Regulators look at long-term spirit, fintechs had time to comply: Experts

The fintech industry players attend a panel discussion at the Business Standard BFSI Insight Summit 2024

Regulation surrounding financial technology (fintech) companies has evolved over time, giving firms ample opportunity to comply. Now, these companies must prioritise corrective action as they scale up operations, industry players said at the Business Standard BFSI Insight Summit 2024. Edited excerpts from a panel discussion featuring Akshay Mehrotra, co-founder and chief executive officer (CEO), Fibe; Anurag Jain, founder and chief operating officer (COO), KredX; Reeju Datta, co-founder, Cashfree Payments; Srinath Sridharan, independent director, Fintech Association for Consumer Empowerment (FACE); and Ujjwal Jain, CEO, Share.market:

 

Is there an identity crisis among fintechs? How do you handle that since most imagine fintechs are concerned with only digital payments?

 

Mehrotra: Payment companies aren’t profitable; they don’t make money. There’s no concept of lending without profitability. Technically, 95 per cent of revenue for any fintech platform comes from lending, making lending the most important component.

 

AnuragJain: The early movers in fintech often focused on payments. If you look at the fintech ecosystem globally, payments are the gateway to fintech. They’re easy to acquire and it doesn’t matter which vendor processes your payment anymore.

 

However, lending is different. There are many factors to consider before choosing a lender. That’s why payments serve as a gateway to fintech, with many companies entering through payments and then venturing into other products.

 

To answer your previous question about what fintech is: We’ve been discussing this for a couple of years. At the Digital Lenders Association of India (DLAI), we often debated whether large financial institutions should be classified as fintech. When we looked at eligibility, we defined fintech as any business that deals in money and primarily uses technology in one or more workflows.

 

Datta: For people in general, it’s likely that payments are seen as central, especially since they use UPI (Unified Payments Interface) everywhere. However, in fintech circles, they’ll say it’s all about lending, as much of what the Reserve Bank of India (RBI) discusses is focused on lending.

 

So, within fintech, payments may not be considered so, but for people at large, digital payments are the primary experience. To change this, you’d need to create a product that users can easily recall, similar to how they think of digital payments.

 

Ujjwal Jain: In India, digital payments are synonymous with fintech because macroeconomic conditions in India make fintech mainstream, with financial services largely driven by payments. This is why digital payments are so closely tied to fintech.

 

Fintech should be about technology, not just financial services. Otherwise, there have been banks and brokers for ages, so what makes this whole industry different?

 

Sridharan: Fintech in India isn’t just 10 years old; it began in 1992 with the formation of the National Stock Exchange, which I consider the first fintech company. BFSI (banking, financial services, and insurance) has been an early adopter of technology, including artificial intelligence, which is a 70-year-old field. Policymakers often equate fintech with payments, mainly due to initiatives like UPI. In reality, fintech powers much more, such as stock markets, insurtech, and wealth tech.

 

For fintech leaders, the challenge is whether they are “fin” or “tech”. The RBI, for example, focuses on financial aspects and regulation, not the tech side. This creates a broader issue for regulators globally — who struggle with how to regulate tech giants, where technology is part of the equation, but financial principles and risk management remain the core.

 

Is the lack of innovation a challenge when it comes to fintechs? 

 

Sridharan: I believe there hasn’t been any major disruption or innovation in fintech in the past three years. The UPI-Jan Dhan-Aadhaar (JAM) trinity remains the fundamental backbone for Indian tech innovation. India is one of the few countries where the government and regulators initiated innovation, and the private sector built business models around it.

 

However, it’s time for regulators to start guiding the sector on how to bring innovation to the market. If the pandemic and demonetisation hadn’t happened, would we be so familiar with digital payments? I keep asking myself that question.

