Fintech Laws in India- Evolution and Latest Regulations

Last Updated at: Feb 08, 2021
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Fintech Laws in India

As the name suggests, Fintech is an integration of two components of business– Finance and Technology. The combination of these two services of business has resulted in the emergence of one of the most successful businesses in the industry. Additionally, this particular sector aims to improvise the financial sector services by incorporating elements of technology to deliver hi-tech and faster services to the customers.

At its core, fintech is majorly used to help MNC’s, small scale businesses, and consumers to manage their financial operations in a better and organised manner by using these specialised coding algorithms in their software network. Moreover, looking back at its evolution, the use of technology in the financial sector was solely used at the back office end to organise their day to day transactions and sort of daily affairs of the company. But, now, this sector has been a major part of the financial business and the focus is entirely shifted from business-oriented to consumer-oriented services.

Fintech now includes different sectors and industries such as education, retail banking, fundraising and nonprofit, and investment management to name a few. Additionally, with further development of cryptocurrency and bitcoins-the industry has made its strong footing in the market.

Evolution of the Industry

Initially, the FINTECH industry started its operation in the banking sector but over time, it has witnessed tremendous growth and development by spreading its operations in the insurance sector, asset management sector, payment gateway sector, and so on.

With the development of the fintech sector, there has been a huge wave of changes in the dealings of the business and the way monetary services are performed. Further, the journey of the industry from Credit Cards in the 1950s to ATMs in the 1960s and finally giving the market Net Banking Facilities in the 1990s, the industry has always aimed to simplify the financial transactions.

But the major evolution of this industry took place after the 1990s with the introduction of software applications like Paypal which was established in 1998, then came the headlines of the fintech industry- the bitcoin era which has been all over the place. Likewise, the introduction of Paytm, Google Wallets, UPI services, and the establishment of Fintech Startups has geared up the sector and is still growing.

get legal assistance

Current Trends

A NASSCOM report says that the fintech programming and administration advertising in India was around $8 billion in 2016; it expects to develop 1.7 times by the end of 2020. Further, the report includes that the exchange an incentive for the Indian fintech division was around $33 billion in 2016 and was scheduled to reach $73 billion in 2021 at a five-year compound yearly development rate (CAGR) of 22%.[1] Visakhapatnam is being created as a FinTech valley. Additionally, the Indian Fintech programming business sector is expected to touch $2.4 billion by the end of 2020 from the current $1.2 billion in FY 2019.

Role of the Fintech in the Financial Sector

With the growth and development of technology in the market, the role of Fintech companies has also expanded its horizons. Additionally, the major role played by them are:

  1.     Online lending offers
  2.     Wealth management advisory and support
  3.     Insurance-based technological services
  4.     Payment and remittance sector

Services Offered By Fintech Industry

  1. Crowdfunding Platforms: Further, the platforms allow entrepreneurs and early-stage businesses to raise funds from all over the world, allowing them to bypass geographical boundaries and reach international markets and investors.
  2. Mobile Payments: Mobile payment applications and gateways are one of the most prevalent uses of fintech. Additionally, such applications allow users to carry out banking activities without physically visiting a bank. For example, companies like Venmo and Interac allow customers to send and receive money through smartphones at minimal transaction fees.
  3. Robo-Advisors: Robo-advisors are online investment management services that use algorithms to optimally allocate assets and generate portfolios for customers. Moreover, they allow users of all age groups to engage in investment activities at low fees with minimal manual effort.
  4. Insuretech: The term insure tech refers to the application of technology to the insurance model, which allows companies to provide tailored insurance services and data security. Further, insuretech helps streamline the insurance process through online claims filing and policy management.
  5. Regtech: Regtech (regulatory technology) focuses on the automation of compliance processes for financial institutions. Further, it offers fast and cost-effective management of large amounts of data, including transaction records and compliance documents, such as corporate tax returns.
  6. Blockchain and Cryptocurrency: Blockchain uses encryption technology to create cryptocurrencies, a promising new medium of exchange that is more secure and better than cash. In effect, blockchains offer vast possibilities to disrupt and change conventional business models.
  7. A notable emerging blockchain application is that of smart contracts. These are digital, self-executing contracts that can electronically facilitate, verify, and implement agreements. Experts say that these blockchain products are likely to change how future deals will be executed.

