@°VISION WEEKLY FOCUS INSPIRING. INNOVATION #83, NOV 2022 Navigating the technological revolution in Financial Sector Have you ever used your phone to pay for something? Or renewed your insurance policy with a click of a button? Or opened a Bank account from the comfort of your own home? If yes, then you've experienced the massive impact of the fintech revolution. Within a few decades, technology has become a critical component of the financial sector across the world. What began with Aadhaar and UPI is now a financial revolution in India as well, with the fintech sector witnessing exponential growth DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | BHOPAL | RANCHI | PRAYAGRA) C1)© 8468022022 © [Link] While, Fintech is transforming the global financial landscape and creating new opportunities to advance financial inclusion and development, it also presents risks that require updated supervision policy frameworks. Through its innovations, it has disrupted the traditional channels of financial intermediation. In this backdrop, let us first understand what is fintech and where does India’s Fintech ecosystem stand? What factors have been driving the growth of Fintech industry in India? How has the Fintech industry improved the financial landscape? What are the plausible risks posed by the recent growth in the Fintech sector? How ean we facili- tate the growth of Fintech whilst managing associated risks? In this edition, we will attempt to answer these questions. What is fintech and where does India’s Fintech ecosystem stand? »» FinTech is an umbrella term for all kinds of new and innovative technol- ogies emerging in the world of finance. Services provided igital Wallets; Prepaid Payment instruments (PPIs); \Cryptocurt Central Bank Digital Currency (CBDC); Payment Gateways; Contactless transactions lonabled by QR-code and NFC etc. fo Peer (P2P) lending [individuals obtaining loon ee directly from other individuals); Crowd Funding (practise Kettogotifdime,Beaylof funding by raising money from a large number of that result in new busi- people); Buy Now Pay Later (BNPL) platforms ot ness models, applica~ ~» In other words, it can be described as “techno- logically enabled finan novation Alternative lending Wealthtech Robe Advisors (digital platforms that provide automated, None a Rlocesses so Jalgorithmic investment services; Trade in Cryptoassets products with an associ- | m zeRODHA @ Groww land non-fungible token (NFTs); Algorithmic trading etc. ated material effect on financial markets and | gg Banking INecbanking; Customer Onboarding Platforms; Chat rommaten nd the pe- |g) a Vision of financial InsurTech services.” |ment; Customized insurance services like Bite-size insur- Ep Enabled. by: male PO Pa Cee) oof riercineuranece ofc technologies like Artifi- Identity Management & Control through digital Know Your Customer (KYC) procedures for fraud detection, cial intelligence (Al), aeethan georeM y RegTech lanti-money laundering (AML), etc.; Transaction Menitor- ‘gy jing such as through Blockchain technology; Risk manage- etc., Fintech enterprises enaea tere provide Wap. array of [Account Aggregators (AA) networks (data-sharing services, Nawith «meaty hes system that is requited for making investments or accessing enterprises operating [credit, among other financial services), online accounting within multiple domains. Jand underwriting, Tax filling platforms etc. be Bak | rr I Harcware Providers | Finance FinTech Technology DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | BHOPAL | RANCHI | PRAYAGRA) CZ)© 8468022022 © [Link] Status of India’s Fintech ecosystem Though the epicenter of this Fintech mostly lies in the developed economies, the impact is seen fo be higher in the developing economies of the Asia Pacific like India. Fintech industry has become one of the fast- est-growing sectors in India, indicated as below- ee a et runt i Growth rate © Global status (& Fintech unicorns |-> india is currently the world’s 3rd largest fintech ecosystem after USA and China with 7,460 compa- nies in the domain. }-» India’s fintech market achieved a 14% share of the global funding. |-» At 87%, India has the highest FinTech adoption rate in the world The sector's Compound Annual Growth Rate (CAGR) increased by 20%, The India fintech ecosystem has 23 unicorns (out of 106 in total). | transactions @ Rise CG Future Poter Total number of transactions related to digital payments increased from 2,071 crore in FY 2017-18 to 5,554 crore in FY 2020-22. Indian FinTech sector expected to reach a valua- tion of above US$I5O billion by 2025. (global average is 64%), What factors have been driving the growth of Fintech industry in India? The growing number of mobile subsoribers (1.18 billion), internet users (540 million) and mobile internet users (520 million) in India has indisputably allowed FinTech to tap into underserved customers over digital channels. Furthermore, multitude of other factors, including government endeavour to create a supportive ecosystem, shave resulted in a thriving Fintech landscape in India Development of ‘India Stack’: In the past decade, Indian government has successful- ly built a unique and robust infrastructure for incubation and growth of Fintech known as the India Stack. IndiaStack 4 Core Principles Paperless Layer Reliance on digital records for individual's identity ARPigitocker exe Ef Presenceless Layer Authenticate service from anywhere in country Ay oe et Cashless Layer Democratizing payments LIA Aezso |) Appigilocker eave ef Consent Lay; WS cr ro Secure movement of data DO aC ta « g 3 Lm ad 3 | Cov Benetr] Open benk £ Payment Biometric Payments | account: Lending = ring Poyments- | pees | 90 hon ° 5 me) “ojana 2 Instant Unified Payment = Remittances: Debit carde- Interface-UPI g “WPS Rupay g = Online Repertory 2010 20m 201220132014 201520162019 DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | BHOPAL | RANCHI | PRAYAGRA) C3)© 8468022022 © [Link] »» Technological advancements: At the core of the rapid growth of fintech are new technologies that have revolutionized ways in which financial products and services are created, provided and managed. It has enabled creation of entirely new products like Non Fungible Tokens (NFTs), eryptocurrencies etc. ~» Conducive regulatory framework: > Several guidelines and frameworks were issued by RBI related to PPIs, P2P lending platforms, Pay- ment aggregators, Payment Banks etc. with a view to encourage the growth of fintech industry in a regu- lated environment. > Regulatory sandbox by RBI, SEBI and IRDAI: The Regulatory Sandbox allows the regulator, the (Srey * Anois + Robotic Prsest Automaton innovators, the financial | Arfeicliniallgence ond Machine reer service providers and the Sorina at # Disrbuted Ledger Technology (0) customers to conduct |! pomeines field tests to collect evidence on the benefits cand risks of new financial | + Wutte rer htetace Bat innovations, while care- | y rugmonted ond Vitel Rolly = Open AP fully monitoring and con- taining their risks. Ce 1 Plotformifcation > Development of Non-Banking Financ’ 1g framework for Payments Banks and recogni I Companies (NBFCs) by RBI. > Expanding Open Government Data: Account Aggregator (AA) network, a legal financial data-sharing system framework was established, enabling customer data to be shared within the regulated financial system with the customer's knowledge and consent. > New FinTech Department in the RBI established to give focused attention to this evolving and dynamic sector “> Changes in consumer behaviour: > e of Tech-savvy generation and digital native: The new generations of millennials and Gen Z expect financial services like money transfers, investment etc. to be effortless, secure, and scalable, ideally without the assistance of a person or the visit of a bank. Evidently, digital payments have grown 160 times in India since 2008. > Push provided by post demenetization and covid-19: While demonetization initiated the shift away from a paper based, cash-based economy towards digital, electronic, technology driven economy, the lockdowns and social distancing norms during the pandemic hastened the innovation and digitalization across the financial sector. > Growing Financial inclusion and digital literacy: Schemes like Pradhan Mantri Jan Dhan Yojana, Di tal India Programme, PM Gramin Digital Saksharata Abhiyaan (PMDISHA), etc. have helped in expanding the consumer base of fintech. DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | BHOPAL | RANCHI | PRAYAGRA) C@-)'< © 8468022022 © [Link] Flourishing entrepreneurship culture: Digital identities: Role in Fintech ecosystem Rise of new enterprises in the Fintech sector, especially in digital payments, lending and wealth segments, are a corollary of India’s startup and innova tion ecosystem built through initiatives like Startup India, Atal innovation Mis sion, NIDHI, FinTech Hackathon etc. A digital identity is an online or networked identity adopted or med in cyberspace by an individual, organization or oloc- tronie device. In combination with emerging technologies such as Al big data etc., digital identities can play an enabling role in the fintech sector Improved risk assessment and reduced fraud by creating more holistic and accurate customer risk profiles to inform suspi- “> Developments in digital identity ece- | cious transaction monitoring and provision of credit and system: The Ministry of Electronics and | isk-based products. Information Technology (MeitY) has pro-_| > Impreved customer experience by leveraging a variety of user posed a new model of “Federated Dig- | _ attributes to better understand the customer's needs and prefer- ital Identities” under which a citizen's | °nee multiple digital IDs — from PAN and |~»Protection from damage, tampering, loss and theft, with ‘Aadhaar to driving licence and passport | cutting-edge authentication and security protocols. numbers — can be interlinked, stored, |"» Streamlined and easier onboarding and compliance aid Getascad nacho nlattelDe processes through access to a reliable and consolidated digital “> Launch of ef (digital POMC India’s CBDC ‘digital Rupee (e%)': What is it and how can it inspire launch India’s own Central tee eneeee ts Bank Digital Currency |v» As oer RBI, CBDG is @ z (CBDC) was announced |” legal tenderissued by a of” 8/Z — teco ow ean during the Union Budget | central bank in a digital | [meintsinod ving a | || eurreney sued by a ff commas ff comscne 2022-23 and RBI hos | form. \(eceeiteat |] teense | recently launched ¢ pilot It is pegged to the value eskeheln ‘mone 2 Project on CBDC along | of ‘that county's fiat ¢ aN 4 with a Concept Note on it. | currency and adds digital view of users. »> Finaneial support: | form to existing physical ene Growth in foreign direct | form of bank note. peaturee “b Apart from reducing cost associated with physical cash management and prompting financial financial inclusion, it is also expected to further the cause of financial digitisation by enhancing the adoption of blockchain and other digital means for financial services as well as support competition, efficiency and innovation in payments. investment (FDI) flows and