FinTech in India (2023, PDF)

Definition of FinTech:  FinTech stands for financial technology, which refers to technologically enabled financial innovations.  It involves new business models, applications, processes, or products that can significantly affect financial markets, institutions, and the pro...

Definition of FinTech:  FinTech stands for financial technology, which refers to technologically enabled financial innovations.  It involves new business models, applications, processes, or products that can significantly affect financial markets, institutions, and the provision of financial services.  Financial Stability Board (FSB) defines it as “technologically enabled financial innovation that could result in new business models, applications, processes, or products with an associated material effect on financial markets and institutions and the provision of financial services.”  FinTech represents the convergence of finance and technology to create innovative solutions for financial services. Evolution of FinTech in India:  The growth of FinTech in India began in the early 2000s, with the rise of digital payments and mobile banking solutions.  The proliferation of smartphones and the emergence of digital-native consumers contributed significantly to FinTech's rise.  FinTech startups emerged across various sectors, including: o Digital lending o Wealth management o Insurtech (insurance technology) o Blockchain-based solutions  2016 marked a milestone in India's FinTech development with the launch of Unified Payments Interface (UPI) by National Payments Corporation of India (NPCI), enabling instant money transfers between bank accounts. Impact of FinTech on Financial Services in India:  FinTech has made financial services faster, cheaper, more efficient, and accessible.  India is now the world’s third-largest FinTech ecosystem, in terms of the number of FinTech entities operating.  87% adoption rate of FinTech in India, well above the global average of 67%.  India’s FinTech market is projected to grow from USD 50 billion in 2021 to USD 150 billion by 2025. Role of RBI in the Evolution of FinTech in India:  Technological innovations in FinTech have been driven by the following factors: o Digital public infrastructure o Institutional arrangements o Policy initiatives  India Stack and the JAM trinity (Jan Dhan Yojana, Aadhar, Mobile) played a key role by providing digital infrastructure and an enabling ecosystem for innovation.  RBI's role focused on institutional arrangements and policy initiatives. Institution Building by RBI: 1. Institute for Development and Research in Banking Technology (IDRBT): o Established on March 06, 1996, IDRBT has been pivotal in shaping the digital transformation of the Indian banking industry. 2. National Payments Corporation of India Ltd (NPCI): o Incorporated in 2008, NPCI is crucial in driving the transformation of retail digital payments in India. 3. Indian Financial Technology & Allied Service (IFTAS): o Set up in 2014, IFTAS focuses on IT-related services for the RBI, banks, and financial institutions. 4. Reserve Bank Information Technology Pvt. Ltd. (ReBIT): o Established in 2016, ReBIT strengthens the cyber resilience of the RBI and the banking sector. 5. Reserve Bank Innovation Hub (RBIH): o Established in 2021, RBIH promotes innovation in financial services. 6. FinTech Department of RBI: o The FinTech Department was established on January 4, 2022, marking RBI's formal commitment to supporting FinTech development. Summary:  FinTech in India has evolved due to a combination of technological advancements, policy frameworks, and institutional support.  RBI has played a significant role through institution building, setting up key organizations like IDRBT, NPCI, IFTAS, ReBIT, RBIH, and its dedicated FinTech Department.  India’s FinTech ecosystem is robust, with significant adoption and future growth potential. Policy Initiatives by RBI in the FinTech Sector: RBI has played a crucial role in shaping the development of the FinTech sector in India through timely and appropriate policy initiatives. Below are the key policy actions taken by RBI: 1. Regulatory Guidelines for Payments Banks (2014): o Introduced to enhance financial inclusion and promote digital transactions in underserved areas. o Payments Banks were required to:  Provide small savings accounts, payments/remittance services, and other basic banking facilities.  Focus on leveraging technology to reduce costs and improve efficiency.  Were restricted from lending activities but allowed to issue ATM/debit cards and offer payment services including internet banking. 