Fintech and compliance: One size does not fit all

The financial technology sector, AKA Fintech, has grown diversely and at lightning speed in recent years, especially due to advances in technology. Fintech companies have started to focus on specific consumer needs and customize their services as much as possible. After the US and China, the Indian Fintech market is the third largest in the world. India alone is home to over 2,000 Fintechs. Customers now have a range of financial products to choose from across several digital platforms. With this unprecedented growth comes risks like fraud, customer data breaches, etc. For this reason, Fintechs have come heavily under the scrutiny of regulatory bodies.

Adhering to a set of regulatory guidelines, relevant laws, business standards and specifications is essential in any business, but more so banking. Fintech companies must ensure that they follow established guidelines and specifications while taking care to protect consumer data.

With this in mind, the RBI recognized the need for a separate body to regulate this new and growing industry. In 2018, it created a Fintech Department under the Regulatory Department, which was later moved to the Payment and Settlement Systems Departments of the RBI, where most of the RBI activities were regulated. Since then, RBI has come up with a new robust regulatory framework for fintech firms which it revises from time to time.

Fintech regulations

Since most fintech companies in India offer a wide range of products and services across sub-categories of finance, the legal requirements and compliances automatically become complicated and layered during the process. This is why when it comes to products such as payment gateways, digital wallets, insurance aggregators and online loans, there is no one size fits all. Based on individual technology-based partnerships, each of these services requires a tailored technology stack as they are also regulated by various entities in India such as RBI, SEBI and IRDA. As the regulatory landscape is fragmented and control over fintech compliance and distributed across many organizations, it is important to have qualified assistance in relation to applicable laws, requirements updates and potential penalties.

Measures to lower the risk profile of Fintechs

1. Understand the local legal landscape and regulations – New entrants to the market need to understand the legalities and regulations that dictate the lending and borrowing industry in the country they operate in, as well as fintech regulations. This will help them avoid future legal complications and give them a chance to benefit from government incentives secured for Fintechs.
2. The business strategy must match the compliance strategy – Fintechs strive to work on financial inclusion and offer consumers a wider range of products at the click of a button. While it is important to focus on their business goals, it is critical that the business strategy is aligned with its compliance strategy. For example, when a Fintech collaborates with another company, it must ensure that the business partner does not pose any compliance risk to it.
3. Investment in technology and early- As a start-up, you often have budgetary limitations. Companies are not prioritizing spending on compliance technology. It is recommended to first understand what kind of technology and investment is required for a solid compliance structure. With advancements in technology in the fintech sector, it is crucial to understand the key requirements for devising a strong compliance framework to mitigate the various risks involved.

Fintechs should not see regulations as roadblocks to their growth. It is important for fintech companies to maintain an open line of communication with regulators. Transparency and effective two-way dialogue will help Fintechs integrate with the industry and make it easier for them to comply with an ever-changing country.

A fintech’s integrity is reflected through its compliance to follow regulations set by the regulatory bodies. Compliance enforcement helps the company prevent and detect violations, which protects the organization from fines and lawsuits, and increases respect and reputation in the eyes of the industry. By taking a risk-based approach with tailored responses, a Fintech can confidently keep pace with the rapid regulatory changes in the industry and grow with each passing year.