venture capitalists and Angel investors, apart from government support through schemes like- International Financial Ser- vices Centres Authority's “Brdor ool convert gaint FinTech Incentive Scheme, Fund of Funds for Startups (FFS) Scheme and Startup India Seed Fund Scheme (SISFS), provided much needed financial support to FinTech activities. “> Dedicated centre: A Fintech hub has been developed at the International Financial Services Centre (IFSC), GIFT City ~» Industrial collaborations: NIT| Aayog's Fintech Open Summit and India Post Payments Bank's Fincluva- tion are some examples of a joint initiatives to collaborate with Fintech Startup community to co-create and innovate solutions for financial inclusion. » Sector specific schemes for technological and I transformation: Such schemes are expected to have positive fallouts for the overall fintech industry. Examples- > National Digital Health Mission (NDHM) and the National Health Staek for Health insurance sector. > TReDS platforms launched for MSMEs for trade financing, DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | BHOPAL | RANCHI | PRAYAGRA) CS-)© 8468022022 © [Link] Mice) s in India: Hotspot for India’s Fintech industry Tier Il and Ill cities in India contributed to 54% of digital transactions in 2020, demonstrating a 92% growth in just one year. This indicates how fast fintech adoption, especially in the payment segment, has been expanding in these cities. Tier ll and Tier Ill cities are expected to play a key role in the growth of Fintech in the future as well, relying on the below factors- 7 “» Hubs for next wave of Start-up culture: Nearly 50% of the recognised start-ups in India are now emerging from Tier 2 and 3 cities, according to the Ministry of Commerce and Industry. =» Unserved lending and investment needs: Fintech solutions like buy now pay later, customized microloans, ete. have immense scope in catering to the financial needs of unbanked or under-banked population, especially middle-class segment. > Growing trust in fintech: Factors like simplified user interfaces, launch of platforms in native language like Paytm, Khatabook etc. has helped in building trust and enhancing demand of fintech services. > Changing consumption patterns: Enabled by growing incomes and shift towards flexible and remote working, Tier Il and Tier Ill cities are emerging as the new consumption centers in India, replac- ing metros and tier | cities. FinTech startups can cash in on this opportunity to offer novel products in the payment and wealthtech segments. However, to fully utilise these opportunities, several hurdles such as poor internet connectivity, lack of scalability due to low population density, lack of infrastructure, low awareness etc. need to be dealt with. How has the Fintech industry improved the financial landscape? Using technology to provide the full range of traditional financial services and beyond, Fintech enterprises have brought disruptive changes across the financial sector, with several positive implications for the soci- ety and economy- “> Enhancing efficiency of financial services: Fintech businesses use existing and emerging technolo- gies to help enhance operational efficiency of financial institutions while offering numerous benefits like- > Improved customer service (0.g,, intelligent service robots and chat interfaces). > Reduced transaction and operational costs (0.g., savings through use of cloud based services and automated systems). > Enhanced transparency and democratization (0.9., transparent and decentralized data sharing through blockchain technology). > Provision of personalized user exper nee (2.g., robo advisory tailored to customer preferences) > Reduced turnaround time (e.g., automated financial transactions) > Emergence of new financial produets (e.g., Enhanced innovation through Open-source software, serverless architecture, and software-as-a-service (SaaS)). > Secure transactions (e.g., use of data encryption techniques and identity authentication technolo- gies like facial recognition). DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | BHOPAL | RANCHI | PRAYAGRA) C@)© 8468022022 @ wwwvisioni “> Strengthening and deep ening of India’s capital markets: Recent fintech innovations are bolstering back-end technology and customer-facing solutions. These solutions are expect- ed to bring varied benefits for the Indian capital mar- kets, ineluding- > Retailisation: While simplifying end-to-end investment, trading pro- cesses, and facilitating informed investments, fintech ushers time-sav- ing and cost-effective stock market participa- tion, especially for retail investors in tier 2 and 3 cities. © Evidently, more than 80% of new investment CAPITAL MARKET FINTECH CLUSTERS (CORE MARKET INFRASTRUCTURE + Technelogy promoting decenrial- laation, reduction of physical assets -Blockchain & Distributed Ledg POST-TRADE DIGITIZATION frastructure & Platform a ALSAmAITICS “Creating robs operations Seer Peal pert ae Machine leeming Predictive analytics Big Date [ALTERNATIVE FUNDING PLATFORMS Equity and debt copit formation Enhaneing Finan I literacy: Several app-based fintech platforms have emerged that offer free basic stock trading, real-time, relevant, personalized financial news etc. where new investors can learn about strategic investments and stock market jargon. > Reducing risks: By providing more choice of credit sources, proliferation of FinTechs could lower the risks an economy faces if credit provisioning is dominated by a fow banks. © Further, integrating Al technology and algorithm-based services with fintech