In the last one month, RBI has made the following two announcements back-to-back which have sent shockwaves through the entire fintech industry leaving stakeholders on both sides of the debate pondering the implications and the path forward:
- Paytm Payments Bank won’t be allowed to accept fresh deposits or carry out credit transactions after March 15 citing compliance standards.
- Card networks such as Visa and Mastercard to stop commercial card transactions under the Business Payment Solution Providers (BPSP) business citing concerns about the legitimacy and inadequacy of merchant KYC and the end use of funds.
In fact, reports suggest that other non-bank intermediaries may also face scrutiny from the Central Bank. While one side of the debate says that this will stifle the innovation; the other side argues the importance of compliance and building businesses with guardrails.
Over the last decade, fintech sector used technological progress and innovation to propel the sector from the fringes to the forefront of financial services. Several factors contributed to this remarkable growth:
- Robust growth of the banking sector: Fintechs capitalized on the expansion of the banking industry, finding opportunities to disrupt traditional financial services.
- Rapid digitisation: The shift toward digital channels created fertile ground for fintech innovation. From mobile payments to online lending, fintechs harnessed digital technologies to transform financial processes.
- Changing customer preferences: Consumers now demand seamless, convenient, and personalized financial experiences. Fintechs responded by offering user-friendly interfaces, tailored solutions, and improved customer journeys.
However, RBIs actions have given a wake- up call to the sector reminding that fintech sectors’ future lies in striking a delicate balance between innovation and adherence to legal norms. Any entity that is onboarding a customer for business will need to adhere to the KYC, regulatory norms as a Regulated Entity. This may add to the compliance costs and Risk management costs for many players. This means allocating resources, updating systems, processes, and documentation on the compliance side as well as investing in robust risk management tools for mitigating fraud, ensuring data security, and monitoring transactions.
No one can argue that compliance is not important. But here is why it plays a pivotal role, more so in a digital age:
- Legal certainty: Clear regulations provide businesses with a roadmap. When fintech companies operate within defined boundaries, they can focus on growth without fear of legal repercussions.
- Consumer trust: Trust is the bedrock of any financial service. Compliance ensures that customer data is secure, transactions are transparent, and privacy is respected. In the age of cybercrime and data breaches, customer confidence is paramount. Adhering to regulations ensures we maintain high security standards and promote transparency, protecting consumers from scams, fraud, and misuse of personal data. This leads to a customer base that trusts our processes, systems and products, enhancing our credibility and reputation.
- Innovation within guardrails: Compliance need not stifle innovation. Instead, it provides guardrails within which fintech companies can explore groundbreaking solutions.
- Investor confidence: Compliance instils confidence in investors. A compliant fintech firm is more attractive to venture capitalists, angel investors, and institutional backers.
Co-founder & CEO
LeRemitt
In summary, while innovation drives fintech’s growth, a strong foundation of compliance is essential. And, as the sector matures, collaboration between regulators, industry players, and innovators becomes crucial. Fintech founders must embrace compliance as an enabler rather than a hindrance. Just the way, the introduction of 3-point design seatbelts in 1973 was a major stepping stone for improving car safety, while initially considered as an inconvenience, it resulted in increased passenger safety while the vehicles became capable of higher speeds; RBI’s actions have created challenges and opportunities for fintech players. Adaptability, compliance, and customer-centric approaches will be crucial for fintechs in fast lane in this evolving landscape.
At LeRemitt, a cross border platform operating under RBI approved OPGSP framework- we have built bank grade due diligence systems and compliance checks are built into the platform.
