Happy Monday, everyone!
MTLegal Team is bringing you a weekly update on everything that happened in the fintech space over the past week.
Our goal with these updates is to inform you about any new developments, trends, regulations, or notable events in the fintech sector.
This will help fintech companies plan, protect, and preserve their businesses based on market changes and regulatory updates.
Here’s last week’s update:
A) Fintech Advancements in India
1) Surge in Fintech IPO Filings Highlights Market Growth
Overview: The Indian fintech sector has seen a sharp rise in IPO filings, nearly doubling over the past five years. The market has grown exponentially, making India the third-largest fintech ecosystem globally.
According to a report by Boston Consulting Group and Z47, IPO filings have increased from 75 annually in 2018-2019 to 120-140 between 2021-2023.
Challenges and Opportunities: Despite strong growth, only 40-60% of fintech founders feel adequately prepared in terms of profitability and governance for a successful IPO.
Additionally, many fintech firms experience post-IPO share price declines, underscoring the importance of solid fundamentals.
Market Impact: Companies like Mobikwik, PhonePe, Groww, and Pine Labs are expected to list in the coming years, contributing to a fintech ecosystem valued at over $100 billion.
However, fintech firms remain in their early stages compared to traditional financial institutions.
2) India Now Boasts 26 Fintech Unicorns Worth $90 Billion
Overview: India’s fintech industry has achieved remarkable growth, with 26 fintech unicorns valued at a combined $90 billion.
The industry ranks third globally, behind only the U.S. and China, according to data from JM Financial.
Growth Trajectory: India’s fintech startup count has quintupled, with over 10,200 registered startups by 2024.
The ecosystem includes one decacorn (a company valued at over $10 billion) and numerous unicorns, minicorns, and soonicorns.
Key Sectors: Payments and lending have attracted the most capital, driving the sector’s rapid expansion.
Experts predict India could see 150 fintech unicorns by 2030, contributing to a projected $200 billion in fintech revenue.
B) Banking and Economic Developments
1) Banks Hesitant to Embrace OTP Alternatives Despite RBI Push
Overview: Despite RBI’s call for alternatives to the widely used One-Time Password (OTP) system in digital payments, banks have been slow to adopt new technologies.
OTP has been the primary method of two-factor authentication (2FA) for over a decade, but more secure options like biometric verification are now available.
Innovative Solutions: Startups like Minkasu Pay are offering biometric alternatives for net banking transactions, while companies like Wibmo are working with private banks to integrate biometric solutions.
However, challenges around compliance, liability, and customer convenience have slowed adoption.
Concerns: Legal teams remain cautious about new systems, with concerns over customer protection in the event of fraud or errors. Additionally, biometric systems require significant rearchitecting of payment processes, leading to slow uptake across the industry.
2) Payment Aggregators to Combat Fraud with “Negative” Database
Overview: In response to rising cases of digital payment fraud, payment aggregators in India plan to create a “negative database” of fraudulent transactions. This central repository will help aggregators detect and prevent fraud by sharing information on both fraudulent customers and merchants.
Significance: With cases of digital fraud surging fivefold in 2023-24, the negative database will be a crucial tool for reducing risk across platforms. Payment aggregators like Amazon Pay, Razorpay, and PayU will be able to flag fraudsters using the same card across multiple platforms.
Industry Collaboration: The database will be managed by a self-regulatory organization (SRO) under the Payments Council of India, fostering greater transparency and cooperation among payment platforms.
3) RBI’s Lending Revolution: NBFCs Poised to Join Unified Lending Interface
Overview: The RBI is set to expand its Unified Lending Interface (ULI) to include non-banking financial companies (NBFCs), allowing them to access the UPI-like platform for seamless digital lending. Initially launched in 2023, ULI is designed to streamline the lending process by integrating data from various sources.
Potential Impact: By eliminating barriers to credit delivery, ULI is expected to significantly reduce loan turnaround times, especially for small and rural borrowers. The platform’s open architecture will allow NBFCs and fintechs to plug into the system for faster credit decisions.