platforms allows inves tors to explore different market opportunities and financial regulators to identify, characterize and manage risks. “> Driver of Social Good: FinTech in a developing country like India represents a clear means of enabling actionable humanitarian good towards accelerating the socio-economic development. DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | BHOPAL | RANCHI | PRAYAGRA)© 8468022022 © [Link] Pre Ensuring Financial inclusion of the unbanked and underbanked {i For Women For Micro, Small & Medium Enterprises (MSMEs_ Mobile money can provide a safe place for |» Blockehain and smart contracts based invoice women to save money as well as reduce poverty | "trading can resolve short term capital issues by among female-headed household allowing MSMEs to sell their invoice or other receivables at a discount for working capital data can help collect and assess gen- der-disaggregated data and create tailored |» Peer-to-peer lending and crowd funding have products for women such as Microfinance loans | the potential to improve access to finance to targeted at female entrepreneurs MSMEs who are otherwise declined credit from banks due to their risk portfolio. curity coverage Pounder Insurance Economic Enhanced relief efforts efficiency of Automated the operation | This helps insurance companies set appropriate premiums and pey- of pansion improve customer retention menterconad schemes in the more through risk | “® Claims processing: Automation can help insurers process claims | rapid management | faster and more accurately. eieGune eet applications, Enhaneing social “> Predictive Modelling: It uses statistical analysis to create models that can predict the likelihood of something happening Decentralised Insurance (also known as “distributed ledger | of funds in automation of | technology-based insurance”) uses blockchain and smart con- | government investment tracts to create an untrusting environment for insurance compa- | schemes while processes, and nies and their customers. also reducing facilitation of the chances “> Bigdata analysis can help generate deeper risk insights, to regulatory of corruption increase the speed of servicing, to lower costs, and to open the compliance. and leakages. way for ever greater product precision and customization, Propelling Sustainable investment and climate finance ij) “> Monitoring environmental, social, and governance (ESG)transitions: Fintech businesses can measure and verify the impact of sustainable financial products, such as ‘green’ bonds, loans, and investment funds. Climate risk assessment: Software-as-a-service cloud-based platforms using big data, Al, machine learning, and sensors coupled with remote sensing technology are helping financial institu- tions to geospatially map specific loans to specific climate risks. “» Quantifying ecosystem services: Technologies, such as satellite imagery and light detection and ranging (LIDAR) can be used to incorporate ESG factors into the financial system - thus making nature bankable, “> Carbon eredits and offsets: Carbon tracking fintech providers now enable businesses to under- stand the carbon impact of their transactions: And carbon offsetting providers are helping them to compensate for the emissions. Regulatory technology for enhanced observance: Regiech solutions can enable financial institu- tions to measure and assess the impact of climate risk regulations and policies by expanding regula tory reporting and incorporating climate-related disclosures. DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | BHOPAL | RANCHI | PRAYAGRA) CB)© 8468022022 © [Link] In Conversation! Neobanks: 7% filire banking Vinay: Hey Vin! Sorry, | think I'l have fo cancel our plans for the Museum today? fm Vini: Hey Vinay! Why? Where are you headed to? Vinay: | have to go to the bank to open a new account and setup some investment funds. It'll take me all day standing in queues and filling forms. Vint: Why don't you open an account online in a Neobank? Vinay: That sounds hassle-free. But what exactly is a neobank? Vint: Neobanks are fintech firms that function like banks but operate exclusively online, without any physical branches. They do so through a collection of financial apps and services. Vinay: Okay! So, aré they similar to payment banks? Vini: Not exactly. Payment banks in India cannot give out loans as of yet. Whereas Neobanks can perform all the functions of a traditional bank as they have tie-ups with RBI licensed banks. Vinay: Understood. Apart from saving me a trip to the bank, do these banks offer other benefits? Vini: Well yes! You see, since Neobanks don't have to bear the expenses of running physical locations, they are able to pass these benefits on to their customers by way of low or no fees and high-interest rates on deposits. Vinay: That's great! What else? Vini: They are also known for leveraging the latest technologies like artificial inteli- gence, automation, and blockchain, to offer benefits like personalized solutions, faster response times, round-the-clock service, and quick on-boarding. Vinay: Also, | would be able to carry my bank in my pocket at all times =< Vink: That's right! Emerging Tech in Fintech: What does the future hold? “» In the current global landscape, new and emerging technologies are expected to bring disruptive change in all spheres of life. Needless to say, several new business opportunities in the Fintech sector can open up in intersection fo these technological domains. “> Potential fintech applications which will help in enhancing efficiency of the financial sector