There has always been a constant slugfest between regulation and technology. The fintech sector, particularly has seen the ill-effects of this: lower funding volumes. Even FinTech entrepreneurs seem to be in a constant state of anxiety because of this. So, what’s going on with the regulation of the FinTech space in India? Ankita Hariramani, partner, Spice Route Legal, opens up on what it means to be a fintech entrepreneur in 2025 and beyond.
The open secret or the dark reality is that to be a FinTech entrepreneur in 2025, by all means, they should be, but they have to be open to regulation and take it seriously because nobody has been spared. What do you think?
Ankita: Initially, there was a lot of resistance by FinTech players who didn’t understand why they were being regulated that way. But that’s changing. It’s a fine line between how much of an entity is tech and how much of it is financial services. The moment it’s more on the financial services side of the spectrum, there’s more likelihood one would have to comply with certain laws.
I think a lot of startups were more “Fin” in the garb of being “FinTech” and perhaps, the RBI has seen through this. Though they may position themselves as a tech company, they’re talking about AUM all the time. If one starts a FinTech company, they ought to be talking more about their tech capabilities. Perhaps, the entire premise of FinTech started as a partnership between the tech and the bank. But, somehow, in the process, FinTechs got a little smug and started thinking of themselves as more “fin” than “tech” and that they may not necessarily need a bank. How do you think that relationship is coming along? Do you think the future really is where the power still lies with the bank and FinTechs just have to accept the fact that a chunk of business of a FinTech company or a lending company still comes from partnering with the bank, which is the ultimate repository of data?
Ankita: It’s like the FinTechs want to be banks and banks want to be FinTechs. Having said that, it’s so interesting, that when it comes to partnerships with banks, there are a whole bunch of activities that regulated entities can outsource to these tech companies because they have larger access, more penetration in the market and accessibility to Tier-II and Tier-II cities. So, they’re using them in ways that a bank or a NBFC may not be able to target. In that way, the partnership is beneficial for both and I think it’s a win-win if it meets each party’s needs.
FinTechs don’t have the capital, but they have the resources, a lot of alternate data and the ability to reach out to the masses, while the banks and the NBFCs have the capital. And that’s why the partnership works. I wouldn’t say that each party can do without the other; they need to work hand in hand for this ecosystem to grow at the pace at which it’s growing but in compliance.
Do you think there’s a level playing field between the bank and FinTech when it comes to regulation?
Ankita: What’s happening, increasingly over time, is that the dependency by banks on FinTechs has really grown exponentially, which is why the fear is that if today, a FinTech goes belly up, the bank and consumer interests might be impacted. For instance, with the ZestMoney fiasco, there were three lenders and the conundrum became which lender would control what, which was an aspect not anticipated until now. But the RBI has become more cognisant of these aspects and even with a simple tech outsourcing, it imposes obligations on banks to evaluate how material the tech is to a system and if it were to go down, how it would impact the business and more. So, there are different permutations and combinations and in the last few years, the RBI has interacted with a lot of players and done a lot of market research.
VCs and startup founders have been recently talking about how the RBI and regulators are being unfair to them and, probably, deservedly, so. Has the realisation come the hard way for them that regulation is the path to success that can make or mar an entrepreneurial journey and that regulation has to be embraced?
Ankita: Absolutely and more than regulating activities, what’s become clear by the regulator is that if you’re a FinTech operating in the Indian ecosystem today, you cannot do away with accountability. No matter what product it is, you always need to understand the intent of the regulations and ensure you’re not reading between the lines or taking cowboy positions on what the law is. That message has become very loud and clear & this was due for a while because there were a lot of innovative products being offered in the financial services sector having to deal with ambiguity in the laws. So, the RBI had to take aggressive stances and impose penalties.
A lot of FinTech startups, such as those in the lending space, have had to face a crackdown from the RBI. If I were a FinTech entrepreneur, what would I have to be most concerned about and what is the future of that space from a regulation perspective?
Ankita: Today, the digital lending ecosystem is, by and large, settled in terms of regulation. Maybe 3 or 4 years ago, the DL and the default loss guarantee guidelines weren’t in place, but now, the RBI has issued a bunch of FAQs to further clarify its stances. The reaction that we’re seeing by the RBI is an outcome of the law not being complied with. There are a lot of aspects prescribed in the existing regulations, like disclosures, which are pro-consumer and which outline how to handle data and ensure the user gets access to information, what the interest rates are, how two lending partners can’t give loans at two different interest rates for the same consumer segment and more. But it’s the players who are not complying with the law to a T. So, for a player in the lending ecosystem today, the RBI’s position on the right from recovery, disbursal, repayments and more all are fairly settled. After a lot of industry consultations and letters, there have been evaluations and clarifications.
