The emergence of fintechs seemed disruptive to the financial services industry, causing banks and the regulator to be cautious about their impact. However, recent developments indicate that the regulator is not only looking at the fintechs positively but is also looking forward to them contributing towards the ultimate goal of financial inclusion.
After a considerable pause, the Reserve Bank of India (RBI) recently issued non-banking financial company (NBFC) licenses to two well-known fintechs.
Fintechs have come a long way from their rapid-growth technology-based solutions built for small borrowers. Their fast growth also raised risks of mishaps prompting the regulator to come down strongly and curb some prevalent practices. Nonetheless, it is noteworthy that even while taking action on fintechs, the regulator did recognise their ability to contribute to financial inclusion. Consequently, a committee was formed, and its report released in September 2022 outlined guidelines for digital lending, improving clarity on the potential role that fintech companies could play.
In addition to expressing support for the industry in public forums and engagements, the RBI has now begun to meet with fintech leaders as a group to understand their needs. Granting NBFC licenses to fintech companies will enable direct engagement with the regulator, enhancing mutual understanding. Obtaining an NBFC license will also help fintech companies gain trust and acceptance from the regulator.
Competing with each other
Banks and fintechs have so far looked upon each other as competitors. Fintechs, with their agility, quickly adopted new technologies and launched innovative products and services that were more accessible, efficient and cost-effective - challenging traditional banking services.
For instance, consider the cost of customer acquisition. While a bank required opening a brick-and-mortar branch, hiring a large employee base, and constructing other infrastructure to acquire new customers, fintechs accomplished this with the aid of data science and technology. Once customers were acquired, fintechs used technology to track their financial behaviour and provide products that improve their financial well-being. By helping customers enhance their credit scores to secure loans, fintechs also contributed to financial literacy. In other words, what banks have been striving to achieve in terms of financial inclusion over the last several decades, fintechs could achieve much faster.
With their mammoth size, legacy systems and complex bureaucratic structures, banks found it challenging to keep up with technological change and were inherently slower to innovate. The competition was unfair.
In collaborative space
However, banks and fintechs need not be competitors; they can be collaborators. Banks are well-regulated and possess stable, low-cost sources of funds. They have robust systems and skilled professionals for managing balance sheets, underwriting and collections. Fintechs, on the other hand, bring technology proficiency to cover the last mile and develop customer-specific product innovation. Their coming together will be beneficial to the customers and also to the financial industry as a whole. It will allow for more innovation leading to improved products and services that are more accessible and affordable. Through the collaboration, banks can leverage the agility and technological prowess of fintechs, while fintechs can tap into regulatory compliance, customer protection and balance sheet management expertise of banks.
Enduring avenue for investment
Incorporating fintechs operating as NBFCs in the regulated ecosystem would also allay the concerns of regulators. NBFCs have a well-established method of raising funds for lending, which alleviates any apprehensions about their funding sources. Furthermore, regulators can utilise their existing supervisory processes to evaluate, confirm, and control the level of stressed loans. Finally, any unease associated with the misuse of loan default guarantees and other means to delegate underwriting decisions excessively would be mitigated.
As India positions itself to become a financial technology leader, beginning with payment systems, the regulator must encourage good players who bring in good capital by providing an enduring avenue to participate in the financial ecosystem.
Towards financial inclusion
Financial inclusion in India has come a long way since the nationalisation of banks. From physical bank branches to banking correspondents and now fintechs, access to finance and last-mile coverage for customers has become a reality. The regulator undoubtedly recognises the valuable contribution of fintechs in this regard. Granting licenses directly to fintechs and digital lenders would provide official recognition from regulators. Bank regulation is currently robust, and NBFCs are gradually being aligned with banks in terms of regulation. Incorporating fintechs into the regulatory framework is a positive, welcome step.
However, regulations for fintech should not burden them excessively, as the cost of compliance could hinder their agility. Recognising the value of fintechs and providing them with their rightful place in the financial ecosystem is what fintechs are eagerly anticipating.
(Sandeep C. Patil is Head of Asia and Partner at QED Investors, a fintech-focused global venture capital fund).