and expedite financial inclusion have been discussed below- Technologies Potential applications »> Predictive analysis to meet consumers’ credit and investment needs. Artificial Intelligence and | “> Virtual Assistants or Chatbots for resolving grievances Big Data Reliable and unbiased Credit Rating services. DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | BHOPAL | RANCHI | PRAYAGRA) C3)© 8468022022 © [Link] Metaverse Fe Metaverse wallets for carrying out financial transactions including buying and selling products (NFIs or virtual real-estate) on the metaverse platforms. Gamification to help customers analyse real-world financial deci- sions in the virtual world by recreating those scenarios in the metaverse." Decentralized Finance (DoFi) Construction of financially inclusive marketplace where pricing is determined by market forces and parties transact using secure tech- nology on a public blockchain. Independent operation of financial transactions: Intermediaries such as brokerages, exchanges, or banks can be eliminated using secure distributed ledgers through blockchain technology. What are the plaus' Technological transformations brought on by Fintech sector can not only amplify risks of traditional financial sector, but also bring to the fora new regulatory and oper ational risks. Some common con- cerns have been discussed below- Risks to Consumers “> Fraud/misconduet: Novelty and opaqueness of fintech business models and lack of consumer familiarity with technologies can enhance risk of fraudulent lend- ing or investment opportunities, misappropriation of funds, or imprudent lending. “> Adverse impacts due to tech- nology unreliability or vulnera- bility: Due to heavier reliance on digital and automated process- es, consumers may be more vulnerable to cyber fraud, misdi- rected transactions, platform malfunctions and data loss in comparison to traditional finan cial services. DELHI | JAIPUR | PUNE | HYDERABAD | AHMED: ible risks posed by the recent growth in the Fintech sector? Novel solutions, lack of user awareness and literacy, unpredictable technological outcomes, and profit driven motives can lead to ‘emergence of new ethical issues: ‘Conflicts of interests between consumers and fintech enti > Eg, Fintech lending platforms heavily dependent ‘on generating certain fees, may focus more on loan quantity over quality to maximize returns, while consumers bear the loss of imprudent loans (Misrepresenting information and misleading mark that emphasizes benefits and downplays costs, > E.g,, online payday loans look harmless at first sight due to the small amount and the flexibility to repay. But they could trap customers in debt due to rapid interest accumulation, hidden penalty charges, and rollover fees. Environmental implications > Several aspects of fintech business models can contribute negatively to global warming or climate change, such as-enhanced access to fossil-fuel based investments, promotion of consumerist behaviour through easy loans, energy consumption of crypto higher carbon footprint from excessive Algorithmic decision-making leading to potentially unfair outcomes > Use of algorithms for consumer-related decisions may lead to unfair, discriminatory, or biased outcomes due to poor algorithm design, incom- plete or unrepresentative input data etc. JABAD | LUCKNOW | CHANDIGARH | GUWAHATI | BHOPAL | RANCHI | PRAYAGRA)'< © 8468022022 © [Link] “» Convoluted Grievance redressal: Complex partnership and outsourcing relationships may make it difficult for consumers to identify the responsible party and obtain resolution. »» Business failure or insolvency: Inexperience, untested businesses, and higher dependence on market factors of new fintech enterprises puts consumers at greater risk of loss of funds due to their business failure or insolvency. “> Inherent challenges for disclosure and transparency: Limited electronic disclosure of terms and conditions, and lack of transparency on costs and business models create risks to consumers, particularly those less financially literate. “> Finaneial exelusion: Inequality of access to high-speed internet, lack of financial and digital literacy, low awareness about financial services and products ete. are major barriers for adoption of fintech. Threats posed to Integrity of financial systems “> Cyber risks and inadequate CoP keene Data protection: Inadequate safeguards with respect to data protection and cyber security could expose consum- ers to the risk of inappropriate commercial uses and unautho- rized disclosure and use of their ility- Efficiency - Privacy financial as well as other per- |{ Access to data for sonal data, leading to fraud, || regulatory goals vs “Traditional” stability- identify theft and online extor- || anonymity (eg AML/ competition tradeoff tion (for example, ransomware | CFT, Supervisory datal) attacks). o} ~» Proliferation of illegal activi- Privaey/ ties: Money laundering, financ- consumer competition ing of terrorism practices and Protection 2 other criminal activities like radesste talaior pial drug trafficking, can proliferate eotiler’ vetnanimity led amid digital financial platforms better/ worse access to that facilitate anonymity in credit: misuse of data) transactions. »» Lowered resilience of financial market: Imprudent lending practices, poor risk assessment, and lack of standard credit guidelines in the Fintech sector, can make the credit market more procyclical and volatile, sion: Credit activity outside the prudential regulation space could render credit-related countercyclical policies less effective. > E.g., Crypto