Future Expansion: The ULI pilot has already demonstrated success, reducing loan approval times from weeks to just hours. The RBI plans to extend the platform’s reach to more products and lenders, revolutionizing India’s credit landscape.
4) RBI Official Warns Fintechs on Aggressive Loan Recovery Tactics
Overview: RBI Deputy Governor Swaminathan J has raised concerns about the aggressive loan recovery practices of some fintech platforms. While digital lending has streamlined loan approvals, recovery efforts often involve unethical tactics, including privacy violations.
Privacy Violations: Some fintechs use customer data to harass borrowers, breaching privacy rights and damaging the reputation of associated regulated lenders. The RBI is focusing on improving oversight to ensure that fintechs follow ethical practices during loan recovery.
Industry Responsibility: The RBI has reiterated that regulated entities are accountable for the actions of their outsourced recovery agents, urging the industry to adopt more empathetic recovery methods and comply with privacy regulations.
C) New Business Developments
1) RBI Raises Privacy Concerns Over Aggressive Loan Recovery Tactics in Fintech
Overview: India’s digital lending landscape has seen significant growth, but RBI Deputy Governor Swaminathan J has raised concerns over fintech platforms using aggressive and unethical loan recovery practices. While loans are sanctioned digitally, recovery often requires a physical approach.
Privacy Violations: The Deputy Governor flagged a worrying trend of fintech recovery agents accessing borrowers’ personal data and using it to pressure and intimidate them. This practice, Swaminathan warned, breaches customer privacy and could damage the reputations of associated regulated lenders.
Regulatory Focus: RBI’s regulations state that regulated entities are accountable for their outsourced recovery agents’ actions. The central bank continues to push for fintech companies to adopt more ethical recovery methods while maintaining the integrity of the system.
2) RBI Slaps Penalties on Three Housing Finance Firms for Non-Compliance
Overview: The Reserve Bank of India imposed monetary penalties on three housing finance companies—Godrej Housing Finance, Aadhar Housing Finance, and Housing and Urban Development Corporation (HUDCO)—for non-compliance with its regulations.
Details: Godrej Housing Finance and Aadhar Housing Finance were fined ₹5 lakh each for failing to meet RBI standards, including obtaining independent valuation reports and charging interest incorrectly. HUDCO was fined ₹3.5 lakh for failing to comply with customer risk categorization and other procedural requirements.
RBI’s Stance: The penalties reflect RBI’s stringent enforcement of compliance among financial institutions, emphasizing the need for adherence to fair practices and risk management protocols.
D) Recent Regulatory Announcements by RBI
1) Customers Now Have Freedom to Choose Credit Card Networks
Overview: In a significant change, the Reserve Bank of India has issued a draft circular allowing credit cardholders to select their preferred credit card network, including Visa, Mastercard, or RuPay, a move that aims to increase competition among payment providers.
Impact on the Market: Previously, banks often had exclusive agreements with certain card networks, limiting customer choice. This move is expected to enhance competition, particularly with the growing presence of RuPay, and benefit consumers with more options.
Exemptions: American Express, which operates its own independent network, is exempt from this new regulation.
2) RBI Releases Draft on Managing Model Risk in Credit
Overview: The Reserve Bank has issued a draft circular outlining the regulatory principles for managing model risks in credit, highlighting the importance of validation, governance, and oversight in the use of credit management models by Regulated Entities (REs).
Model Risk Management: Credit models used by banks and financial institutions are inherently risky, as they rely on assumptions that may not hold in real-world scenarios. The RBI’s guidelines emphasize the need for comprehensive validation and a robust risk management framework..
Compliance Timeline: Regulated Entities must comply with the guidelines for new models within three months, while existing models must be validated within six months. This regulatory push aims to strengthen prudence in credit risk management.
We hope you found this update insightful.
MTLegal Team is here to support everyone in the fintech sector—whether it’s for licensing, registration, or contractual needs.
We’ve got your back.
Contact us today, and let’s protect the business you’re building!
