Fintech to switch on reset button as self-regulatory mechanism comes in

A fortnight after the Reserve Bank of India (RBI) made public its ‘Framework for self-regulatory organisation(s) for fintechs (SRO-FTs)’, the first signs of change in the way the sector looks at itself are upon us.
 

The Fintech Association for Consumer Empowerment (FACE) – an SRO-FT aspirant – “is considering its mandate to expand its membership to fintech beyond the credit ecosystem… so that fintechs, regardless of their business and scale, will have parity to contribute to the industry’s objectives and receive distinct value for their unique needs,” says Sugandh Saxena, its chief executive officer (CEO). This is in keeping with what has been spelt out in the framework: To make SRO-FT(s) truly representative and “ensure refined decision-making and prevent the organisation from being swayed by the interests of a dominant few”, or lobby groups acting as Trojans in SROs.

 

Mint Road matters  
 

What’s also sinking in is fortunes here on will hinge on how SRO-FT(s) imagine their relationship with Mint Road, and the business moves on from its long-held peeve that the regulator acts unilaterally. For “it will have extensive implications as to how investors view the sector,” says Uttam Nayak, former senior vice-president, Visa Inc. Rishi Agrawal, co-founder and CEO of Teamlease Regtech, agrees and says: “The maturity levels expected of fintech will go up now. The days of funds flowing into them generously are anyway over and how they respond to the regulatory initiative will have a huge bearing on it.” Unlike legacy financial services and regulated entities (REs), fintechs have had a relatively easy ride until recently: Playing off business models based on arbitrage backed by venture capital and private equity (PE) firms (betting on the valuation game); and a largely indulgent media. Nayak also lets it slip that “fintechs will have to move away from being personality dependent to process, planning and business case driven”.

 

According to Tracxn Technologies – a data intelligence platform for private market research – fintech funding at $2 billion in 2023 marks a decline of 63 per cent and 76 per cent compared to $5.4 billion in 2022 and $8.4 billion in 2021. Look at these numbers from another perspective. In November, the Centre for Advanced Financial Research and Learning, in its first ‘India Finance Report (IFR)’, had called attention to the immense potential of fintech. The independent body set up by the RBI noted that of the 14,000 startups born between 2016 and 2021, close to half were fintechs. The IFR projected lending by these entities to exceed that of banks by 2030. These forecasts may not hold if funding heads southwards; and it will if the SRO-FT(s) regime were to falter.
 

An October 2022 white paper by Coatue – the US-based technology-focused investment manager founded by Philippe Laffont – turned out to be prescient. Over the next decade, the coming generation of fintech needs to focus “on owning the balance sheet, and maniacal rebundling…”. And do recall RBI Governor Shaktikanta Das’ forewarning (‘Global Fintech Festival’, Mumbai, September 20, 2022): The fintech road ahead will witness ever-growing traffic in addition to the large number of existing players already there. “It is, therefore, imperative that every player on this road follows the traffic rules.”

 

Beyond personalities
 

Ask Ravi Duvvuru, founder of Duvvuru & Reddy LLP, what he makes of SRO-FT(s), and he says: “The idea is very good, but it all boils down to execution.” As a member of the advisory group to the Regulatory Review Authority 2.0 set up by the RBI, he points to an area of concern: Mint Road wants the SRO-FT(s) to be perceived as a legitimate arbiter of disputes. But just how are these to be settled, penalties decided and enforced? “On top of all this, membership is voluntary to begin with. The SRO-FT(s) can’t force an entity to become a member by indirectly stressing a gate-keeping role vis-a-vis the regulator,” he says.

It’s a sensitive issue in a sector Nayak has characterised as being “personality dependent” (read founders) – which is not the case, comparatively – in others parts of the financial world. Anand Kumar Bajaj, founder-MD & CEO of PayNearby, puts it gingerly: “Since the SRO-FT(s) rules will be in prudent interpretation of regulations, good governance and acceptable practices, there should not be any disputes.” As the overall ecosystem matures, there will be cross-pollination of ideas and learning from different platforms, leading to a more unified approach and appreciation of each other’s roles. This even as Bajaj concedes, “Initially, I expect a learning period for ecosystem maturity to evolve”.

 

What is unsaid: Mint Road’s initiative to foster a culture of self-governance among fintechs through SROs which could proactively set and adhere to industry standards and best practices, “may also create pulls and pressures in its wake. And it can get complicated if you have entities which are members of multiple SROs,” says Rohan Lakhaiyar, partner at Grant Thornton Bharat. In the queue to be SRO-FT(s) are FACE, and the Digital Lenders’ Association of India. There’s nothing as yet to suggest that another grouping will not jump into the fray (even as there are whispers that the Indian Banks' Association and the Payment Council of India are to jointly set up an SRO for digital payments). And fintech is a sector where just about every other financial vertical has been re-imagined as a business model.
 

Mint Road has it that at least a third of an SRO’s board of directors, including the chairperson, must be independent (directors) or IDs. Top-flight IDs are hard to on-board; not many will risk reputations in an SRO for fintech when governance standards have not yet settled. Nor can a person drawn from a PE firm or with an association with it, be on the board of an SRO-FT(s) as an ID. Technically, it’s a no-go as if a PE has an exposure to an SRO-FT(s) member it becomes a related-party. IDs apart, “one also has to be watchful on how venture capital and PE firms interact with the SRO,” says Agrawal.
 

It’s an indirect way of putting it across that influence peddling with the banking regulator through the SRO is a possibility; it will be sometime before the gold-rush mindset goes away. But Sugandh is hopeful: “The future of financial services is fintech, and SRO-FT will play a very significant role in shaping the fintech sector. We expect to attract qualified IDs who are driven to create an industry-level impact and bring a well-rounded perspective.”
 

The fintech reset is on us.