2. Regulatory Guidelines for Account Aggregators (2016): o Aimed at facilitating easier access and sharing of financial information between financial institutions and customers. o This initiative marked India’s approach to ‘Open Banking’ by introducing Account Aggregators (AAs). o AAs are intermediaries that:  Collect and consolidate financial data from various sources with the customer's consent.  Present it in a standardized format to authorized entities such as banks, NBFCs, and other financial institutions. o Key benefits of this initiative:  Enhanced financial data portability.  Improved credit assessment.  Easier access to customized financial products and services. o The guidelines emphasized data privacy and security measures to protect customer information and ensure compliance. 3. Regulatory Guidelines for Pre-Paid Instruments (PPIs): o RBI issued guidelines to enhance the security of digital payment mechanisms. o Key features:  Regulated entities issuing PPIs (such as mobile wallets, prepaid cards, etc.) to ensure:  Interoperability between different digital payment systems.  Consumer protection.  Efficient grievance redressal mechanisms.  KYC norms for PPI users to prevent money laundering.  Issuers required to:  Maintain escrow accounts.  Adhere to strict reporting requirements to RBI for transparency and accountability. 4. Regulatory Guidelines for Peer-to-Peer (P2P) Lending (2017): o RBI introduced guidelines to regulate and foster the growth of the P2P lending sector. o Key aspects:  P2P platforms were required to operate as NBFCs and obtain registration from RBI.  Guidelines focused on protecting investors and borrowers by:  Imposing limits on transaction sizes and leverage ratios.  Enhancing transparency and reducing systemic risks.  Strict eligibility criteria and mandatory credit assessment processes to promote responsible lending and mitigate risks of defaults. 5. Regulatory Guidelines for Invoice Discounting (2018):  Issued under the Trade Receivable and Discounting System (TReDS) to address liquidity challenges for Micro, Small, and Medium Enterprises (MSMEs).  TReDS platform facilitates the uploading, accepting, discounting, trading, and settling invoices/bills of MSMEs, enabling both receivables and payables factoring (reverse factoring).  Participants include MSME sellers, corporate buyers, Government departments, PSUs, and financiers (banks, NBFCs).  Key features: o “Without recourse” transactions to MSMEs. o Strict eligibility criteria for participants and adherence to KYC norms. 6. Regulatory Sandbox Framework (2019):  Created to foster responsible innovation in financial services and promote efficiency.  Eligible entities can live test their products in a controlled environment with possible regulatory relaxations.  Four completed cohorts on: o Retail payments. o Cross-border payments. o MSME lending. o Prevention of financial frauds.  Introduction of Neutral cohort (2023) to support diverse ideas and the ‘On Tap’ facility for submitting applications.  Interoperable Regulatory Sandbox (IoRS) allows testing of hybrid products under multiple financial regulators. 7. Digital Lending Guidelines (2022-2023):  Regulates the rapidly expanding digital lending sector to ensure transparency, consumer protection, and systemic stability.  Key provisions: o Mandatory registration of digital lenders. o Stringent data security requirements. o Fair lending practices to protect borrowers from predatory practices. o Refined guidelines (2023) to address emerging challenges and promote responsible lending. 8. HaRBInGer (2021-2023):  A global hackathon launched by RBI to find innovative solutions to challenges in the financial landscape.  G20 TechSprint (2023), co-hosted by BIS Innovation Hub and RBI, focused on technology solutions for cross-border payments. 9. Framework for Self-Regulatory Organisation (SRO-FT, 2024):  Aimed at ensuring ethical conduct, effective governance, and risk management by FinTechs.  Promotes self-regulation within the FinTech sector while protecting consumer interests. 10. Unified Payments Interface (UPI):  A significant FinTech innovation in India’s payments space, revolutionizing mobile payments.  Features:  o Instant, 24x7 fund transfers using virtual payment addresses. o Supports peer-to-peer (P2P) and peer-to-merchant (P2M) transactions. o UPI became the largest retail payment system by transaction volume. o Innovations like UPI123Pay, UPI Lite, RuPay credit card linking, and conversational payments. o Expansion to facilitate payments via pre-sanctioned credit lines in addition to deposit accounts. 11. Interoperable Card-less Cash Withdrawal (ICCW) at ATMs:  Card-less ATM withdrawals using UPI for authentication.  Aimed at reducing frauds like skimming, card cloning, and device tampering. 