India’s approach towards regulation of financial services is a unique concoction of technological enablers, regulatory interventions and business opportunities that are specific to India.  The Indian FinTech sector has been at the forefront of global growth and advancement, ranking third amongst the fastest growing FinTech markets in the world in terms of funding, deal volumes, and overall strength.  With over 3,000 FinTech start-ups registered in India, the Indian FinTech industry’s market size is estimated to grow multi-folds and is set to reach USD 1.5 trillion by 2025.^[i]

The rapid and transformational changes in financial services made by FinTechs are being continuously monitored and evaluated by the financial services regulators to keep up with the underlying technological and entrepreneurial flux.  Regulators in India are trying their best to be creative, nimble and tech savvy with their approach.  They are now expanding their focus from entity-based regulation to activities-based regulation.

Key developments in the Indian FinTech sector

The support of the Reserve Bank of India (“RBI”) for growth in the country’s FinTech sector is rooted in promoting innovation, enhancing financial inclusion, ensuring regulatory compliance, and safeguarding consumer interests in the rapidly evolving digital financial ecosystem.  Below are some key initiatives taken by the RBI towards the growth of the Indian FinTech sector:

RBI FinTech Department: In January 2022, the RBI established a FinTech department to identify innovation opportunities associated with the FinTech sector.^[ii]  During the financial year 2023–24, the department: (a) conducted multiple pilot programmes involving various use cases of central bank digital currencies, India’s own digital currency;^[iii] (b) organised several events under India’s G20 Initiative;^[iv] and (c) set up more than 75 digital banking units in over 75 Indian districts.  Additionally, the department addresses emerging challenges such as cybersecurity threats and data privacy concerns, ensuring that technological progress aligns with robust regulatory standards.  RBI’s FinTech department has been praised for its efforts in fostering innovation and regulating the FinTech sector in India.

Framework for Self-Regulatory Organisation in the FinTech sector: The RBI has in May 2024 issued a “Framework for Self-Regulatory Organisations in the FinTech Sector” (“Self-Reg Framework”), to establish a structured and collaborative regulatory approach to manage the rapidly evolving FinTech landscape.  This framework outlines the process of recognition of self-regulatory organisations as well as their broad functions and governance standards.  By empowering the self-regulatory organisations with the responsibility to oversee their members, the RBI seeks to enhance transparency, accountability, integrity, fairness, consumer protection, and promote fair competition.^[v]

Besides the above, there have been various technology driven initiatives in the FinTech regulatory space by the RBI for the ease and convenience of the FinTech industry.  We have discussed some of these key initiatives below.

Major opportunities and challenges for FinTech in India

In India, technology has played a pivotal role in fostering growth of the digital economy.  Over time, Indian banks and financial services providers have progressively embraced technology to enhance their outreach, customer service, and operational efficiency, adapting to evolving market conditions and technological advancements.  Traditionally, banks have been the primary providers of payment services in India.  However, rapid technological advancements have disrupted this monopoly and now non-bank entities are seen competing with banks, serving either as technology service providers to banks or directly offering innovative digital payment solutions.  The regulatory framework in India has also supported and encouraged greater participation from non-bank entities in the payments space.

Over the years, the RBI has encouraged the use of electronic payments to meet its objective of a “cash-less” society.  This gained enormous momentum during the COVID-19 pandemic, where a massive shift in consumer behaviour in the realm of payments was also seen, resulting in immense popularity of contactless payment methods.  FinTech companies promptly introduced solutions like mobile payment applications, digital wallets, and quick response (“QR”) code payments using Unified Payments Interface (“UPI”) to facilitate contactless payments transactions.  As a result, India witnessed a tremendous growth in the digital payment volume, from 8.6 billion in the month of May 2022 to 16.9 billion transactions in the month of May 2024.^[vi]

Resultantly, digital financial services are now being adopted more widely than ever before.  This trend is likely to continue.  Given the immediate availability and convenience offered to consumers, digital financial services are likely to continue driving the Indian FinTech sector’s growth.

Further, there has been increased adoption of the “Account Aggregator” mechanism introduced for secure and seamless sharing of financial information held by an entity regulated by a financial services regulator (i.e., RBI, Securities Regulator or Insurance Regulator), of an individual.  In one of the most basic use cases of this, India has witnessed various innovative FinTech offerings being made available by financial information users that consolidate individuals’ financial information and transactions across various kinds of financial services, including bank account, securities, mutual funds and insurance policies, at a single digital platform.

Endnotes:

^[i]   Available at https://www.investindia.gov.in/sector/bfsi-FinTech-financial-services, last accessed on July 8, 2024.