 

Anurag Jain: The reason there are more advancements in payments than in lending is that payments are more transactional, operational, and about settlement. In contrast, lending, especially to micro, small, and medium enterprises (MSMEs) is far more complex. Banks and 9,500 non-banking financial companies in India have been working on it for decades but haven’t solved it yet. It’s not an operational issue, but rather a matter of credit risk and culture. Regulators are more sensitive to the impact on stakeholders, the lending process, and the parties involved, making it a deeper and more involved issue than payments.

 

For MSME lending to work, we believe there needs to be some level of sovereign guarantee. Private players, despite many attempts, haven’t been able to solve it because they lack the capacity to bear the non-performing assets (NPAs) or defaults to assess creditworthiness. Payments and lending are different, so regulatory freedom in payment is far greater than what exists in lending.

 

Mehrotra: Among fintechs too, front-facing products gain visibility, while backend technology remains under the radar. Every aspect of financial services and banking is impacted differently by fintech, but much of the heavy lifting happens behind the scenes, shaping the market in ways most consumers don’t see.

 

Ujjwal Jain: We’ve been building from scratch, focusing on capital markets as a key area of impact post-payment. Equity markets have enabled businesses to raise capital, and the financialisation of savings has grown, driven by tech innovations, regulators, and brokers. Monthly SIP (systematic investment plans) inflows now stand at Rs 22,000-23,000 crore, supporting wealth creation and business growth. The broking industry saw a shift post-Covid, with digital accounts growing rapidly.

 

Despite 170 million demat accounts, only 40 million remain active annually, reflecting disengagement after losses. In contrast, mutual fund folios show better returns and sustained engagement.

 

To address this, we launched Wealth Basket, enabling portfolio-style investing on broking platforms.

 

Datta: The more tech you have in a business or model, the more it scales up. You need more tech, and it has to be very simple. Innovation for us, like with KYC, requires applying principles of simplicity. For KYC, why not use account aggregation? Can regulators consider this? Could we simplify digital identity, like Aadhaar, or even eliminate the need for anything else?

 

Users are benefiting from fintech products like lending. How is that happening? 

 

Mehrotra: There’s huge demand for lending solutions. Last month, 2.7 million people applied, and the app has 43 million people to date asking for money. We have requirements: Being salaried, having a savings account, and earning above Rs 18,000 to apply. Ninety-five per cent of customers have a savings account with the top 12 banks but never used it for credit. That’s the game changer.

 

One-third of our loans, for health care or education, are interest-free. You can walk into any large hospital or university and get zero-cost EMI (equated monthly instalment) powered by us.

 

We use subvention, like zero-cost EMI for mobile phones. This wasn’t possible in the physical world, but with integration into hospital systems, we can facilitate loans instantly.

 

How have you been able to crack a model that traditional institutions could not solve?

 

Anurag Jain: We created a bridge between these two sides: Businesses needing credit and investors with surplus funds. Businesses are getting credit, and investors earn more interest on their funds. We built a pan-Indian technology platform operating in over 500 cities, open 24/7 for investors. They can view deals, buy them, and fund businesses’ working capital.

 

Which are the businesses in the fintech domain that are at risk currently and might be stopped by the regulator? 

 

Sridharan: Businesses at risk are those that are non-compliant, whether wilfully or unintentionally. The regulator will shut you down. There’s no judgement on business models or commercial models. Regulation exists because financial services deal with public money.

 

The banking sector hasn’t changed for long. What has changed in the last decade is fintech companies using new data sets that traditional banks and insurers never considered, like social media algorithms. This has transformed risk assessment and customer evaluation.

 

Anurag Jain: We’ve worked closely with Indian regulators, which, though conservative, are thorough in their approach. Every decision undergoes evaluation and scrutiny before being made public. The industry is evolving, and regulators have given fintechs and financial services ample time over recent years. With the rise of digital transactions and app usage, there’s a need for guardrails. We must respect these, as they are for the country’s benefit. Blaming regulators is pointless, as their decisions are made with great care.