FinTech in India: Potential and Issues

FinTech, or financial technology, is the term used to describe any technology that delivers financial services through software, such as online banking, mobile payment apps or even crypto currency.

FinTech is a broad category that encompasses many different technologies, but the primary objectives are to change the way consumers and businesses access their finances and compete with traditional financial services.

Issues with FinTech in India

Payment

• Largely Bank-Centric: The payment ecosystem in India is largely bank-centric. Only bank-led Payment Service Providers (PSPs) have direct access to payment systems, while non-bank PSPs have to depend on member banks. The Real Time Gross Settlement (RTGS) system and the National Electronic Funds Transfer (NEFT) are operated by the RBI, while the Immediate Payment Service (IMPS) is operated by NPCI, which is owned solely by banks.
• Entry Barrier to Small Players: The regulations on prepaid payment instruments provide for high net worth requirements for banks and non-banks alike. This acts as entry barrier to small players and consequently limits the choice for consumers.
• Non-Level Playing Field between Banks and Non-Banks: Pre-paid Payment Instruments’ (PPIs) regulations only allow banks to issue open system PPIs after full KYC, while non-bank PPI issuers are not allowed to offer open system PPIs under any circumstances. Broadly, there is a non-level playing field between banks and non-banks.

Reform Initiatives

• In order to reform the payment systems in India, the Inter-Ministerial Committee for Finalisation of Amendments of the Payment and Settlement Systems Act, 2007 has sought to implement the recommendations of the Watal Committee.
• The Committee had recommended amending the current PSS Act to include explicit mandates for competition and innovation, open access and interoperability, consumer protection, regulations on systemic risk and data protection and security.

Shri Subhash Chandra Garg Committee Recommendation

The Government constituted a Steering Committee on FinTech related issues under the Chairmanship of Shri Subhash Chandra Garg, Secretary, Department of Economic Affairs, Ministry of Finance. The Committee, therefore, decided to organize its work and recommendations in the following broad classes:

• Remove discriminatory regulatory barriers in the digital payments infrastructure sector.
• The Committee recommends that, since NBFCs have made significant progress in leveraging FinTech to increase their outreach, such NBFCs may be incentivised to work in the agricultural space.
• The Committee recommends that necessary open API MSME stack based on TReDS data validated by GSTN for use by the FinTech companies can be developed by DFS, MeitY, DoR/CBIC/GSTN.
• The Committee recommends that the Ministry of Finance may develop a marketplace model of debt financing in India by reforming the present model of P2P lending platforms.