^[ii]    Page No. 125 of the Report of the Central Board of Directors on the working of the Reserve Bank of India for the year ended March 31, 2024.

^[iii]  Page No. 125 and 126 of the Report of the Central Board of Directors on the working of the Reserve Bank of India for the year ended March 31, 2024.

^[iv]   Page No. 128 of the Report of the Central Board of Directors on the working of the Reserve Bank of India for the year ended March 31, 2024.

^[v]    Available at https://rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1260, last accessed on July 8, 2024.

^[vi]   Monthly Payment System Indicators – May 2024 – https://rbidocs.rbi.org.in/rdocs/TrendsPSI/PDFs/PICTORIALMAY2024B8675ED193E24CACB8B0CFAA9C07433C.PDF

We have discussed some of the most prominent FinTech offerings in India:

1. Unified Payments Interface^[vii] – UPI has emerged as a transformative force in India’s digital payment ecosystem, revolutionising the way people transact money. India recorded 131 billion UPI transactions with a total value of USD 2.4 trillion in financial year 2024 alone,^[viii] thereby showcasing its strong adoption in the country.  Launched in 2016 by the National Payments Corporation of India (“NPCI”), an organisation set up by the RBI and Indian Banks’ Association,^[ix] UPI enables instant and seamless fund transfers between bank accounts using a mobile phone.  It operates 24/7, allowing users to send and receive money in real-time, pay bills, and make online purchases directly from their bank accounts.  UPI’s interoperability across multiple banks and payment service providers adds to its convenience and use-cases.
2. Bharat Bill Payment System (“Bill Payment-System”)^[x] – a centralised payment platform introduced by the NPCI to streamline and facilitate bill payments. The Bill Payment-System provides a unified platform for consumers to pay their bills securely and conveniently, covering a wide range of services such as electricity, water, gas, telephone, and DTH services.  It integrates multiple billers, payment service providers, and banks into a single ecosystem, allowing users to make payments through various digital as well as offline channels.
3. Digital lending – In recent years, India’s digital lending ecosystem has grown substantially, particularly for retail customers. The growth of digital lending in India has more than doubled since 2020 from USD 150 billion to USD 350 billion in 2023.^[xi]  After extensive deliberations and stakeholder consultation, in September 2022, the RBI issued Digital Lending Guidelines (“Digital-Lending Guidelines”) to regulate digital lending in India, focusing on consumer protection, data security, and the supervision of un-licensed technology partners (known as lending service providers) by regulated entities.
4. Payment Aggregators (“Aggregators”) and Payment Gateways (“Gateways”) – Aggregators and Gateways play a crucial role in India’s digital payment ecosystem. Aggregators act as intermediaries, enabling businesses to accept online payments without the need to establish individual merchant accounts with banks.  The Aggregators are entities that handle funds by way of collection of payments from customers towards amounts due to merchants, pooling of the funds received from customer, and transfer of the fund to merchants.  On the other hand, Gateways provide technology infrastructure for routing the processing of online payments.  The RBI has implemented comprehensive regulations^[xii] for Aggregators to ensure the safety and transparency of online payments, fostering trust and promoting the widespread adoption of digital payments across the country.
5. Cross-Border Payment Aggregators Framework – In October 2023, the RBI introduced the Regulation of Payment Aggregator – Cross Border (“Cross-Border-Aggregator”),^[xiii] liberalising the framework for cross-border payments in e-commerce transactions. These Cross-Border-Aggregator regulations apply to all entities involved in processing and settling cross-border payment transactions for the import and export of goods and services online.  The new regulations, which replace the framework for Online Payment Gateway Service Providers (commonly referred to as OPGSPs), provide for a structured framework, detailing eligibility criteria, authorisation conditions, minimum net worth and due diligence requirements for entities engaged in the business of the Cross-Border Aggregator.
6. Prepaid Instruments (“Prepaid Instruments”) – Prepaid Instruments, which include prepaid cards, digital wallets, and virtual cards, allow users to load a certain amount of money in advance and use it for a variety of merchant transactions such as online shopping, bill payments, as well as peer-to-peer transfers. Companies like “PhonePe” and “Amazon Pay” have been at the forefront of this innovation, offering user-friendly platforms that integrate seamlessly with other financial services. The RBI has set out comprehensive guidelines to regulate Prepaid Instruments,^[xiv] ensuring consumer protection and fostering trust in digital payment solutions.
7. Neo-banking or digital banking services – Neo banks have emerged as a prevalent FinTech offering in India, revolutionising the traditional banking landscape by providing digital-only banking solutions. These non-bank entities operate exclusively online without any physical branches, offering a seamless and user-friendly experience through mobile applications and web platforms.  Neo banks offer a range of financial services such as digital savings accounts, instant account opening, real-time transaction tracking, personalised financial management tools, etc.
8. Virtual Digital Assets (“Virtual Assets”) – Virtual Assets have rather quickly gained interest in India, reflecting the growing global interest in cryptocurrencies and blockchain technology. Virtual Assets encompass a range of digital assets, including cryptocurrencies like Bitcoin and Ethereum, as well as other blockchain-based tokens and digital coins.  Despite regulatory uncertainties, crypto exchange platforms such as “WazirX”, “CoinSwitch” and “CoinDCX” have gained popularity, providing users with secure and user-friendly interfaces to trade and manage their digital assets.  The Indian Government has been working towards formulating a clear framework to ensure responsible use of Virtual Assets.  The Financial Intelligence Unit-India (“FIU-IND”), India’s central agency responsible for receiving, processing, analysing and disseminating information relating to suspicious financial transactions^[xv] has played a crucial role in regulating Virtual Assets by monitoring and enforcing compliance with regulations on anti-money laundering and counter-terrorism financing.  This regulatory oversight aims to ensure transparency and accountability with respect to Virtual Asset transactions.

