Our last edition of FinTales opened with Tennyson. This time it’s Katy Perry. Less high-brow, but poetic nonetheless (we think so!).
“I know there’s gotta be rain, if I want the rainbows
And I know the higher I climb, the harder the wind blows Yeah, I’ve gone to sleep night after night punching a pillow But do you know the darker the night, the brighter the stars glow?”
–Katy Perry
If you haven’t heard this song, we urge you to step away from this newsletter. Have a listen. Go on, we’ll wait.
This song has been on our playlist for a long time. And rightly so. The vaccine is finally out! After battling the gloom, hysteria, and lockdowns in 2020, things are looking up. More than 2.9 million Indians are vaccinated. A RBI report suggests that our economy will also “grow right through the cracks”. Signs of hope and resilience abound.
On that note, we leave you to curate your playlist for 2021. While we deliver your monthly dose of all things fintech.
Welcome to the third edition of FinTales. If you missed our previous editions, you could read them here. Write to us if you (or someone you know) wants to subscribe.
Last month’s union budget was a mixed bag for fintech. RBI rapped HDFC on the knuckles for its payment system outage, sending a clear message that banks must up their technology game. The government wants to ban cryptocurrency (again), but still loves blockchain. RBI wants to revamp the NBFC sector. And make customer grievance redressal transparent. Bewitched by the success of fintech, SEBI revised its regulatory sandbox framework to promote fintech in securities market.
Let’s dive in.
Union Budget 2021: Did fintech get what it wished for?
The budget is the most anticipated (and dreaded) economic event every year. The Sensex rose 2315 points on the budget-day (a record-high in the last 24 years!). Overall, the budget was well received. The fintech industry’s response, however, was mixed. Here’s what the budget had for fintech:
Financial incentives scheme to promote digital payments
Rs. 1500 crore has been allocated to promote digital payments. Industry players hope that these funds are used to reimburse payment companies for the zero-MDR policy (on Rupay cards and UPI transactions). Zero-MDR distorted the unit-economics for digital payment products. It adversely impacted Rupay card adoption and investment in UPI infrastructure. So, the Rs. 1500 crore package may bring temporary respite to the industry. But it isn’t enough. A zero-MDR policy supported by government compensation model is not sustainable. Taxpayers’ money can instead be spent on financial literacy and payment infrastructure. Also, a capped-MDR regime may be more sustainable. Government can also come up with alternatives like tax incentives on digital payments to promote digital payments.
Fintech hub in GIFT city
The Government plans to open a fintech hub in Gujarat International Finance Tec-City (GIFT). GIFT is India’s first operational smart city, and is designated as a special economic zone. Tax relaxations, subsidised office space, and availability of residences and schools will attract fintech companies to GIFT. Having a fintech hub will also facilitate research and innovation, and prepare fintech firms for global competition. Following the news, Asian Development Bank has shown interest to invest Rs. 1000 crore in the hub.
While these are welcome moves, the budget shot down some announcements the industry was anticipating. Like the removal of GST on transactions through banking correspondents, and clarity on zero-MDR policy. So, this year’s budget had a few hits and misses for the fintech sector.
RBI wants to reign in NBFCs
Over the last decade, NBFCs have witnessed phenomenal growth. From being around 12% of the balance sheet size of banks (2010), they are now more than a quarter of the size of banks. But the unbridled growth coupled with light-touch regulation exacerbated systemic risks. Like the IL & FS crisis, and the recent digital lending debacle caused by lax NBFC oversight. This led RBI to propose a new framework to regulate NBFCs. The proposed framework is based on the principle of proportionality. Which means an entity posing higher risk will be regulated more closely than others. The factors for assessing risks are size, complexity of operations, and type of activity undertaken. NBFCs will be classified into base, middle, upper and top layer. The supervision will increase with each additional layer.
This will also impact fintech players who partner with NBFCs. NBFCs could have a stricter vigil over their partners and service providers. NBFCs will likely pass on some of their regulatory burden to fintech companies, in their contracts.
The discussion paper is open for comments till 22 February 2021. If NBFCs, market participants or other stakeholders have any suggestions for RBI, they may write in.