So, one has to be mindful of how products are being structured and not get too innovative in their interpretation.
But, what do you think gives the guts or the gumption to a FinTech entrepreneur not to comply with the RBI?
Ankita: I suspect a lack of enforcement. I think that message has been made very loud and clear by the RBI with recent penalties and sanctions that have been imposed. While there have been actions taken against certain FinTech players, I think it’s a very clear message to all NBFCs to clean up their books and get their acts together. Maybe, the players were waiting till the very last moment to tidy up, but, maybe, there are a lot of innovative interpretations that players took. Some thought they could convince the regulators with their sheer size (about) why their stance or interpretation was the right one. So, I see it as a combined effect of all of these.
And what should payment aggregators be thinking about from a regulation point of view? Are there lessons they can glean from what happened to the lending players?
Ankita: If you look at how the PA guidelines came into force, until then, most PAs were only following the 2009 Nodal Account guidelines after which, there was full-blown regulation. If you look at the regulations, the obligations of PAs are quite strict in terms of reporting or regular form filings to outline the transactions being done and in what modes. There’s a lot of emphasis on tech, cybersecurity and IT security. The RBI expects payment aggregators to have to deal with a lot of compliance because by aggregating different payment modes, it has to make sure what kind of data they have access to, what data shouldn’t be stored and more. So, a lot of obligations stem from ensuring security for payment transactions.
So, payment aggregators should focus on identifying fraudulent transactions, making sure AML checks are in place, reducing the number of chargebacks and doing due diligence on the merchants being onboarded. The last one is critical because the RBI was not appreciative of PAs partnering with gaming companies, crypto players and lending companies with Chinese links, at least back then.
Talking about the crypto space, while entrepreneurs are waiting for legitimacy from the FM’s office, a lot of funding has gone into this space. Some entrepreneurs in this space initially positioned themselves as being the largest crypto exchanges in the country, but, then, quickly termed themselves as financial services play with a crypto product. So, does the idea of crypto as a legitimate regulated product in India have an immediate future or is this a distant idea?
Ankita: I think the future is a little far away than we’d want for this. Regulators are yet to take a call on how to regulate this, be it the securities regulator or the financial services regulator, to determine whether these are securities or currencies. I think those are decisions the regulators need to take before they even evaluate the regulation in place. What they’ve done in the interim is ad hoc fixing. For example, there’s a requirement for all crypto players to register with the Financial Intelligence Unit (FIU) and undertake KYC to ensure the prevention of money laundering. That became an immediate need, so it was plugged in with a specific notification mandating that, but a lot of players were resistant.
What’s interesting is that the law is agnostic; irrespective of whether the player is Indian or overseas, they had to register with the FIU. A lot of overseas players didn’t do that, so they faced the backlash with URLs being blocked and an inability to operate. Players are cognisant that India is an important market and there was no way to offer what they could do without complying with what the law mandates, so they had no option but to register and undertake the compliances. The ones, that could not, choose not to offer their services in India.
From a regulatory perspective, there are a lot of positions regulators in India need to take when it comes to how crypto would be regulated. The RBI has been mindful of global developments, like the blow-up of FTX and Binance. Articles have been issued talking about decentralised finance and cryptos with the view that these are speculative in nature and not to be used as an exchange for payment. How the regulator will regulate it, allow it or disallow it will take a while, but what might be interesting is how the IFSA (International Financial Services Authority), that governs GIFT IFSC, has evaluated and set up a committee to come up with a law on asset tokenisation, which might be made public very soon and open for comments.
From a VC view, where money would go into space, how would regulation feed into the funding of the space? Are there portions in the FinTech space which would become unattractive? And what pieces within FinTech would have a strong future in 2025 and beyond?