Difference Between Fintech and Banking Sector

Fintech Companies Banking Sector Industry
They majorly focus on managing customer experiences Additionally, They majorly focus on the management of risk
They incline towards mobile functionality, data analysis, ease of accessibility, cloud computing, and personalisation Further, they incline towards supply credit, economic growth, trust, security, and capitalisation
Area of premises is solely based on customer satisfaction and good user experience They strive towards integrating good UX patterns to make sure customers have a seamless transaction
They main to provide 24*7 services to all areas of the world including remote areas where banks fail to provide services Banks have been trying to ease the financial transactions for customers in remote areas but have somehow been less successful in attaining it
They have higher penetrations due to mobile connectivity The physical distribution of banks is a major issue to resolve.
They are consumer-oriented Further, they are process-oriented
They heavily depend on the technology Moreover, they are very traditional in their approach

 

Regulatory Aspects of the Industry

With advanced technology comes the advanced responsibility of regulating the services offered by the industry. It increases the issues and number of financial crimes in the country. The major bodies governing the regulatory aspects of the industry are RBI, SEBI, IRDAI, Ministry of Electronics And Informative Technology, and Ministry of Corporate Affairs. However, the RBI currently regulates the majority of fintech companies dealing with account aggregation, peer-to-peer (P2P) lending, crypto ­currencies, payments, etc.

Regulatory Sandbox

RS usually refers to live testing of new products or services in a controlled/test regulatory environment. The RS allows conducting field tests to collect evidence on the benefits and risks of new financial innovations. While carefully monitoring and containing their risks.

RBI had issued an Enabling Framework for Regulatory Sandbox dated August 13, 2009. As per the RS Framework, the entities eligible to participate are FinTech companies. Further, including start-ups, banks, financial institutions. Additionally, any other company partnering with or providing support to financial services businesses. The regulatory sandbox is for a medium to encourage innovations that intend to use in the Indian market. The RS Framework provides an indicative list of innovative products, services. 

The IRDA notified the Insurance Regulatory and Development Authority of India (Regulatory Sandbox) Regulations, 2019 to strike a balance between the orderly development of the insurance sector on one hand and the protection of interests of policyholders on the other, while at the same time facilitating innovation. The IRDAI RS also prescribes the procedure for such applications to the IRDA. 

 Benefits

  1. It fosters “learning by doing”
  2. It facilitates the testing of products viability at less cost
  3. Additionally, provides a structured and institutionalized environment for evidence-based regulatory decision-making
  4. leads to better outcomes for consumers through an increased range of products. Similarly, services reduced costs and improved access to financial services.

Other Legislations

  1. Payment and Settlement Systems Act, 2007
which provides for the regulation and supervision of financial transactions in India. Under the PSS Act, 2007, two Regulations have been made by the RBI, namely, the Board for Regulation and Supervision of Payment and Settlement Systems Regulations, 2008 (BPSS Regulations) and the Payment and Settlement Systems Regulations, 2008 (‘PPS Regulations, 2008’).
  • The BPSS empowers for authorising, prescribing policies and setting standards for regulating. Further, supervising all the payment and settlement systems in the country. Additionally, exercises its powers on behalf of the RBI under the PSS Act, 2007.
  • The PPS Regulations, 2008 lays down the procedural requirements for commencing or carrying on a payment system.  
  1. Regulation of Prepaid Payment Instruments by the RBI: Prepaid Payment Instruments (“PPIs”) are instruments that facilitate the purchase of goods and services, including financial services, remittance facilities, etc., against the value stored on such instruments. Further, on October 11, 2017, the RBI issued the Master Direction on Issuance and Operation of Prepaid Payment Instruments (“PPI Master Directions”) under section 18 read with section 10(2) of the P&SS Act. 
  2. Regulation of Payment Intermediaries by the RBI: The Directions For Opening And Operation Of Accounts And Settlement Of Payments For Electronic Payment Transactions Involving Intermediaries (“2009 EPT Directions”) were issued by the RBI under section 18 of the P&SS Act to protect the interests of the customers and to ensure that the payments made by them are duly accounted for by the intermediaries receiving such payments and remitted to the accounts of the merchants without any delay. Moreover, the RBI recently issued the Guidelines on Regulation of Payment Aggregators and Payment Gateways dated March 17, 2020 (“PAPG Guidelines”) under section 18 read with section 10(2) of the P&SS Act. 
  3. Payment Banks: A payments bank functions as a bank but operates on a smaller scale and cannot advance loans or issue credit cards. Further, such banks are registered as public limited companies under the Companies Act, 2013, and licensed under section 22 of the Banking Regulation Act, 1949, with specific licensing conditions restricting its activities mainly to the acceptance of demand deposits and provision of payments and remittance services.
  4. NBFC Regulation: An entity which carries on FinTech business may have to be registered with the RBI as an NBFC if it falls within the prescribed criteria. In terms of section 45-IA of the RBI Act, no NBFC can commence or carry on the business of a non-banking financial institution without (a) obtaining a certificate of registration from the RBI and without having a net owned fund of Rs. 25,00,000 and not exceeding Rs. 100,00,00,000.  However, in terms of the powers given to the RBI, to obviate dual regulation. Some categories of NBFCs will regulate by other regulators.