assets such as stablecoins (eryptocurrencies where the price is designed to be pegged to a reference asset) could pose issues to monetary policy transmission, lead to currency substitution, and impact capital flows. Risks posed by BigTechs: Technology firms such as Amazon, Facebook, Google etc., commonly known as ‘BigTechs’, have ventured into fintech space. Their entry in the financial domain poses several new challenges for regulatory and supervisory authorities such as ~® Stifled competition and threat to data privacy: Given their entrenched clientele base and data networks gathered using their non-financial services like search engine, e~commerce platforms, BigTechs have the potential to become dominant players as well as threaten consumers’ data privacy rights. DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | BHOPAL | RANCHI | PRAYAGRA)© 8468022022 © [Link] “> Complex governance structure: Biglech provide financial services through their subsidiaries operating under different licenses for different services, such as payments, consumer loans etc. This limits the scope for effec- tive oversight and design of entity-based regulations. > Systemic risk to financial stal Innovative financial products by Biglechs can increase their interconnectedness with the financial system and even lead jo shadow banking. These large fintech enterprises can possibly transmit shocks, increase vulnerability of _ financial systems, and even become ‘tee big to fail’. > Shadow banking are unregulated China's case: How Bigtech firms became interlinked with the banking system? Chinese bigtech platforms engaged in risk transformation of funds by securitisation and selling of microloans by lenders to investors including banks. ‘Securities brought by traditional benks using depositors’ money i- ft Bigtech Firm ‘iT — Leone were securitised ‘and packag financial intermediaries that facilitate the creation of credit across the global financial system. “> Product linkages and cross-subsidies: A big tech e-money issuer or digital bank could offer financial services at a steep discount because it expects to tap other revenue streams that would grow by offering financial services. New Regulatory challenges “> Challenges in Techno-governane: > Skill gap among financial regula- tors: These typically include areas such as: cyber security, legal (e.g., to assess outsourcing contracts), data science and statistics (e.g., te manage and extract insight from big regulatory datasets), technical knowledge on emerging technologies and their impact on financial market dynamics {e.g., volatility of crypto-assets) etc. > Nature of Decentralized systems: Decentralized solutions such as eryp- to-assets and peer-to-peer or DeFi platforms, may prove more difficult +o regulate and supervise if a central governing body is absent. > Gaps in the digital identity land- scape: Fintech sector has to still rely on physical identity protocols for Is it prudent to use Al in financial services? Al is expected to turn: into an essential business driver across the Financial Services industry, generating new revenue potential through new preduets and processes, process automation, risk management, customer service and client acquisition. However, Fintech applications based on Al present several risks including opaque processes, ity of embedded bias, difficulties in placing account- ability in case of regulatory & failures, ties among government agencies, adverse impacts of d supervisory and regulatory capab replacement of human touch in financial services etc. Therefore, safe deployment of Al based services in the Fintech calls for a responsible use of Al with appropriate accountability frameworks and re-examination of princi- ples and supervisory techniques to address the risks. ‘authentication and KYC purposes. Useof physical identities can lead to issues like- » Fraud Entities using false information or stolen identities to gain illicit access to services. » Inefficient and costly onboarding and know-your-customer (KYC) processes. » Highly manual and time-consuming compliance processes increasing scope for human error. DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | BHOPAL | RANCHI | PRAYAGRA) 2)© 8468022022 © [Link] “> Low capacity of fintech for regulatory compliance: Finlechs, while possessing vast technological knowhow and new ideas, lack the expertise to navigate the regulations and licensing discipline of the finance industry. “> Supra-national nature of fintech firms: Regulations for the fintech sector, specifically relating to cyber- security, risk management etc., are fragmented across nation-state boundaries, ~» Financial services are being embedded in non-financial activities: The boundaries between social networks, digital economy platforms, and financial services are blurring. How can we facilitate the growth of Fintech whilst managing associated risks? Based on a deeper understanding of the fintech market and its consumers, as well as an assessment of exist- ing regulation, policy makers need to devise an appropriate strategy to reap the multitude of benefits offered by Fintech. Safeguarding consumer protection and fostering consumer demand and confi- dence »» Authorization and vetting requirements: Requiring fintech entities to be vetted prior to being granted license or registration. “» Segregation of client funds: Requirements that consumers’ funds be segregated from other funds held by a fintech entity and held with appropriately regulated institutions. > Mandating content of terms and conditions: Provision of standardized information