An attempt to enable environment for inclusive growth of Fintech, the payment sector

On February 1, Union Finance Minister Nirmala Sitharaman presented the first budget of the ‘Amrit Kaal’, which envisions a prosperous and inclusive India, as we move towards 100 years of independence. Among achievements achieved in the previous year, advances in digital payments were highlighted and highlighted as key indicators of financial inclusion and formalization of economy.

The Budget highlighted that India has a robust infrastructure for fintech services, enabled by the public infrastructure that includes Prime Minister Jan Dhan Yojana, Video KYC, Aadhaar, India Stack and UPI. UPI transactions have generated digital payments of Rs 7,400 crore amounting to Rs 126 lakh crore in 2022, which is a whopping growth of 91 percent and 54 percent in volume and value compared to 2021. Although there were no groundbreaking announcements for the fintech and payment sectors in this year’s budget, there are few significant areas that could prove to be beneficial for the sector in the long term.

The budget has allocated Rs 1,500 crores to the Ministry of Electronics and Information Technology to promote digital payments. This amount was Rs 200 crore in the previous budget and was increased to Rs 2,137 crore in the actual outlay. Given the impetus for digital payments from the authorities, it is expected that the actual outlay for this year will also be higher. While it is safe to assume that the machine has started rolling and is slowly becoming self-sustaining, much work remains in financial inclusion.

There are about 26 million unique users for UPI in India, which is 18.5 percent of the population. Although the scale is unmatched by any other mode of payment worldwide, more spending will be required to promote digital payments among the underbanked and unbanked, not only with UPI but also with other modes of payment. Increase in outlays is also important to incentivize and compensate financial institutions and payment service providers as they absorb losses to create and maintain large infrastructure for the payment rails due to zero MDR.

The proposal to expand the scope of Digilocker to allow more documents and simplify KYC will enable more fintech innovations. This is important for a country like India where large sections of the population are still underbanked. Easy introduction and removal of friction in digital journeys will encourage more people to shop and use financial services digitally. Using PAN as a common business identifier will help streamline the KYC process for businesses and will minimize hassles associated with multiple documents, increase adoption of digital financial services in the MSME sector. This in turn will increase efforts to speed up the formalization of the economy and increase payments in digital mode.

Announcement on the National Financial Information Registry is a timely step. With increased digitalisation, there are now more individuals and companies who shop digitally. This can enable end-to-end computer-led digital journeys in credit payments. This can also have a positive reinforcing effect on digital transactions as businesses will see greater benefits from shopping online. As the government and RBI create a legal framework for this, it is necessary to address any data protection and privacy concerns so that there is trust and goodwill associated with the new system.

The budget also announced a comprehensive review of existing financial sector regulations. This can be seen in the context of players in financial services pointing out fragmented and tainted regulations. This is particularly beneficial for fintechs as optimal regulations can minimize regulatory risks and enable new innovations. This can also reduce compliance costs and complexity for large financial institutions. Public consultation is also a welcome step and gives a clear message that the government takes a participatory approach to regulations.

The concept of data embassies to be set up in IFSC will strengthen India as a data storage and processing hub. This could enable large companies and other nations to set up back-end data infrastructure for digital transactions, which would have diplomatic and economic implications for countries and the financial industry.

This year’s Union Budget proposes to create an enabling environment for inclusive growth of the fintech and payments sector by strengthening institutions while encouraging and incentivizing MSMEs, cooperatives and other businesses to transact digitally. Although the industry was keen to watch the progress of certain initiatives like Digital Rupee, PIDF, Digital Banking Units, Crypto Regulations, etc., announced in the previous budget, this year’s budget covered many fundamental aspects for the sector that needed to be addressed.

(The author is a Partner (Financial Services Advisory) at Grant Thornton Bharat)

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