Issues Related to Fintech

  1.     Cybersecurity and Data Protection
  2.     Enforcement of Smart Contracts
  3.     Liability concerns
  4.     Unauthorised use of biometrics – fingerprints
  5.     KYC Authentications

 Why Invest in Fintech

Startups are thriving towards investing in fintech these days. Further, because of the credibility and elimination of vulnerability of financial losses due to cyber attacking. Moreover, it leads to flawless cash flow and ensures a seamless transaction.

Five major reasons to invest in fintech companies in the 21st century are:

  1. Protection of financial data and security
  2. Low cost of service
  3. Additionally, the trend in the blockchain market
  4. Uptrends in the technological market
  5. Provides ease of business

How will Vakilsearch Help You?

For any queries related to legal, compliance, and taxation, get in touch with us. Vakilsearch experts are always ready to assist you in the best possible manner.

[1] https://nasscom.in/knowledge-center/publications/fintech-india-global-growth-story

 

Fintech Laws in India- Evolution and Latest Regulations

443

As the name suggests, Fintech is an integration of two components of business– Finance and Technology. The combination of these two services of business has resulted in the emergence of one of the most successful businesses in the industry. Additionally, this particular sector aims to improvise the financial sector services by incorporating elements of technology to deliver hi-tech and faster services to the customers.

At its core, fintech is majorly used to help MNC’s, small scale businesses, and consumers to manage their financial operations in a better and organised manner by using these specialised coding algorithms in their software network. Moreover, looking back at its evolution, the use of technology in the financial sector was solely used at the back office end to organise their day to day transactions and sort of daily affairs of the company. But, now, this sector has been a major part of the financial business and the focus is entirely shifted from business-oriented to consumer-oriented services.

Fintech now includes different sectors and industries such as education, retail banking, fundraising and nonprofit, and investment management to name a few. Additionally, with further development of cryptocurrency and bitcoins-the industry has made its strong footing in the market.

Evolution of the Industry

Initially, the FINTECH industry started its operation in the banking sector but over time, it has witnessed tremendous growth and development by spreading its operations in the insurance sector, asset management sector, payment gateway sector, and so on.

With the development of the fintech sector, there has been a huge wave of changes in the dealings of the business and the way monetary services are performed. Further, the journey of the industry from Credit Cards in the 1950s to ATMs in the 1960s and finally giving the market Net Banking Facilities in the 1990s, the industry has always aimed to simplify the financial transactions.

But the major evolution of this industry took place after the 1990s with the introduction of software applications like Paypal which was established in 1998, then came the headlines of the fintech industry- the bitcoin era which has been all over the place. Likewise, the introduction of Paytm, Google Wallets, UPI services, and the establishment of Fintech Startups has geared up the sector and is still growing.

get legal assistance

Current Trends

A NASSCOM report says that the fintech programming and administration advertising in India was around $8 billion in 2016; it expects to develop 1.7 times by the end of 2020. Further, the report includes that the exchange an incentive for the Indian fintech division was around $33 billion in 2016 and was scheduled to reach $73 billion in 2021 at a five-year compound yearly development rate (CAGR) of 22%.[1] Visakhapatnam is being created as a FinTech valley. Additionally, the Indian Fintech programming business sector is expected to touch $2.4 billion by the end of 2020 from the current $1.2 billion in FY 2019.

