WHAT IS FINTECH?
The transition from physically standing in queues to transfer money, to the seamless execution of such transactions through online platforms, represents a significant advancement in the financial industry. While traditional methods of banking continue to be utilized and offer their own advantages, the advent of digital banking and, more broadly, financial technology (FinTech), has revolutionized the manner in which the financial sector operates.
Fintech, or financial technology,[1] encompasses any technology that facilitates the delivery of financial services through software applications, including online banking, mobile payment applications, and even cryptocurrency. The primary objective of FinTech is to transform the manner in which consumers and businesses access and manage their finances and to provide a competitive alternative to traditional financial services.
It has been around for a long time, but it received a surge in the global sphere after the financial crisis of 2008. The trust of an average borrower in traditional banks declined and it paved the way for the rise of financial technology,[2] or FinTech as we commonly call it today. Covid-19 also resulted in an increase in the use of FinTech, with 8 out of 10 adults in the UK now using a FinTech tool.[3]
WHAT MAKES FINTECH SO UNIQUE?
Aside from the lower cost and the ease of access, the technology could potentially aid in providing access to financial technology to socially deprived classes. Recent studies have shown the latent benefit of FinTech in this regard.[4] A majority of the people living in developing countries are excluded from basic financial services. FinTech’s potential to bridge the gap by making the services available at a lower cost could eventually result in ‘financial inclusion’.
Financial Inclusion[5] refers to the provision of access to useful and affordable financial products and services that meet the needs of individuals and businesses, including transactions, payments, savings, credit, and insurance. These services are delivered sustainably and responsibly. It is important because it helps people to build their financial security, reduce poverty, and grow their businesses.
Another part of the reason for its uniqueness lies in the rapid rise of Artificial Intelligence, or AI in recent years. AI has been sniffling its way through all major sectors and Finance is no stranger. Firms have added incentives of using FinTech in order to gain competitive advantages over traditional and not-so-AI-driven firms. AI has been used to automate transactions, enhance customer experience, and improve decision-making.[6]
In an era of increasing complexity and disparity, the untapped potential of FinTech could go a long way.
FINTECH IN THE US AND THE UK
The rise of FinTech in developed countries such as the United States and the United Kingdom has been meteoric. In the U.S., the number of FinTech startups founded between 2004 and 2015 increased rapidly, but there has since been a sharp decline. In 2015, there were 390 FinTech startups founded, but that number dropped to just 71 in 2018. Although the data is for wholesale markets, the legal restrictions that FinTech firms have to comply with, particularly the varied and often vague State laws in the US make it difficult for the firms to deal with. Also, the firms have to incur an enormous cost of adoption mostly due to the massive accumulation of banking software. This could all result in a bubble, which could soon burst.[7]
The United Kingdom has embraced the notion of a Regulatory Sandbox[8] which enables firms to test innovative propositions with real customers in the market. This provides innovators with access to regulatory expertise and affords firms several advantages, including:
- The capacity to test products and services within a controlled environment;
- The opportunity to determine the appeal of a business model to consumers and to assess the performance of a particular technology in the market;
- A potentially lower cost and reduced time-to-market;
- Assistance in identifying consumer protection safeguards that can be incorporated into new products and services.
Over 50 countries have introduced regulatory sandboxes to foster the growth of FinTech firms. The need for the future has been realised and this landmark initiative leads to a 15.1% increase in capital raised for the firm’s entry into the sandbox. The easier and more funded the entry, the smoother the fintech firms’ entry operation will be.[9]
RISE OF FINTECH IN INDIA
On November 08, 2016, the legal tender of Rs. 500 and Rs. 1000 ceased with effect from November 09, 2016. This was known as Demonetization and it eliminated nearly 86% of the currency in circulation.[10] While it has had its fair share of issues, there is no doubt that Demonetization paved the way for FinTech in India.
We have seen how mainstream digital payments have become because of Demonetization. In addition, a report[11] published by NITI Aayog shows that the Jan Dhan-Aadhar-Mobile (JAM) trinity and Aadhaar, Unified Payments Interface (UPI), etc., have also played a vital role in that regard. All this has led to the Indian dream of financial inclusion being possible and in sight, albeit a lot of work is still there to be done.
In India, the rules and laws applicable to FinTech are significantly fragmented, with no one-size-fits-all approach. There are various sections and acts that apply to FinTech firms in India, however, it must be noted that these provisions were not tailor-made for FinTech and were created for a different purpose.
