Compliance and regulations in Fintech: Need of the hour

India has been on the brink of a digital payments revolution, helped by the pandemic and a government push for digital payments. Widespread use of smartphones and affordable data plans have contributed to Fintech’s growth journey. An EY report puts the fintech adoption rate in India at 87%, a whopping 20% ​​higher than the global average. A NEW report quoted Dilip Asbe, CEO of the National Payments Corporation of India (NPCI) as saying that eight billion transactions worth nearly $200 billion were conducted on the platform. In January, Union Minister Ashwini Vasihnaw told World Economic Forum that the value of instant digital transactions in India last year was far more than in the US, UK, Germany and France. “Combine the four and multiply by four – it’s more than that,” he said.

In the midst of the digital leap, the rise of rural fintech has been a great success story. Rural fintech is taking steps to serve a large segment of the population, leveraging technological tools to provide financial services to the underserved population in rural areas, where traditional banking services are limited.

They use mobile technology, digital payments and alternative credit scoring models to offer a range of financial products and services to farmers, merchants and low-income households. These services include important banking and financial services, payment solutions, digital lending, insurance, mobile wallets, etc. It has contributed to financial inclusion and increased economic growth in rural areas. Digital payment solutions have reduced dependence on cash transactions and ensured transparency and security. It has also resulted in increasing awareness of the benefits of digital financial services. With access to affordable credit, farmers and merchants can invest in their businesses, improve productivity and earn more.

Since rural fintech plays such an important role in the economic empowerment of rural residents, it is important for companies to be extremely careful with regulations and remain committed to compliance to prevent fraud.

Trust in systems that handle money and finances is the key to growth and scale. New payment gateways can face security delays and are vulnerable to fraud from bad actors. To ensure trust in the system, it is important to have balanced regulation from the authorities supported by fintech firms that enforce compliance. This will ensure growth and scale for companies in the sector.

Building partnerships

In the age of fintech, established banks are operating alongside new fintech firms, especially in rural areas. Supported by BaaS (Backend-as-a-Service) platforms, banking or fintech collaborations help transform the banking sector with innovations and new product offerings.

By teaming up with fintech firms, banks can offer new features to customers without worrying about resources needed to build digital products, while keeping profit margins intact. Fintechs benefit from using a single BaaS provider to create various products from banking providers. For customers, the partnerships help to get more products and security. However, these partnerships come with risks such as regulatory arbitrage. As regulators deal with the changing landscape, players and industry players, including banks, fintech firms and infrastructure providers, must work together to be compliant and create a more secure experience.

A unified framework

To promote cooperation between banks and fintechs, regulators need to develop a unified framework for due diligence checks of fintechs and third-party service providers. The focus should still be on innovation, with the regulator ensuring trust and security for the end customer.

As fintechs become more involved with banks, they must meet the supervisory requirements of their banking partners. This may involve explaining how their solution meets compliance and regulatory needs. Third-party infrastructure providers should also share important information with fintech firms to comply with due diligence requests.

This can be illustrated with an example. For example, the law requires banks to file suspicious activity reports (SARs) when they experience fraudulent activity on their platform. Fintech firms should also share these records quickly with the help of their infrastructure providers. It can make the SAR filing process more efficient for banks and regulators.

Many infrastructure-led platforms can help with compliance and more effective bank/fintech partnerships. Using these platforms will help companies save resources, which can be used for product building and maintenance, thus driving growth.

Regulation is the way to innovation

Regulation and policy within fintech is still relatively new, and many actors are still coming to terms with many RBI policy calls aimed at bringing better regulation in the sector.

For example RBI Policy Excluding NBFCs from lending via PPI hampered the operation in the first place. However, RBI needs to take steps and address the key pain points. Good regulation can affect certain actors and sectors in the fintech ecosystem in the short term, but there is guaranteed to be a positive development in the long term. It will eliminate the scale of malpractice and ensure the growth of the wider ecosystem while maintaining trust. In addition, many users are not familiar with new technological tools, which makes the role of regulators important in the space.

Regulatory changes can make operations complex for fintech companies in the short term. However, it will ensure more innovative thinking to solve problems such as risk management, underwriting and other segments. These solutions will make things easier for consumers, businesses and regulators.

Final thoughts

It is important to understand that regulators cannot manage all aspects of financial institutions. They can only audit non-compliant models when they are large enough to enter the audit area. For a customer, one must be aware of the risks of working with companies that do not comply with the requirements. Users should understand that working with non-compliant firms can jeopardize credit scores and lead to financial security risks. Moreover, if companies can envisage regulation in one segment, they can do the same in other areas, including important verticals such as data security.

Top players in the financial services industry need to come together and maintain effective compliance, to help drive growth and prosperity in the sector for years to come.

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