Nobel laureate Robert Shiller in his book Economy and the good of society said that form and process may change, but function remains the same. Regulation, in this digital era, must be seen in this context. Thanks to BigTech players and their innovations, financial services have been disrupted for good, and hundreds of millions of unserved and underserved citizens are the beneficiaries of this fintech revolution. Almost 400 million people in India are using these new digital services which are much faster, far cheaper and more convenient. This raises the question: Why regulate fintech?
Firstly, it is the responsibility of financial regulators as guardians of the financial system to ensure that these new solutions do not harm consumers. Some fintechs engage in unfair business practices: rate capping, debt collection and mis-selling, to name a few. Many consumers end up in debt traps. Around two lakh frauds involving the digital payment system are reported every month. In an environment of financial and digital illiteracy, regulators must ensure that the principles of “best interest” and “greater good” are followed in letter and spirit.
Secondly, care should be taken that no individual fintech can threaten financial stability. This is particularly important because fintechs tend to engage in blitz scaling by exploiting loopholes in their DNA (data, network effects, activity data) and creating huge monopolies that stifle innovation and squash competition.
Third, there are thousands of fintechs and 90 percent of them generally fail over a 10-year period. This is largely due to unproven business models, poor product market adaptation and weak management. If such failures occur on a large scale involving millions of people, markets can become destabilized.
Regulators worldwide strive for a framework that can harmoniously balance the difficult triad of innovation, financial stability and consumer interest. International bodies such as the Financial Stability Board, the Bank for International Settlements and the IMF have discussed, but there is no consensus.
The US uses a laissez-faire approach, while China exercises a greater degree of government control. Europe has published robust guidelines to protect consumer interests, including privacy.
India needs a regulatory framework that can promote financial inclusion, protect consumers, promote stability in the financial system and avoid concentration of business in the hands of a few. The top three digital payment players have an 85 percent market share of UPI. Can network effects be adjusted to avoid this concentration risk?
There are three broad regulation models: self-regulation, co-regulation and statutory regulation. In many environments they develop and exist simultaneously and are not mutually exclusive. Just as excessive statutory regulation can kill innovation, excessive faith in self-regulation can lead to financial systemic risk or consumer harm. In the fast-moving world of fintech, co-regulation may be best suited where there is a give-and-take between regulators and business entities on an ongoing basis.
The timing of regulation is also important. Shall regulations be based on what is now known (after the event) or ex ante (before the event)? Where consumer protection is the highest priority, of course ex ante meaningful. Where it is important to give time for innovation, based on what is now known may be more appropriate. In terms of financial stability, unless something serious is missed, fintechs can get some time and space to meet the regulator’s expectations without the threat of being shut down.
Sambamurthy is the former chairman of NPCI and Paul is the MD and CEO of TalentSprint. The views are personal