Endnotes:

^[vii]    Available at https://www.npci.org.in/what-we-do/upi/product-overview, lastly accessed on July 8, 2024.

^[viii]   Available at https://www.npci.org.in/what-we-do/upi/product-statistics, last accessed on July 8, 2024.

^[ix]    Available at https://www.npci.org.in/who-we-are/about-us, last accessed on July 8, 2024.

^[x]     Available at https://www.bharatbillpay.com/, last accessed on July 8, 2024.

^[xi]    These statistics are contained in the media report titled “Digital lending at an inflection point”, available at: https://economictimes.indiatimes.com/tech/newsletters/ettech-unwrapped/digital-lending-at-an-inflection-point-and-other-top-tech-startup-stories-this-week/articleshow/104411474.cms?from=mdr, last accessed on July 8, 2024.

^[xii]    Guidelines on Regulation of Payment Aggregators and Payment Gateways (Updated as on November 17, 2020).

^[xiii]  Regulation of Payment Aggregator – Cross Border (PA – Cross Border) dated October 31, 2023.

^[xiv]   Master Directions on Prepaid Payment Instruments (PPIs), updated as on February 23, 2024.

^[xv]   Available at https://fiuindia.gov.in/files/About_FIU-IND/About_FIUIND.html, last accessed on July 8, 2024.

FinTech: Indian financial services regulators have introduced technology driven initiatives in the FinTech regulatory space to support the industry, which include:

1. “PRAVAAH” portal:^[xvi]The e-PRAVAAH portal is likely to serve as a significant regulatory technology introduced by the RBI that will function as a comprehensive digital platform designed to streamline the processes for obtaining regulatory authorisations, licences and/or approvals.^[xvii] This “e-PRAVAAH” portal will streamline the submission of numerous application forms covering different regulatory and supervisory departments of RBI, resulting in a reduction of the administrative burden on RBI and other financial institutions.  This portal embodies the RBI’s commitment to leveraging technology for enhancing transparency, efficiency, and ease of compliance in the financial sector.  It is expected to minimise redundancies and errors, ensuring timely and accurate data submission.
2. RBI Retail Direct portal: This portal has been developed by the RBI to enable retail investors to transact in government securities, in a seamless and convenient manner. The portal has recorded 2,06,732 registrations as of July 1, 2024.^[xviii]
3. FinTech Repository: The “FinTech Repository” is yet another significant initiative of the RBI.^[xix] This serves as a comprehensive database of financial technology developments and innovations in the country.  The repository has been designed with the objective of fostering collaboration and knowledge sharing among various stakeholders resulting in a better understanding of the sector from a regulatory perspective.  This could facilitate the designing of appropriate policy approaches, especially for adoption of emerging technologies (like artificial intelligence, machine learning, big data, cloud computing, etc.).
4. “Finquery” initiative: The RBI has recently announced “Finquery”, a one of a kind initiative to facilitate direct engagement between FinTech companies and the RBI itself. The “Finquery” portal will be operational for certain hours in its endeavour to seek streamlining of communication and addressing regulatory concerns of the FinTech sector.  This is an important step towards RBI’s dedication to fostering growth and development of the FinTech sector by promoting transparency and providing an opportunity of direct guidance by the regulator.^[xx]

InsurTech: In India, there have also been certain measures taken by the insurance regulator, i.e., the Insurance Regulatory and Development Authority of India (“IRDAI”), to promote and propel technology in the insurance space.  In the InsurTech space, three technology driven products have been envisioned under the collective branding “Bima Trinity”, where “Bima” in the Hindi language means “insurance”.  These include: “Bima Sugam”, a digital platform proposed to function as the electronic marketplace for insurance; “Bima Vistaar”, an insurance offering/product proposed for providing basic social safety net cover with combined features of life, health, personal accident and property insurances; and “Bima Vahak”, a women-centric distribution channel for insurance products.  The IRDAI has even issued regulations for “Bima Sugam”, which is established as an insurance e-marketplace for buying, selling and servicing insurance policies and settlement of insurance claims.^[xxi]

Endnotes:

^[xvi]   Available at https://pravaah.rbi.org.in/pravaah/#/, last accessed on July 8, 2024.