The primary regulatory agencies in charge are the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), the Ministry of Corporate Affairs (MCA), the Insurance Regulatory & Development Authority of India (IRDAI), Non-Banking Financial Companies (NBFCs) and the Ministry of Electronics and Information Technology (MEITY). The proper regulatory agency in charge of its goods and services would govern a FinTech firm. For example, the RBI regulates FinTech enterprises that deal with account aggregation, cryptocurrencies, payments, etc.[12]
CONCLUSION
On January 5, 2023, the Reserve Bank of India called for applications for the testing phase of the fourth unit of its ‘regulatory sandbox’.[13] A report[14] published by Deloitte shows how India is emerging as one of the world’s leading destinations for FinTech with more than 600 startups in the space of lending, payments, insurance, and trading. India must continue in its proactive measures towards the implementation of regulatory sandboxes and the establishment of a distinct legal framework to govern FinTech firms. In light of the exponential advancement in Artificial Intelligence, this progress must be accompanied with increased legal oversight through appropriate provisions. FinTech is an enduring presence, and it would be prudent to initiate these measures expeditiously. The approach adopted by the RBI, in consonance with the provisions of the United Kingdom, towards the regulation of FinTech, serves as an exemplary model from which India can draw inspiration and chart its course forward.
Author(s) Name: Sanket Keshav (University of Bristol, United Kingdom)
References:
[1] Sean Peek, ‘What Is Fintech? Definition, Evolution and Examples’ (CO, 11 June 2020) <https://www.uschamber.com/co/run/business-financing/what-is-fintech> accessed 06 August 2023
[2] Ed Saiedi et al., ‘Distrust in Banks and Fintech Participation: The Case of Peer-to-Peer Lending. Entrepreneurship Theory and Practice’ (2020) 46(5) Entrepreneurship Theory and Practice <https://doi.org/10.1177/1042258720958020> accessed 06 August 2023
[3] Janine Hirt, ‘Fintech was born out of the 2008 crisis: now it will help us navigate another storm’ (City A.M., 04 April 2022) <https://www.cityam.com/fintech-was-born-out-of-one-crisis-now-it-will-help-us-navigate-another-storm/> accessed 06 August 2023
[4] Andrea Lagna and M.N. Ravishankar, ‘Making the world a better place with fintech research’ (2022) 32(1) Information Systems Journal <https://doi.org/10.1111/isj.12333> accessed 06 August 2023
[5] ‘Financial Inclusion’ (World Bank) <https://www.worldbank.org/en/topic/financialinclusion> accessed 07 August 2023
[6] Alex Lazarow, ‘The Future Of Fintech, According To AI’ (Forbes, 10 December 2022)
<https://www.forbes.com/sites/alexlazarow/2022/12/10/the-future-of-fintech-according-to-ai/?sh=2c582cf83336> accessed 07 August 2023
[7] Jemima Kelly, ‘Is the fintech bubble bursting?’ (Financial Times, 03 December 2019)
<https://www.ft.com/content/92fddc33-536c-47e5-85e3-2041b785dd81> accessed 07 August 2023
[8] ‘Regulatory Sandbox’ (FCA, 1 August 2023) <https://www.fca.org.uk/firms/innovation/regulatory-sandbox> accessed 07 August 2023
[9] Giulio Cornelli et al., ‘Regulatory sandboxes and fintech funding: evidence from the UK’ (2020) BIS Working Papers 91 <https://www.bis.org/publ/work901.pdf> accessed 07 August 2023
[10] Asit Ranjan Mishra and Remya Nair, ‘Rs500, Rs1000 notes scrapped as legal tender: Narendra Modi’ (Live Mint, 08 November 2016) <https://www.livemint.com/Politics/y3SJcShRQ3sqGiSj787MMO/Rs500-Rs1000-notes-withdrawn-as-legal-tender-Narendra-Modi.html> accessed 08 August 2023
[11] ‘NITI Aayog Releases Report on Digital Banks; Proposes a Licensing and Regulatory Regime for India’ (Press Information Bureau) <https://pib.gov.in/PressReleasePage.aspx?PRID=1843259> accessed 19 September 2023
[12] ‘New FinTech Laws Governing Various FinTech Companies in India’ (Online Legal India, 06 February 2023) <https://www.onlinelegalindia.com/blogs/fintech-laws-regulation-in-india#:~:text=FinTech%20companies%2C%20like%20any%20other,%2C%20Bharat%20Pe%2C%20and%20others.> accessed 08 August 2023
[13] Avimukt Dar, ‘RBI’s ‘sandbox’ tests for fraud-proof fintech’ (The Hindu Business Line, 12 March 2023) <https://www.thehindubusinessline.com/business-laws/rbis-sandbox-tests-for-fraud-proof-fintech/article66608800.ece> accessed 08 August 2023
[14] ‘Regulatory Sandbox: Deloitte India: Technology, Media & Telecommunications’ (Deloitte India, 30 July 2019) <https://www2.deloitte.com/in/en/pages/technology-media-and-telecommunications/articles/regulatory-sandbox.html> accessed 8 August 2023
