talk, while sounding overall positive, did sound like a warning to all Fintechs to not overstep their boundaries and served as a precursor to what to expect in terms of regulatory changes. Things are about to become difficult for new age Fintechs and founders and investors would be well served to be wary of regulatory changes while continuing to innovate. Areas where Fintechs comes close to acting as a bank are the most difficult ones, going by this speech.
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