Role of the Fintech in the Financial Sector

With the growth and development of technology in the market, the role of Fintech companies has also expanded its horizons. Additionally, the major role played by them are:

  1.     Online lending offers
  2.     Wealth management advisory and support
  3.     Insurance-based technological services
  4.     Payment and remittance sector

Services Offered By Fintech Industry

  1. Crowdfunding Platforms: Further, the platforms allow entrepreneurs and early-stage businesses to raise funds from all over the world, allowing them to bypass geographical boundaries and reach international markets and investors.
  2. Mobile Payments: Mobile payment applications and gateways are one of the most prevalent uses of fintech. Additionally, such applications allow users to carry out banking activities without physically visiting a bank. For example, companies like Venmo and Interac allow customers to send and receive money through smartphones at minimal transaction fees.
  3. Robo-Advisors: Robo-advisors are online investment management services that use algorithms to optimally allocate assets and generate portfolios for customers. Moreover, they allow users of all age groups to engage in investment activities at low fees with minimal manual effort.
  4. Insuretech: The term insure tech refers to the application of technology to the insurance model, which allows companies to provide tailored insurance services and data security. Further, insuretech helps streamline the insurance process through online claims filing and policy management.
  5. Regtech: Regtech (regulatory technology) focuses on the automation of compliance processes for financial institutions. Further, it offers fast and cost-effective management of large amounts of data, including transaction records and compliance documents, such as corporate tax returns.
  6. Blockchain and Cryptocurrency: Blockchain uses encryption technology to create cryptocurrencies, a promising new medium of exchange that is more secure and better than cash. In effect, blockchains offer vast possibilities to disrupt and change conventional business models.
  7. A notable emerging blockchain application is that of smart contracts. These are digital, self-executing contracts that can electronically facilitate, verify, and implement agreements. Experts say that these blockchain products are likely to change how future deals will be executed.

Difference Between Fintech and Banking Sector

Fintech Companies Banking Sector Industry
They majorly focus on managing customer experiences Additionally, They majorly focus on the management of risk
They incline towards mobile functionality, data analysis, ease of accessibility, cloud computing, and personalisation Further, they incline towards supply credit, economic growth, trust, security, and capitalisation
Area of premises is solely based on customer satisfaction and good user experience They strive towards integrating good UX patterns to make sure customers have a seamless transaction
They main to provide 24*7 services to all areas of the world including remote areas where banks fail to provide services Banks have been trying to ease the financial transactions for customers in remote areas but have somehow been less successful in attaining it
They have higher penetrations due to mobile connectivity The physical distribution of banks is a major issue to resolve.
They are consumer-oriented Further, they are process-oriented
They heavily depend on the technology Moreover, they are very traditional in their approach

 

Regulatory Aspects of the Industry

With advanced technology comes the advanced responsibility of regulating the services offered by the industry. It increases the issues and number of financial crimes in the country. The major bodies governing the regulatory aspects of the industry are RBI, SEBI, IRDAI, Ministry of Electronics And Informative Technology, and Ministry of Corporate Affairs. However, the RBI currently regulates the majority of fintech companies dealing with account aggregation, peer-to-peer (P2P) lending, crypto ­currencies, payments, etc.

Regulatory Sandbox

RS usually refers to live testing of new products or services in a controlled/test regulatory environment. The RS allows conducting field tests to collect evidence on the benefits and risks of new financial innovations. While carefully monitoring and containing their risks.

RBI had issued an Enabling Framework for Regulatory Sandbox dated August 13, 2009. As per the RS Framework, the entities eligible to participate are FinTech companies. Further, including start-ups, banks, financial institutions. Additionally, any other company partnering with or providing support to financial services businesses. The regulatory sandbox is for a medium to encourage innovations that intend to use in the Indian market. The RS Framework provides an indicative list of innovative products, services. 