Ankita: Initially, players in the ecosystem were doing just FinTech, which was more “tech” and less “financial services”. But, with the ecosystem growing, it’s become more financial services through tech. A lot of investors, who had the view of not wanting the long arm of the regulator touching the entity and not wanting to be subject to RBI scrutiny or audits or inspections or wanting to invest in core tech companies, might find it tricky, based on how the laws are structured today. If you’re a tech player providing services to a bank with an outsourcing arrangement, you would, indirectly, be subject to RBI scrutiny, if push comes to shove. So, to that extent, investors are a little wary due to the scrutiny entities can face. Regarding investors having the right to appoint observers, who evaluate what’s happening in a Board meeting, but who are not taking accountability as a director, there’s a recent direction by the RBI to NBFCs informally about converting these observers to Directors or moving them away. So, it’s getting trickier, but I think the serious players, like larger financial conglomerates or investors or funds having a core focus on FinTech, won’t be surprised by this.
The fact that the recent Budget talked about doing away with the angel tax is something that would boost the startup industry when it comes to investments in this particular sector. It’s a market that’s growing with new products, new innovations and new laws. It’s not going to stand still, so there are players keen to invest and are okay with the kind of scrutiny that Indian law imposes.
What did the Paytm episode teach the ecosystem? It seems like the RBI was very loud and clear and it set alarm bells ringing for the FinTech space for investors, consumers, merchants and entrepreneurs. So, how will this go down in the history of the Indian FinTech space?
Ankita: Superapps would provide the context on why this was an issue. Superapps are apps that become one unified interface to access multiple financial products each offered by different regulated entities. So, on one platform, you could do broking services, invest in mutual funds, buy an insurance policy, get a loan and more. Each of these financial products is regulated by different regulators and by different laws. It’s important for consumers interacting with the front-end platform to have clear visibility into the multiple backend entities providing the financial products that have been partnered with. What’s not clear is that the way these apps are structured, a user may not know they are interacting with which entity. With the TPAP piece, Paytm had a license for their payment entity, not their tech entity, until they went to the NPCI to get approval.
From a consumer perspective, what the RBI wants is a clear indication of who they’re interacting with, who to go to for grievances and more. So, it becomes very important there are guidelines to regulate super apps and it can’t be through one regulator, it has to be a coordinated effort by all the regulators; if not jointly, then through the SROs (Self-Regulating Organisations). It’s not just the financial products, it’s, also, the data they access and intercompany arrangements at the back end. So, you’re literally dealing with a whole bunch of issues, which is why structuring these products in compliance with the law is important. I suspect these were the kind of issues that the RBI may have evaluated with Paytm, along with a bunch of KYC issues and lending arrangements. If you look at the last year, the RBI’s focus throughout has been consumer interests, be it usurious lending rates, customer grievances or continuity of services.
What are the repeated mistakes entrepreneurs are making?
Ankita: There’s a hunger for growth and a lack of resources for compliance. So, they want to scale, reach out to the masses, increase the number of entrepreneurs on the platform and downloads, do a whole bunch of marketing and advertising and more, but they, also, need to spend on compliance. And it seems like clients hate spending on lawyers. It takes effort and cost to ensure a product is compliant and without the right team backing a product from a regulatory perspective, things can go wrong.
With AI getting into FinTech and teams becoming leaner with a lot of data processing happening through AI, what would the role of a Chief Compliance Officer or a legal partner look like?
Ankita: Industry knowledge and application are not something that can be replaced. The compliance that would have to be done for different entities would be different, even if it’s the same sector because each would have its own sets of problems, partnerships and banks with different thresholds of compliance imposed. There can’t be a straitjacket approach. So, lawyers or Chief Compliance Officers could come in to advise companies on how to fix non-compliance or if there are gaps.
I think there are a lot of players using AI for robo-advisories and for credit decisions and the RBI voiced its views to responsibly use AI to ensure there are no biases. I think the regulators need to go into aspects of whether a financial sector growing at this pace should be subject to white box AI mandating to ensure there’s transparency, trust and interpretability. As of today, it’s very superficial and surface-level, but it’s still being evaluated by the RBI.
In 2025 and beyond, in the FinTech space, as an entrepreneur, is it enough to just know tech and relegate the regulatory aspect to legal counsel? Or is it a sin to be a FinTech entrepreneur and not know about regulation? What should the skill set of a FinTech entrepreneur look like and change?
Ankita: I don’t think tech expertise would suffice. In one case, the RBI rejected an application because the founders of a financial services play only had tech experience. In a lot of instances, the RBI is mandating senior folks on one’s team to handle different functions.
Shrija Agrawal is a business journalist who has covered startups and private capital markets before it was considered cool in India. The views expressed are personal