summaries/ key facts statements (KFSs), appropriate warnings and information for consumers can be made mandatory. “> General conflict mitigation obligations: This may include compulsory disclosure of conflicts and ade- quate policies and administrative arrangements among finetch to prevent conflicts of interest from harm- ing the interests of the consumers. +» Establishing Algorithmic accountability based on key principles of fairness, explainability, auditability, responsibility, and accuracy. “> Awareness building and efforts to improve financial capability for both consumers and industry through measures such as awareness campaigns and financial capability initiatives and tools. Identifying, mitigating, and addressing risks to financial stability and integrity ~> Appropriate risk management guid. Fintech entities can be subjected to general risk manage- ment and prudential rules that often apply to traditional financial counterparts, “> Establishing supervisory framework to mitigate cyber risks: The framework can typically consist of measures such as creating a documented cybersecurity program or policy; identifying critical information assets; cyber-event reporting and cyberthreat intelligence sharing networks etc. ~» Promoting data minimization and privacy-by-design for fintech entities: For data collection and use, fintech companies should be encouraged to follow consent-based approaches to data privacy, allowing users to exercise greater access to and control over their data, “> Enhaneing cooperation, both interagency and cross-border: Collaboration mechanisms may be formalized to cover cross-cutting issues, such as Money laundering, financing of terrorism practices or con- sumer protection, with other financial sector regulators. > In this regard, global standard-setting bodies and international bodies like the IMF and World Bank can play a critical role by developing instruments like ‘Bali Fintech agenda’ DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | BHOPAL | RANCHI | PRAYAGRA)© 8468022022 © [Link] ee Outlined by the World Bank Group and IMF, the agenda advocates embracing the promise of fintech | ‘while managing risks to consumers and to the stability and integrity of the financial system. It broadly aims to promote 4 objectives: 7% Foster enabling Strengthen the adres Shy’ Promote environment fo financial sector alee & international harness opportunities policy framework. slat collaboration @ | | OC) Q &) B| O] SB] we Develop || Reinforce || Address || Monitor || Adaptthe || Provide | | Safeguard || Develop | | Encourage ‘open and fair || challenges | develop | regulatory || greater | consumer || resllent || sharing of accessible || competi- || relatedto || mentsto _ framewor legal land investor| | digital _| | information founda- || tion and reach, formulate and clarity and | | protection; | | infrastruc and tional || contest- || customer | | conducive | | SUPEVISOYY || certainty tures to | | experienc- infrastruc able informa- || policies eater while protect [Link] tures. markets to | | tion, and and cle eat removing data strengthen ensure a || comm Identity || “SPnew” | | unneces Integrity || coordina level cial risks. || products | | sary legal ‘and tion for playing | | viability to ‘and || obstacles. | financial || privacy. || effective field. || promote entities, Integrity. policy financial maintain making. inclusion. stability, ‘and respond fo risks. . Maintaining healthy competition and providing regulatory oversight for BigTechs ~> Ensuring equitable access to data: Open banking systems and accessible government data and finan- cial infrastructures can help foster competition and provide a pathway for fintech [Link] offer services efficiently, > For instance, automated access to government data platforms has enabled banks in India to approve MSME and personal loans online in under an hour from over 20 to 25 days. »» Securing Data Protection and Data-Sharing through “purpose specificity” and “security requirements > ‘Purpose specificity’: It requires the user's data to be collected and utilized for the purpose consented by the respective user. > ‘Security requirement’: It specifies that the bigtechs should put in place adequate organizational measures to protect the integrity, confidentiality, and availability of users’ data. ~> Encouraging Data portability: It can enable users to get their personal data back from bigtechs for their ‘own purpose or ask fo transfer their data to a third party in a technically feasible format. DELHI |JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | BHOPAL | RANCHI | PRAYAGRA)'< © 8468022022 © [Link] — Strengthening Regtech and Suptech: Possible solutions to regulatory hurdles? Techno -Governance| Supervisory technology (suptech) is the use of innovative technology by supervisory agencies to support supervision. It helps supervisory agencies to digitise reporting and regulatory processes, resulting in more efficient and proactive monitoring of risk and compliance at financial institutions. mechanisms proper Technology Example applications Financial | automated Reporting |Ability to pull data directly from banks’ IT systems supervisors’ —_know!