Light’s out at HDFC
On 21 November 2020, HDFC experienced an outage in its payment systems because of a power failure at its primary data centre. HDFC (and other banks like SBI) has experienced similar outages in the past. But this one was a big deal. So much so that RBI directed HDFC to halt the launch of its new digital initiatives, and sourcing of new credit cards to customers. Till it got its house in order. This month, RBI appointed an external professional IT firm to conduct a special audit of HDFC’s IT infrastructure. This is one-of-a-kind action by RBI. And indicates RBI’s growing concern over the technology infrastructure of banks.
Digital payments have grown to 1623 crore transactions (value of Rs. 3435 lakh crore) in the FY 2019-20, from 498 crore transactions (value of Rs. 96 lakh crore) during FY 2010-11. Can banking systems handle the meteoric rise of digital payments? Are disaster management and recovery practices of banks robust enough to carry on with minimum disruption during crisis? Well, these are million-dollar questions (quite literally!) – responses to which will determine how well deeper integrations of fintech with banking will work.
The Indian government is planning to ban cryptocurrency – again
The Indian Government is set to implement the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (Cryptocurrency Bill) to ban private cryptocurrencies in India. The industry faced a similar challenge in April 2018, when RBI prohibited regulated entities from providing any services related to virtual currencies (VC). This law was quashed by the Supreme Court of India in March 2020.
The Government may also introduce a centrally backed digital currency (CBDC) under the Cryptocurrency Bill. Various jurisdictions are planning to introduce a government backed digital currency. Sweden and China are already running pilot programs for E-krona and the Digital Yuan, respectively. Singapore and the United Kingdom may also jump on the band-wagon soon.
The Cryptocurrency Bill is expected to be introduced in the second part of the budget session. The official text of this bill will only be available once it is formally tabled in the Parliament by the finance ministry. The government may also pass this bill through the ordinance route. Which means that it may not even be discussed in the Parliament, at least till the next Parliament session in July-August 2021. However, the ban may not be enforced overnight. Investors will reportedly have a transition period of 3-6 months to liquidate their cryptocurrency investments.
The Government seeks to ban cryptocurrencies to address concerns such as anonymity of transactions, tax evasion, money laundering, terror financing and extreme volatility. A blanket ban will wipe out a USD 1 billion industry in India with 7 million investors. Banning cryptocurrency will only push all these existing problems underground, and will only make it more difficult to address these problems. Regulating cryptocurrency could help promote best practices in the cryptocurrency industry. Most well-known cryptocurrency exchanges today self-regulate by following know-your-customer (KYC) and anti-money laundering (AML) requirements. A law that formalizes these practices could help this industry grow exponentially in India.
RBI walks the extra mile for customers – will fintech players follow suit?
“What helps people, helps business” – RBI’s vision of enhancing experience of financial services customer seems motivated by this Leo Burnett’s saying.
2020 was a difficult year. Some vulnerable customers fell prey to dubious tactics of rogue digital lenders. Failure rates for UPI transactions spiked. These reasons were pressing enough for RBI to bring a change to consumer grievance redressal system.
Last month, RBI made it mandatory for payment system operators to set up a 24×7 customer helpline by September 2021. RBI also proposed to club the ombudsman scheme of banks, NBFCs and digital transactions into a single body. This will make the grievance redressal process seamless, quicker, and customers will now be able to file their grievances under this integrated scheme.
These changes may ease the process of filing complaints for customers. But fintech companies will likely need to beef-up their in-house customer grievance systems. So that customer complaints do not reach the ombudsman, which could lead to regulatory attention.
SEBI revises the framework for innovation sandboxes
SEBI opened mutual funds space for technology startups in January. This month, SEBI revised its ‘innovation sandbox framework’ with a clear intention to promote fintech for securities market. SEBI hopes fintech will enable an efficient, fair and transparent securities market. The participants (of sandbox) will get access to historical and anonymized data sets (through an API) of securities market to test their fintech products. The industry is keen to grab-on this opportunity. But lack of intellectual property protection for ideas may dissuade some fintech players to apply for this sandbox.
In any case, the opportunity for fintech to make it big in the securities market, after capturing the financial service space, seems exciting.
That’s it from us. We’d love to hear from you.
Tell us what you think about the developments we covered. Or if you’d like us to cover any other development in our next edition.
Write to us at contact@ikigailaw.com.
See you in March!
Yours,
Ikigai Fintech Team
