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The financial technology (“FinTech”) sector has played a pivotal role in shaping the financial services industry in the last decade. FinTech has been developing at an unprecedented rate and it has been predicted that the Indian FinTech market will reach approx. USD 6,000 billion mark by 2025. Mr. Arunabh Choudhary (Partner, Juris Corp); Ms Aditi Joshi (Senior Associate, Juris Corp) take the readers through regulatory changes to expect in India in the fintech sector
The financial technology (“FinTech”) sector has played a pivotal role in shaping the financial services industry in the last decade. The FinTech industry has witnessed the monumental rise of start-ups owing to technological advancement and increase in accessibility, thereby attracting large scale investments. Undeniably, FinTech has been developing at an unprecedented rate and it has been predicted that the Indian FinTech market will reach approx. USD 6,000 billion mark by 2025.
In order to streamline such growth in the sector, the Indian financial regulators viz., Reserve Bank of India (“RBI”), Securities and Exchange Board of India (“SEBI”) and Insurance Regulatory and Development Authority of India (“IRDAI”) have undertaken various measures to introduce and implement regulatory reforms in the sector. In this article, we have charted some of these initiatives and their plausible outcome in the near future.
Regulatory Changes to Expect in the FinTech Sector in India
- Guidelines on Regulation of Payment Aggregators (“PA”) and Payment Gateways (“PG”)
RBI vide its notification dated 17th March 2020 issued guidelines to:
- regulate the activities of PAs and
- provide baseline technology-related recommendations to PGs (“PA Guidelines”).
Further, the PA Guidelines with respect to the directions related to escrow account management were modified by the RBI vide notification dated 17th November 2020.
Regulatory Sandbox (“RS”)
The RBI provided for Enabling Framework for RS highlighting clear principles and roles proposed for RS vide notification dated 16th December 2020. Additionally, RBI has announced the opening of second cohort with the theme of ‘Cross Border Payments’.
Amendments to KYC Master Direction
RBI amended the KYC Master Direction and stated that the voluntary usage of the Aadhar number for identification purpose is permitted. In addition to the above, the KYC Master Directions were further amended on 9th January 2020 pursuant to which RBI has permitted video-based customer identification process.
Retail Payment Systems
RBI notified the Framework for Authorisation of Pan-India Umbrella Entity (UE) for Retail Payments on 18th August 2020 (“RP Framework”). As per the RP Framework, UE will inter alia set up, manage, and operate new payment systems especially in the retail space, develop new payment methods, standards and technologies and take care of developmental objectives. RBI has also announced a framework to operationalise the Payments Infrastructure Development Fund (PIDF) Scheme to support digital payment infrastructure vide its notification dated 5th January 2021 (“PIDF Framework”). The purpose of the PIDF Framework is to increase the number of payment acceptance devices in the country.
Virtual Currencies (VCs) – Regulatory Developments
RBI has time and again cautioned users, holders, and traders of virtual currencies (“VCs”) about the potential financial, operational, legal, and security-related risks associated with trading in VCs vide several notifications. However, the Hon’ble Supreme Court of India, vide its judgment in the matter of Internet and Mobile Association of India v. RBI has lifted the ban imposed by RBI on entities that are under the purview of RBI, from dealing in VCs and crypto businesses.
Storage of Payment System Data
For better transparency and regulation, RBI vide notification dated 6th April 2018 mandated that data related to payment systems must be stored only in India and compliance of the same must be reported to RBI latest by 15th October 2018.
RBI (Digital Payment Security Controls) Directions, 2021
The RBI (Digital Payment Security Controls) Directions, 2021 (the “Directions”) as released vide notification dated 18th February 2021, will apply from 18th August 2021 to scheduled commercial banks (not including regional rural banks), small finance banks, payments banks and credit cards issuing NBFCs (collectively referred to as “RE”). The purpose of these Directions is to stipulate maintenance of a common minimum standard of security for internet banking, mobile banking, card payments and similar digital payment systems.
Clarification on KYC process and use of technology for KYC
SEBI, pursuant to discussions with various market participants, decided to make use of the following technological innovations to facilitate online KYC viz. (i) e-sign service; (ii) equivalent e-document; (iii) e-sign mechanism under Aadhaar or cropped signature affixed on the online KYC form.
Framework for Regulatory Sandbox
On 5th June 2020, SEBI introduced a framework for Regulatory Sandbox under which entities regulated by SEBI will be granted certain facilities and flexibilities to experiment with FinTech solutions in a live environment on limited set of real customers for a limited time frame.
IRDAI has introduced the Regulatory Sandbox which can be used to carve out a safe and regulated environment to experiment with innovative approaches. In 2020, IRDAI invited applications for the second cohort under its IRDAI (Regulatory Sandbox) Regulations, 2019.
Working Group on Innovations in use of Wearable/ Portable devices
IRDAI constituted a working group in December 2017 to look at how technological advancements may be treated from the point of view of risk improvement, risk assessment and use of such devices as a part of policy design.
Discussion Paper on Telematics and Motor Insurance
The working group constituted by IRDAI, on revisiting the product structure of motor damage vide its report dated 20th March 2019 has also prescribed the use of telematics for motor insurance.
Data Empowerment and Protection Architecture (DEPA)
In addition to the above, the Department of Economic Affairs had released the Report of the Steering Committee on FinTech Related Issues in 2019, which discusses the various issues faced by the FinTech sector in India and further discusses the ways in which such issues can be tackled.
For an in-depth analysis on each of the aforementioned regulatory developments and foresight, please refer to the link below:
FinTech in India-Regulatory Updates and Foresights-Note.pdf
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