Fintechs set to take fresh guard as reality comes to bite the sector

With funding tightening and regulators increasing scrutiny on risk, firms must move past the growth-at-all-costs model to survive

A Reserve Bank of India (RBI) communiqué following the cancellation of Paytm Payments Bank’s licence on April 24 said: “The general character of the management of the bank is prejudicial to the interest of depositors as also the public interest” and “no useful purpose or public interest would be served” by allowing it to continue as envisaged in Section 22 (3) (e) of the Banking Regulation Act, 1949. A month on, the reality has sunk in: It is a wakeup call for fintechs. 

Governance at legacy RBI-regulated entities has been subject to intense scrutiny and is in the public domain. It also weighs on fintechs, even as their funding heads southward. Amid the West Asia crisis, incremental funding and exit options for such companies and investors (private equity and venture capital) will be difficult. The plot ahead leaves little room for the narrative of growth at all costs and valuations making headlines — the drumming of vanity financials is over. 

“The focus on governance has significantly increased, particularly in risk management, compliance and customer protection. Fintechs need ongoing investment in people, processes, technology and culture to sustain governance that keeps pace with evolving needs,” says Sugandh Saxena, chief executive officer (CEO) of the Fintech Association for Consumer Empowerment (FACE), a self-regulatory organisation for the industry. For example, in data or artificial intelligence governance, fintechs will require a completely different wireframe and highly specialised skills that aren’t easily available. “We should recognise the constraints under which many small and emerging fintechs operate, and the role of the ecosystem in converging knowledge, awareness, standards, and networks to support fintechs on governance.” 

Risk perception 

However, few are aware that FACE’s 2024 survey on risk perception by its members threw up “a few surprising results”. While Mint Road has been reiterating that governance, risk management and customer grievance redress are key themes for the sector to focus on, “…fintech lenders do not perceive these themes as “high risk” for their business operations” (they are not in the top 10 issues of the survey). Why so?

 

FACE’s commentary held that fintech lenders believe they have taken adequate steps to address management and governance risks. That said, FACE cautioned, “With the recent regulatory action on some market participants, it appears that much more needs to be done in this area and fintech lenders would be well advised to revisit these risks and take corrective action wherever needed.” A fresh FACE survey on risks will be released in a fortnight; it will make for interesting reading. 

“Once a passionate founder starts disrupting the ecosystem with innovative solutions and raises a round of capital, the dynamics of the boardroom often shift,” notes Rishi Agrawal, CEO and cofounder of TeamLease Regtech. The focus disproportionately moves to deploying capital for exponential growth. There is much more discussion on monthly active users, burn rates and planning to secure the next round of funding. “Compliance discussion often takes a back seat or becomes a footnote in board meetings. Investors are often focused on planning for their ten-fold returns, while the founder is often chasing growth with compromised governance.” 

Let us recall former RBI deputy governor T Rabi Sankar’s speech on “RBI and fintech — the road ahead” (July 7, 2023). On disruption by fintechs, he said, “We are not talking of new products but basically talking of disruption of existing institutions and processes.” Conceptually, therefore, a fintech providing characteristic banking services like loans or payments is essentially performing a banking activity — it just looks different. “Such entities may not require a banking licence but they need to be regulated similarly to how such activities are regulated for a bank.” 

That time may be upon us: RBI’s language in its press release after the Paytm Payments Bank controversy has telegraphed this explicitly. 

As for funding (for fintechs and the wider startup world), “the shift toward being more disciplined will accelerate as investors prioritise profitability, capital efficiency and resilient business models over aggressive growth-led expansion,” feels Neha Singh, cofounder of Tracxn, a data provider. Overall, the West Asia crisis is unlikely to trigger a structural disruption but even as “capital is expected to remain available for high-quality companies, deployment is likely to become increasingly cautious and concentrated”. Look at the fintech funding pattern: $2.2 billion in calendar year (CY) 2024, $2.4 billion in CY25 and $822.9 million in CY26 (year-to-date). These figures may convey that funding is holding up but the rounds are down for these timeframes: 379, 296 and 60. This means a smaller pool of firms is cornering funding. 

 

Key to success 

“High standards of governance will be key to a fintech successfully scaling up and sustaining its edge,” says Ranvir Singh, founder and CEO of Kissht. This will include investments in processes, a culture of compliance-first and “also, onboarding independent directors, or IDs, (on boards) who are highly credible and contemporary.” The last aspect is tricky: IDs are already in short supply as it is. The best are drawn away by the remuneration offered by boards outside financial services and many shy away from being on the RBI’s radar. 

The few IDs willing to “accommodate fintechs” will re-examine their plans. As Rohan Lakhaiyar, partner, financial services risk advisory, Grant Thornton Bharat, put it: “Innovation and regulation inherently have conflicting demands, but they should not be viewed through an adversarial lens.” The issue is not necessarily the evasion of compliance “but rather the blurring of compliance boundaries due to the digitisation of financial services, which significantly increases the scope and span of legacy products.” While certain players may have, at times, engaged in opportunistic regulatory arbitrage by exploiting grey areas, this has not been the defining characteristic of the broader fintech ecosystem. 

This is in line with what Sankar said in July 2023: “Regulation might lag in responding to the speed and complexity of changing processes. Eventually, however, regulatory gaps will get filled and uniformity in regulation will be ensured. Fintech firms would therefore be more stable as a long-term business proposition if business strategies include regulatory compliance as a basic requirement. Innovation should not be about exploiting regulatory arbitrage.” And that regulators need to ensure that non-bank entities that function outside the regulatory perimeter for banks do not undermine the role of banks, raising concerns about financial stability. 

Simply put, cleverness can no longer be a business model.