The banking and financial services sector has long been a pioneer and centre of technological innovation, providing end-user banking and financial services. Fintech has emerged as a direct competitor to legacy banking, but has not yet become an inclusive facilitator of financial services.
The diverse socio-economic demography with its competing socio-economic interests and levels of status has led the banking regulator, the Reserve Bank of India (RBI), and others to tightly monitor sector technological innovation. However, even the RBI has recognised the utility that innovation brings by creating regulatory sandboxes and allowing technological innovation as part of regular sector trade activities. The Securities and Exchange Board of India, the securities regulator, has allowed the use of artificial intelligence and machine learning by reporting entities.
Financial inclusion has long been a priority, and fintech offers convenient, safe, secure, transparent and affordable universal digital payment. 2022 promises to be pivotal in the fintech revolution, and regulators and legislators have identified their priorities. These include servicing vulnerable segments of the economy and population, and scaling up production and technical R&D to support increasing digital financial transactions.
The government proposes establishing digital banking units (DBU) that focus on the delivery of financial services to lesser cities. DBUs rely on a skeletal digital infrastructure offering self-service financial products and services at specialised, fixed business hubs. The RBI has published guidelines for them to be set up by domestic scheduled commercial banks other than regional rural banks, payments banks and local area banks.
DBUs will rely on smart equipment and may adopt in-sourced or out-sourced operating models. Self-service kiosks at DBUs will encourage vulnerable populations to be responsible for and manage their own finances and achieve financial literacy. DBUs will bring untapped demographics into the mainstream financial collective, but will have to offer hands-on customer education on safe digital banking products and practices when introducing customers to self-service digital banking services.
Services include savings bank accounts, mass transit system cards, digital kits for merchants, UnionPay International QR codes, BHIM Aadhaar or virtual purchases through the national identity scheme and points of sale (PoS). The guidelines make digital grievance redress mechanisms compulsory. These may be provided by the DBUs themselves or through digital business facilitators or business correspondents.
Financial inclusivity, a cornerstone of the United Nations 2030 Sustainable Development Goals, is meaningless without the infrastructure to support increased transaction volumes. The RBI has proposed a framework of new umbrella entities (NUE) that will set up, manage and operate retail payment systems. NUEs will introduce novel digital payments and improve service, convenience and safety. Free-market forces will foster innovation, control service pricing and ensure better adherence to regulatory regimes. Once authorised by the RBI, NUEs can offer ATMs, white-label or non-specific PoS, Aadhaar-based payments and remittance services, and new payment methods and technologies. Consortiums have wasted no time applying for licences to take advantage of the liberalised payment system.
Co-operation between legacy banking and innovative fintech under the watchful eye of the RBI is the way forward. However, the involvement of private players will require strict disclosure and data privacy and protection to ensure safe and robust data use. The RBI’s guidelines on cybersecurity will be the main compliance provision, with banks having to downflow data protection and compliance requirements to their partners.
Looking ahead, blockchain and cryptocurrencies will transform fintech. Regulators have signalled an intention to create a central bank digital currency, but it is vital that this is not seen as a threat but an opportunity to revolutionise the financial services industry. With the Supreme Court heavily criticising the RBI for its circulars restricting the use of cryptocurrencies, regulators will wish to avoid a repeat.
Bagmisikha Puhan is an associate partner and Siddhant Gupta is an associate at TMT Law Practice.
TMT Law Practice
adjacent to Aurobindo Market
New Delhi-110 016, India
Tel: +91 (11) 26512813
+91 (11) 41682996