FinTechs are transforming financial services across sectors, including credit, payment systems, wealth management, investment advice, insurance, financial inclusion, and even financial sector supervision. The COVID-19 pandemic has given a strong boost to digitisation – the fusion of technology and finance played a crucial role by facilitating smooth loan disbursals, robust 24×7 payment systems, uninterrupted access to financial services, and direct benefit transfers.
One way of looking at fintech innovation is in terms of 3 variables – Time, Access and Data.
1.Many innovations, in essence, enable saving time, that is, transactions to be done with speed, e.g., fast payment systems.
2.The second element of innovation is about access, that is they take services to people who are not exposed to financial services, promoting inclusion in both senses – equity as well as formalisation of economic activity.
3.The third element of innovation is data – using available data to create new processes and generating further data that can incentivise further innovation – think of cash-flow based lending, or using tax data for credit assessment. Increased penetration of internet, processing speed and data availability has given a huge boost to financial innovation in the last decade or so.
These three elements are driving innovation in the Fintech space.
Problem Area : Fintech entity providing characteristic banking services like loans or payments is pretty much doing a banking activity – it just looks different. Such entities may not require a banking license but they need to be regulated similar to how such activities are regulated for a bank.
Steps Taken by RBI : RBI has taken several steps to create a nurturing environment to foster innovation.
- In 2016, introduction of account aggregator was done.
- In 2017, regulations were established for Peer-to-Peer (P2P) lending, even at a time when the sector was nascent in India. The regulatory sandbox framework released by the Reserve Bank in August 2019 was intended for the purpose of fostering innovation. The response to the regulatory sandbox has been encouraging to say the least. An Interoperable Regulatory Sandbox (IoRS), to facilitate testing of hybrid products/ services falling within the regulatory ambit of more than one financial regulator is in place.
- In November 2021, the Reserve Bank launched its first global hackathon – “HARBINGER with the theme ‘Smarter Digital Payments’. The hackathon received encouraging response with 363 proposals submitted by teams from within India and from 22 other countries across the globe. As a sequel, we have also announced the second hackathon with the theme “Inclusive Digital Services”.
- In 2021, the Reserve Bank established its own Innovation Hub called the RBIH here in Bengaluru to support creation of an innovation ecosystem through collaboration among financial institutions, the technology industry, and academia. RBI and the Innovation Hub have commenced pilots in the states of Madhya Pradesh, Tamil Nadu, UP and Maharashtra for fully digitalized Kisan Credit Card loan, which is being disbursed in minutes.
- RBI has launched the Rupee Central Bank Digital Currency (CBDC) pilot. Currently, 10 banks are participating in the wholesale pilot and 13 banks are part of the retail pilot. Both the pilots have been going on successfully.
Conclusion : The fintech sector will play a crucial role in achieving objectives of greater financial inclusion, cost and time efficiency and so we play the role of someone who encourages development of this sector.