12. Interoperable Payment System for Internet Banking Transactions:  Interoperable payment system for internet banking transactions was approved to ensure quicker settlement of funds for merchants. Adoption of FinTech by RBI 1. RBI adopts FinTech innovations to enhance financial inclusion, efficiency, and regulatory oversight. 2. Focus areas include Central Bank Digital Currencies (CBDCs), Unified Lending Interface (ULI), and Supervisory Technology (SupTech). 3. SupTech uses advanced analytics and data-driven tools to strengthen RBI’s supervisory framework. II. Central Bank Digital Currencies (CBDCs) 4. RBI launched the Digital Rupee (CBDC) pilot in 2022 for efficient currency management. 5. CBDC combines the benefits of digital currencies with the trust of fiat currencies. 6. Digital Rupee serves as a legal tender, usable for transactions and as a store of value. 7. CBDCs are classified as: o CBDC-R (Retail): For P2P and P2M transactions with programmable and offline features. o CBDC-W (Wholesale): For institutional use in Government securities and call money transactions. 8. Initial use cases for CBDC-R included Person-to-Person (P2P) and Person-to- Merchant (P2M) transactions. 9. CBDCs streamline cross-border remittances, reduce costs, and enhance transparency. 10. RBI explores bilateral partnerships and BIS multilateral projects for CBDC cross- border use. III. Unified Lending Interface (ULI) 11. ULI, formerly the Public Tech Platform for Frictionless Credit, enables seamless credit delivery. 12. ULI was conceptualized by RBI and developed by RBI Innovation Hub (RBIH). 13. Announced in the 10August 2023 Developmental and Regulatory Policies, its pilot began on August 17, 2023. 14. ULI operates as a Digital Public Infrastructure (DPI) with an open API framework and standardized protocols. 15. It supports plug-and-play models, eliminating complex integrations for lenders. 16. Consumers benefit from paperless, fast credit options, reducing time and cost. 17. As of now, 16 lenders use ULI, accessing over 50 data services for credit assessments. 18. ULI services include data from: o Land records, GSTN, Account Aggregators, and property search data. o Other services like Credit Guarantee through CGTMSE and digital gold loans. 19. ULI loan journeys cover 12 categories, including Kisan Credit Cards, MSME Loans, and Digital Cattle Loans. 20. Future plans include expanding ULI to a Business-to-Customer (B2C) model. Supervisory Technology (SupTech) Solutions 1. SupTech uses AI, machine learning (ML), and data analytics to process large financial datasets and detect anomalies. 2. It helps identify risks in the banking, securities, and insurance sectors. 3. RBI's SupTech tools include: o Import Data Processing and Monitoring System (IDPMS). o Export Data Processing and Monitoring System (EDPMS). o Central Repository of Information on Large Credits (CRILC). 4. Risk-based supervision of banks is a key data-driven SupTech initiative. 5. The Advanced Supervisory Analytics Group (ASAG) uses ML models for social media analytics, KYC compliance, and assessing governance effectiveness. 6. DAKSH, an advanced off-site supervisory system, digitizes supervisory processes. 7. Integrated Compliance Management and Tracking System (ICMTS) enhances seamless reporting by supervised entities. 8. Centralized Information Management System (CIMS) improves data management and analytics capabilities. II. Facilitating Cross-Border Payments 9. RBI is part of Project Nexus, an international initiative for instant cross-border retail payments. 10. Nexus, conceptualized by BIS Innovation Hub, links domestic Fast Payment Systems (FPSs) across India and ASEAN countries (Malaysia, Philippines, Singapore, and Thailand).  11. The Nexus platform is expected to go live in 2026 and will enhance cost-effective, efficient retail cross-border payments. 12. RBI and Monetary Authority of Singapore (MAS) operationalized UPI-PayNow linkage on February 21, 2023. 13. The UPI-PayNow linkage enables instant P2P cross-border payments between India and Singapore. 14. UPI QR code payments are accepted in Bhutan, Singapore, and UAE, allowing Indian tourists to pay at merchant sites using UPI apps. 15. February 2024: UPI connectivity launched between India and Mauritius, enabling seamless payments for travelers. 16. February 2024: UPI connectivity launched between India and Sri Lanka, supporting QR-based payments at merchant locations. Bhutan, Singapore, UAE, Mauritius, Sri Lanka III. Conclusion 17. RBI's FinTech initiatives balance innovation and stability while building a future- ready financial ecosystem. 18. Key initiatives include CBDC adoption, SupTech implementation, digital credit platforms, and cross-border payment innovations.