We are well positioned to let fintech lead the success of Digital India

The surge in digital adoption during the pandemic has made India a pioneer of the fintech revolution for developing as well as developed countries. The Niti Aayog report, India’s Booming Gig and Platform Economy, has emphasized the role of fintech and a regulatory sandbox regime to help India reach its $5 trillion target. The same was earlier highlighted by the annual report for 2019 from the Union Ministry of Electronics and Information Technology. It mentions that India has the potential to create over $1 trillion in economic value from the digital economy, including services.

The Ministry of Finance also maintains that the Indian fintech market will reach around $160 billion by 2025. According to a recent 2022 report by BLinc Invest, our fintech market is the world’s third largest already.

Digital financial services have become a key driver for credit payments via digital platforms. This fundamental success can be attributed to the Jan Dhan-Aadhaar-Mobile (JAM) trinity revolution, which served as the foundation for credit availability and direct benefit transfers. It enabled penetration of underbanked and unserved segments of our vast market that brick-and-mortar banks were unable to reach. It provided transparency, thanks to its adaptability, multilingual access capabilities and robust interface, which led to an expansion of the country’s consumer base. In addition to easing friction between financial institutions and retail customers, it has also drawn capital flows into the Indian economy.

Furthermore, fintech firms have played an important role in bridging the gender and accessibility gap in financial services. They helped to meet challenges arising from restrictions on the personal mobility of women and loss of work at a time of economic distress due to covid. The ease of signing up, transacting and getting credit offered by fintech services only added to the many reasons their cashless model resonated with a female consumer base. Thus, fintech firms have helped businesses as well as individuals.

One of the latest amazing initiatives of this decade would be the modern fintech hub being set up in Gift City, Gujarat. Also, the Indian market has witnessed an upward trend in fintech unicorn and soonicorn valuations. This is a result of the regulatory sandbox regime introduced by the Reserve Bank of India (RBI) in 2019 that has helped pave the way for the $5 trillion economy El Dorado.

Nevertheless, some lacunae and loopholes in fintech regulation undeniably exist. The multiple disruptions of technology make it difficult for politicians to keep up with the design of laws. For their part, innovators must not compromise security while improving services. It is therefore crucial for the regulator to introduce reasonable restrictions where data protection, privacy and security may be threatened. So far, the regulations have been “light touch”, aimed at reducing risks arising from the fintech industry. Key examples will be the licensing of payment aggregators and the regulation of payment data and digital lending. It is important for the regulator to find a balance between product innovation and consumer protection.

Broadly, the fintech sector is regulated under five regulations: (i) Payments and Settlement Systems Act of 2007; (ii) Guidelines for peer-to-peer lending from 2017; (iii) National Payments Corporation of India regulations for payments via Unified Payments Interface (UPI); (iv) regulations governing NBFCs under the RBI Act of 1934; and (v) regulations governing payments banks under the Banking Regulations Act of 1949.

Also note that the RBI created an in-house fintech department in January 2022. This has been created in an effort to promote orderly growth in the country’s digital financial services sector, identify issues and challenges, facilitate constructive innovation, increase incubation and regulate fintech industry for its steady work. This development is a result of RBI’s financial inclusion agenda. In addition, the regulator has rolled out a number of favorable guidelines for credit facilitators such as small finance banks and payment banks. This has tracked the use of UPI, internet-based banking and mobile banking. As stated by Commerce Minister Piyush Goyal last year, India’s fintech adoption rate is 87%, against the global average of 64%, second only to China.

It’s fascinating. An industry barely a decade old is helping the Indian economy through a period of knightly uncertainty emerging from a pandemic and the war in Europe. From the launch of Digital India and the Atal Innovation Mission to our financial inclusion manifesto, a confluence of banktech, insurtech and wealthtech is ushering in the fourth industrial revolution. What began as a financial inclusion agenda has been scaled up by digital tools that can help achieve not only that, but much more in terms of financial uplift.

Trisha Shreyashi and Krishna Pardeshi are a lawyer and panelist at HBR, and a lawyer at a REIT, respectively.

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