Growing fast, fintech needs a way to keep watch on itself

Global banking generated $6.5 trn as revenue in 2022: Fintech had 5% of the same. But by 2028, fintech revenues are expected to grow three times faster

The Reserve Bank of India (RBI) last week released the Omnibus Framework to recognise Self-Regulatory Organisations (SROs) for regulated entities (REs). Many analysts and market players now expect the release of sector-specific guidelines for SRO-fintech (SRO-FT) soon. 

It is reasonable to expect RBI-recognised SRO-FT, around Q1 FY25. In the draft SRO-FT framework, issues like the number of SRO-FT and its membership (regulated, unregulated, or both) remain open.

The draft framework lays serious responsibilities on the SRO-FT in terms of its ability to promote compliance culture, innovation, capacity building and fostering a consensus-based approach among its members. SRO-FT will represent the collective voice of the sector in engagements with the regulator and other statutory agencies. 

Fintech is the delivery of financial services by companies to customers with the use of technology. There is no universally accepted definition of fintech due to the fragmented landscape of service providers and a rapidly evolving global fintech ecosystem. The Financial Stability Board’s (FSB’s) definition is followed by many central banks. It defines fintech as a “technologically enabled financial innovation that could result in new business models, applications, processes or products with an associated material effect on financial markets and institutions and the provision of financial services” (FSB, 2019).

An SRO is usually a non-government entity consisting of the majority of market participants as its members, held together by a common code of conduct adopted voluntarily. It is the long-term interest in market stability and client protection which facilitate adherence to common goals enabling ease of doing business and fostering responsible market conduct. In India, the discussion around SRO-FT was catalysed in 2017 with RBI’s ‘Report of the Working Group on Digital Lending including Lending through Online Platforms and Mobile Apps’.

An SRO in the financial services assists regulator(s), especially in the non-prudential part of regulations dealing with disclosure norms, client protection, tax treatments, transparency, and professional market conduct. The regime of self-regulation has come to be widely accepted and promoted globally, like the Financial Industry Regulatory Authority in the United States or the recognition given by the Swiss Financial Market Supervisory Authority to 11 SROs. Out here, the Securities and Exchange Board of India has recognised four SROs and the RBI has given nod to two in microfinance.

Fintech, worldwide, is in a nascent stage. Compared to the revenues generated by the global banking industry, at $6.5 trillion in 2022, fintech generated a mere 5 per cent of the same (McKinsey & Co, 2023). But the future will be vastly different: The McKinsey report says fintech revenues are expected to grow three times faster than those of traditional banks by 2028. The current size of digital lending in India is ~1-1.3 trillion.

According to the Centre for Research in International Finance-Digital Lenders Association of India (DLAI) Fintech Barometer (Volume 1), out of the ~7.5 trillion industry wide personal loan originations, those by members of DLAI was ~59.8 crore. Another report by Experian-DLAI puts the business-loan segment catered to by digital lenders at ~32,566 crore. The IIFL Fintech Dossier 2023 estimates the market is likely to grow to $1.3 trillion by 2030, with digital lending at around $515 billion.

What additional changes will the paradigm of fintech SRO entail? Why is it even needed when you have the RBI, ask some analysts. 

Does it mean dual reporting going ahead? 

What adaptations do I need to make to be an SRO-compliant member?

A common perception regarding SRO-FT is around its compliance-heavy projection, but the omnibus framework explains it may have a greater enabling role in market development and supporting the sector. With these contours, it would be interesting to observe how the regime of self-regulation plays out in Indian fintech.

The writer is CEO, Digital Lenders Association of India