The Reserve Bank of India (RBI) has issued a draft framework for self-regulatory organisations focused on the fintech sector (SRO-FT) to empower the budding sector to operate and innovate responsibly. The central bank added that the body "should play a crucial role in promoting responsible innovation by providing a framework that encourages responsible experimentation”.
Fintech advancements can introduce distinct risk elements such as cyber threats, data breaches, and operational susceptibilities. Here's where an SRO can play a pre-emptive role by identifying these evolving risks and devising proactive strategies.
Serving as a collaborative entity, it will gather insights from across the industry to create robust frameworks for mitigating risks effectively. It will also aid in resolving grievances, conflicts of interest, and disputes among its members.
The Fintech Convergence Council, representing 150 companies, lauded the "forward-thinking approach" of setting up SROs, which could foster responsible innovation and ensure a robust ecosystem for fintechs. Indian consumers are fast adopting innovative offerings from fintech start-ups like UPI and the digital public infrastructure. Yet, many players sought stronger guardrails to ensure customer-centricity, transparency, and ethical practices, even as the country's financial landscape is reshaping.
"This proposed framework aligns seamlessly with these principles, empowering us to elevate our industry towards a higher standard. FCC would continue to serve industry interests for innovative offerings and align with RBI to drive responsible industry innovation, " said Harshvardhan Lunia, Chair of FCC and Lendingkart Technologies' founder and CEO.
Second Time Lucky
This marks the RBI's second attempt at creating an SRO for the fintech sector, following 2020's guidelines for a payments SRO. Despite several entities applying for the licence, final approval from the central bank is pending.
The industry, facing challenges in establishing a unified SRO, initiated discussions on the need for self-regulation in early 2023. The formalisation occurred on October 6 when RBI announced the move during a press briefing.
Ankit Ratan, co-founder and CEO at Signzy, a no-code AI platform for the fintech sector, is delighted that the regulator has shown confidence in the entire ecosystem by entrusting industry stakeholders with the decision-making process. "We believe that the SRO will provide a bridge to promote responsible innovation while adhering to all the regulations, which is a crucial step in protecting customer interest and mitigating risk for the overall industry, which will enhance digital trust in the ecosystem," he claimed.
Over the years, fintech start-ups have transformed how individuals and institutions use financial services in India. Securing a significant portion of the market in crucial sectors such as payment gateways, small-ticket personal loans, and buy now, pay later (BNPL) lending, the industry is rapidly increasing its impact in domains like card issuance, asset management, and insurance distribution.
Research And Markets 'Fintech Market in India 2023 – 2028' report valued the fintech market’s size at Rs 3.70 trillion in FY 2023 and expects it to reach Rs 11.36 trillion by FY 2028, expanding at almost 24.95 per cent CAGR between FY 2024 and FY 2028. It estimates that fintech currently makes up 3 per cent to 5 per cent of the total revenue in financial services, giving it a lot of headroom for growth.
The development of an SRO will help build a resilient ecosystem that strengthens the sector's global competitiveness. It is hoped that operating under the oversight and guidance of the RBI, the industry will witness an elevation in regulatory compliance standards with the SRO on the horizon.
Ashish Goyal, co-founder and CFO of Fibe (formerly EarlySalary), a personal loan app, opined that by acting as a unified voice of the industry, the SRO can work towards putting forward collective concerns and addressing challenges.
"Its formation will open up possibilities of greater collaboration among industry stakeholders as well as with the regulatory body, leading to a more transparent and secure ecosystem for consumers. Given the dynamic nature of the fintech industry, the formation of an SRO and adherence to industry standards will not only lead to responsible innovation but also safeguard the interest of consumers," he optimistically stated.
Enabling Responsible Growth
One of the potential benefits of the SRO is that by shouldering certain aspects of governance, it can alleviate regulatory burdens, thereby creating a conducive environment for growth and innovation. This will allow companies to focus on delivering innovative solutions and services to their clients, contributing to the development of a sustainable financial ecosystem.
Secondly, the SRO framework provides an effective platform for expressing industry opinions and requirements. This collaborative approach, coupled with industry-wide participation, is much required as it can help the government understand the sector's needs.
"This also facilitates the creation of future regulations that are both fair and support responsible growth. The emphasis on innovation, transparency, fair competition, and consumer protection aligns seamlessly with the core principles of fintech start-ups. We also appreciate the RBI's decision to engage stakeholders and the invitation for feedback," Sundeep Mohindru, promoter and director of digital invoicing discounting platform M1xchange, commented.
However, some loose ends need to be tied up. Some observers wonder how encouraging voluntary participation by industry players in the SRO can lead to any tangible actions. They also would like to understand whether this participation would be limited to regulated players or unregulated entities would also benefit from collaboration with the SRO.
It is hoped that with the passage of time, there will be better clarity about how this body can help the fintech industry by living up to its role as a mediator and maintaining a balance between the innovation-fueled expansion of the fintech sector and effective risk management.