The IRDA notified the Insurance Regulatory and Development Authority of India (Regulatory Sandbox) Regulations, 2019 to strike a balance between the orderly development of the insurance sector on one hand and the protection of interests of policyholders on the other, while at the same time facilitating innovation. The IRDAI RS also prescribes the procedure for such applications to the IRDA. 

 Benefits

  1. It fosters “learning by doing”
  2. It facilitates the testing of products viability at less cost
  3. Additionally, provides a structured and institutionalized environment for evidence-based regulatory decision-making
  4. leads to better outcomes for consumers through an increased range of products. Similarly, services reduced costs and improved access to financial services.

Other Legislations

  1. Payment and Settlement Systems Act, 2007
which provides for the regulation and supervision of financial transactions in India. Under the PSS Act, 2007, two Regulations have been made by the RBI, namely, the Board for Regulation and Supervision of Payment and Settlement Systems Regulations, 2008 (BPSS Regulations) and the Payment and Settlement Systems Regulations, 2008 (‘PPS Regulations, 2008’).
  • The BPSS empowers for authorising, prescribing policies and setting standards for regulating. Further, supervising all the payment and settlement systems in the country. Additionally, exercises its powers on behalf of the RBI under the PSS Act, 2007.
  • The PPS Regulations, 2008 lays down the procedural requirements for commencing or carrying on a payment system.  
  1. Regulation of Prepaid Payment Instruments by the RBI: Prepaid Payment Instruments (“PPIs”) are instruments that facilitate the purchase of goods and services, including financial services, remittance facilities, etc., against the value stored on such instruments. Further, on October 11, 2017, the RBI issued the Master Direction on Issuance and Operation of Prepaid Payment Instruments (“PPI Master Directions”) under section 18 read with section 10(2) of the P&SS Act. 
  2. Regulation of Payment Intermediaries by the RBI: The Directions For Opening And Operation Of Accounts And Settlement Of Payments For Electronic Payment Transactions Involving Intermediaries (“2009 EPT Directions”) were issued by the RBI under section 18 of the P&SS Act to protect the interests of the customers and to ensure that the payments made by them are duly accounted for by the intermediaries receiving such payments and remitted to the accounts of the merchants without any delay. Moreover, the RBI recently issued the Guidelines on Regulation of Payment Aggregators and Payment Gateways dated March 17, 2020 (“PAPG Guidelines”) under section 18 read with section 10(2) of the P&SS Act. 
  3. Payment Banks: A payments bank functions as a bank but operates on a smaller scale and cannot advance loans or issue credit cards. Further, such banks are registered as public limited companies under the Companies Act, 2013, and licensed under section 22 of the Banking Regulation Act, 1949, with specific licensing conditions restricting its activities mainly to the acceptance of demand deposits and provision of payments and remittance services.
  4. NBFC Regulation: An entity which carries on FinTech business may have to be registered with the RBI as an NBFC if it falls within the prescribed criteria. In terms of section 45-IA of the RBI Act, no NBFC can commence or carry on the business of a non-banking financial institution without (a) obtaining a certificate of registration from the RBI and without having a net owned fund of Rs. 25,00,000 and not exceeding Rs. 100,00,00,000.  However, in terms of the powers given to the RBI, to obviate dual regulation. Some categories of NBFCs will regulate by other regulators.

Issues Related to Fintech

  1.     Cybersecurity and Data Protection
  2.     Enforcement of Smart Contracts
  3.     Liability concerns
  4.     Unauthorised use of biometrics – fingerprints
  5.     KYC Authentications

 Why Invest in Fintech

Startups are thriving towards investing in fintech these days. Further, because of the credibility and elimination of vulnerability of financial losses due to cyber attacking. Moreover, it leads to flawless cash flow and ensures a seamless transaction.

Five major reasons to invest in fintech companies in the 21st century are:

  1. Protection of financial data and security
  2. Low cost of service
  3. Additionally, the trend in the blockchain market
  4. Uptrends in the technological market
  5. Provides ease of business

How will Vakilsearch Help You?

For any queries related to legal, compliance, and taxation, get in touch with us. Vakilsearch experts are always ready to assist you in the best possible manner.

[1] https://nasscom.in/knowledge-center/publications/fintech-india-global-growth-story

 


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