- edge, skills, and tools Al [Automated data validation and consolidation should keep pace with ene [Answering consumer complainis while collecting information the speed of innovation hat could signal potential areas of concern and related risks, ; [Market surveillance, misconduct analysis as well as micropra+ Bigdata including cyber threats. [dential and macroprudential supervision Regtech and Suptech solutions could be excellent catalysts for this. RegTech (regulatory technology) uses technologies, such as cloud comput- ing, big data and artificial intelligence, to meet regulatory compliance while ‘automating parts of the process. Some examples of Reglech applications are provided below- “> Developing Digital Technology Example applications Identity ecosystem for Social good: The digital ID ecosystem needs to be designed to ensure privacy, and be user-centric, open eect fisdble ‘Machine learning Prioritizing and optimizing reporting, Horizon scanning Blockchain/dist Cloud based platforms ‘Automated processing of new regulations Identifying relevant regulations Providing easy regulatory advice: ‘Analysis and synthess of data for reporting Reducing manual, human tasks Tracking and verifying data fective data management and storage Legislation seanning, infermation management, labelling Identify verification Conclusion FinTech has the potential fo reshape the financial services and financial inclusion landscape in India in fundamental ways. There is a need to strike a subtle balance between effectively utilizing FinTech while min- imizing its systemic impacts. Policymakers need to put in place a timely and proportionate regulatory and supervisory approach to managing financial risks arising from fintech. Ensuring financial stability, safety, and integrity will remain the core mandates, and these can, in turn, contribute to sustainable development amid healthy innovation and increased competition. DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | BHOPAL | RANCHI | PRAYAGRA) 5)© 8468022022 @ [Link] TOPIC AT A GLANCE igital Payments: Digital Wallets; Propaid Payment instruments (PPIs); Cryptocurrencies ete. Technologically enabled financial [Alternative lending: P2P lending; Crowd Funding; Buy Now jevation that result in new business ey Pay later ete. Pare) models, applications, processes, or prod [Wealthtech: Robo Advisors; Algorithmic trading ele. ucts with an associated material effect Banking: Neobanking; Customer Onboarding Platforms ete, ‘on financial markets and institutions and InsurTech: Insurance Web aggregator, Micro insurance ete. the provision of financial services. aa Factors driving the growth of Indian Fintech industry eee een eee ee ee +» Development of India Staek (UPI, Aadhaar, E-KYC, Digilocker etc.) for the society and economy ++» Technological advancements in financial sector through use of arlifl cial learning, machine learning, big data ete joncy of financial services: > Improved customer service. Ss» Conducive regulatory framework: RBIs guidelines and frameworks;|| > Reduced transaction and operational cos! and time. Regulatory sandbox; Development of licencing framework for Payments Banks; launch of Account Aggregator (AA) network ete, > Changes in consumer behavior and favorable demography: Rise of Tech-sawy generation and digital native; Push provided by demonetization | |-» Strengthening and deopening of India's capital > Enhanced transparency and democratization. > Provision of personalized user experience; ote ‘and oovid-¥; Growing Faronctalnolison and digit iwrooy st. markets! Retai-isation of stock markets; Enhanced +» Developments in digital identity ecosystem and launch of e€ (digital || _Financil literacy; Reduced risks etc. Rupee). Driver ef Social Good: Ensuring Financial inclusion +> Flourishing entrepreneurship culture; industrial col yns;|| of the unbanked and underbanked, Enhancing findaclal sippoct Sad badiated Saaired Séclal Securty coverage and Propeling Sustainable +> Positive fallouts from sector specific schemes for technological and || _ investment and climate finance, like National Digital Health Mission (NDHM). digital transform Hb Risks to Consumers: Fraud/misconduct; Adverse impacts due to technology unreliability or vulnerability, Convoluted Grievance redressal; Business failure or insolvency; Inherent challenges for disclosure and transparency ete. |» Ethical concer Conflicts of interests; Misrepresentation of information and misleading marketing; Environmental implications; Unfair outcomes of Algorithmic decision-making. > Threats 1d to Integrity of finan ystems! Cyber risks and inadequate Data protection; Proliferation of illegal activities; Lowered resilionce of financial markets; Decreased effectiveness of policy transmission. "> Risks posed by BigTechs: Stiled competition and threat to data privacy; Complex governance structure; Systemic risk to finaneial stability etc. > New Regula;tory challenges: Challenges in Techno-governance like ski gap among financial regulators, nature of Decentralized systems etc, Low capacity of fintech for regulatory compliance; Supra-national nature of fintech firms ete. er demand and confidence |) Segregation of client funds. stability and integrity > Appropriate risk management guidelines. 1) Establishing supervisory framework to mitigate oyber risks. > Promoting data minimization and privacy-by-design for fintech General conflict mitigation obligations entities > Establishing Algorithmic accountability > Enhancing cooperation, both interagency and cross-border. > Awareness building and efforts to improve financial capability n and providing regulatory Strangthoning Techno -Governance mechanisms ‘oversight for! > Ensuring equitable access to dato. : 2 Bulding proper expertise among financial regulators. > Developing Digital Kdentty ecosystem for Social good. > Securing Data Protection and Data-Sharing > Encouraging Data portability, DELHI |JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | BHOPAL | RANCHI | PRAYAGRA)