April 3, 2024


Should fintechs be allowed to self-regulate?

The Indian financial technology (fintech) journey has been eventful, with ups and downs. As companies have gained a foothold, expanded, and succeeded, some have been caught in regulatory and legal hell. Paytm is a recent example of that. But it’s largely understood that fintech is not only here to stay but an important tenet of India’s financial and digital future.

The question is, who’s going to regulate these companies? The Reserve Bank of India (RBI) has some ideas. In a recently released draft framework, the central bank said fintech companies should create a self-regulatory organisation (SRO) for statutory and regulatory compliance. Can, or rather, should these companies be given this much leeway in regulation?


The marriage between the banking sector and technology seemed inevitable. Since the doors to a cashless society were opened, companies saw an opportunity to provide people with applications and platforms to make payments and better manage their finances. India and China are leading the way.

Fintech has taken India by storm. The adoption rate in India is about 87%, higher than the global average of 64%. Over the past several years, funding in the Indian fintech sector has skyrocketed.

In the mid-2000s, online payment and banking services surged. As time went on, mobile wallets began to pop up as a safe and practical alternative to cash payments. The 2008 financial crisis was something of a catalyst. People slowly shifted away from the traditional banking system. In the US, the entry of Google Wallet in 2011 and Apple Pay in 2014 was just the beginning.

In India, the catalyst was the controversial demonetisation policy in 2016. Coupled with the government’s Digital India drive and wish for a cashless economy, technology companies saw an opening. The challenge in front of them was immense. They entered a banking space with over 100 banks and 1.2 lakh branches.

Traditional banks struggled to roll out their banking services integrated with the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system. Fintech startups saw an opportunity here and entered the sector via collaborations. Companies like Paytm, PhonePe, Mobikwik, and Freecharge were established. Thanks to increased smartphone adoption and better network connectivity, these companies thrived.

Traditional banks took note and needed to rethink their strategies. They welcomed more fintech inclusion in their services to attract and keep up with tech-savvy customers. Banking as a Service (BaaS) helped neo-banks and digital banks enter the fray.

So, who’s overlooking all this? As far as fintech is concerned, the regulatory framework is fragmented. There isn’t a unified set of rules and norms to govern all fintech services. Apart from the RBI, it’s the Insurance Regulatory and Development Authority of India (IRDAI), the Securities and Exchange Board of India (SEBI), the Ministry of Corporate Affairs (MCA), and the Ministry of Electronics and Information Technology (MEITY).

Things look like they could change. Last September, RBI Governor Shaktikanta Das urged fintech companies to form an SRO. The RBI prefers the self-regulatory route, with an SRO being able to motivate members to align with regulations through communication between companies and promoting a culture of compliance. In essence, things would go through the SRO.

VIEW: It’s a good idea

As the fintech market has grown by leaps and bounds, there was always a concern about a lack of comprehensive regulation. The SRO framework achieves two things – provides clear guardrails for companies to follow while doing business and helps implement more robust measures to protect consumers. It’s a different approach from China’s strict rules on supervising non-bank payment institutions.

The fintech space needs ample room to innovate. In the West, fintech companies routinely have to toe the line between regulatory compliance and innovation. That’s what the SRO framework allows for while ensuring rules are clearly laid out and understood by all companies. It’s a good thing since regulations need to be agile in the fintech sector since it’s different from legacy banking. The new rules will make financial service providers more accountable while reducing systematic failures in the long run.

The SRO framework also shows the RBI’s confidence in the broader financial ecosystem and in the fintech sector in particular. Given what’s happened with some companies in this space, like Paytm, an SRO will help build more trust in the market. That’s good for the sector as investors won’t be hesitant with their chequebooks. The fact that such a regulatory mechanism was even proposed in the first place is a testament to the Indian fintech industry’s remarkable growth story.

COUNTERVIEW: Not the right approach

Regulatory oversight in the fintech space is inherently challenging. There are way too many companies, small and big, indulging in different activities. A single overarching SRO won’t cut it. It won’t be effective in regulating the entire sector. A better approach would be some sectoral categorisation and tailor-made regulatory measures.

The Indian fintech sector is characterised by diverse companies. A Fintech Association for Consumer Empowerment (FACE) report stated that nine companies have an 81% market share in the fintech lending space alone. A self-regulatory governance system would be challenging due to this unequal market structure. The rules ask the sector to form a consensus on the number of SROs. There are bound to be conflicts of interest.

Even if the SRO is considered a ‘not-for-profit public good’ entity, it doesn’t mean anti-competitive practices wouldn’t happen. The companies with dominant market share will most likely manipulate the SRO and form a structure favouring them. That will only increase the gap between the big and small players. But just on a very general level, allowing a sector that deals with people’s money and life savings to self-regulate seems like a bad idea. Why not have similar regulations to banks? Fintech companies also provide loans and facilitate payments.

Reference Links:

  • Evolution of the Indian FinTechverse – M2P
  • The Evolving FinTech Landscape in India – FICCI Blog
  • Fintechs should create a self-regulatory body to ensure statutory compliance: RBI draft norms – Mint
  • FinTech SRO: The Paradigm Shift in FinTech Regulation in India – The Economic Times
  • India pilots self-regulation for fintechs – The Banker
  • New Fintech Regulatory Body: What Does it Mean for India? – FinTech Magazine
  • Views: Why the RBI deputy governor is wrong about asking fintech to self-regulate – Medianama

What is your opinion on this?
(Only subscribers can participate in polls)

a) The fintech sector should be allowed to self-regulate.

b) The fintech sector shouldn’t be allowed to self-regulate.


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