^[xvii]    Available at  https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR393LAUNCHOFPRAVAAHF86AACEF58014AF6A8048535F406A530.PDF, last accessed on July 8, 2024.

^[xviii]   This has been reported under the ‘RBI Retail Direct Statistics: Cumulative Data’ published on July 1, 2024. The report is available at: https://rbiretaildirect.org.in/stats/RD%20Statistics%2001072024.pdf.

^[xix]    Available at https://fintechrepository.rbihub.in/home and https://emtechrepository.rbihub.in/, last accessed on July 8, 2024.

^[xx]   Available at https://bfsi.economictimes.indiatimes.com/news/fintech/rbi-launches-finquiry-to-allow-fintechs-directly-engage-with-the-regulator/111287150, last accessed on July 8, 2024

^[xxi]   https://irdai.gov.in/documents/37343/366347/Press+Note+on+Regulatory+Revamp.pdf/9ad7286a-b0a7-ea19-d51c-4c942bad43e1?version=3.0&t=1711121865505

India has institutionalised various regulatory bodies to regulate the specific areas in the FinTech sector in India, which are:

1. RBI: The RBI is India’s central bank and is responsible not only for securing monetary stability, but also to operate the currency and credit system in India and a modern monetary policy. The RBI is the regulatory body for the banking and credit system, payment systems as well as foreign exchange.  Essentially, it is responsible for regulating the money market and foreign exchange market in India.  RBI regulates banks, NBFCs, payment system providers, and credit bureaus.  For the purposes of governance, the RBI issues regulations, directions, circulars and guidelines for the orderly regulation of the offerings based on banking, credit and payment system products.  As the regulator, the RBI is also responsible for grant of licences and authorisations to the industry players.
2. Securities and Exchange Board of India (“SEBI”): The SEBI regulates capital markets, both primary and secondary, in India. It exercises supervisory powers over stockbrokers and investment advisors for their broking and advisory services.
3. IRDAI: The IRDAI is the regulatory authority for the insurance sector and insurance products, and regulates insurers, corporate agents, web aggregators and third-party insurance agents, including corporate agents, etc.

Given that Indian regulators are now adopting an activity-based approach to regulation, it is not uncommon for a FinTech to be regulated by different financial services regulators at the same time, depending on the varied range of products and services offered.

The following paragraphs set out an overview of the key laws & regulations that govern FinTech businesses in India.

1. Payment Systems: The Payment and Settlement Systems Act, 2007 (“Payment Systems Act”) provides the legal framework governing the operation of payment systems in India, which involves facilitating payments between a payer and beneficiary, through clearing, payment, or settlement services between the system participants. The RBI has been entrusted with the responsibility to regulate payment systems and hence the RBI has issued regulatory frameworks governing various types of payment system operators that the RBI has envisaged, such as Aggregators and Prepaid Instruments.  The Payment Systems Act requires an entity to obtain an authorisation from the RBI to operate a payment system.
2. Payment Aggregators: One form of payment system operators are entities that propose to operate as Aggregators and are regulated by the RBI under the Guidelines on Regulation of Payment Aggregators and Payment Gateways, 2020 (“Aggregator Guidelines”). The RBI has categorised intermediaries involved in the electronic payments’ ecosystem into Aggregators and Gateways.  The Aggregators enable merchants to make available electronic payment methods to their customers for transactions on their websites and marketplaces, collect payments from customers towards amounts due to merchants, pool the collected funds, and transfer fund to merchants to settle customers’ payment obligations.  However, Gateways provide technology infrastructure and support to route and facilitate the processing of online payments.  In summary, intermediaries that actually handle funds would qualify as Aggregators, and those that have no connection to funds would be Gateways.  Based on their functional roles in terms of handling of funds, while Gateways do not require an authorisation from the RBI, any non-bank entity that proposes to operate as an Aggregator is required to obtain an authorisation from the RBI as a payment system under the Aggregator Guidelines.  Once authorised, Aggregators are required to operate in accordance with the conditionalities provided under the Aggregator Guidelines, such as those relating to timelines for settlement, maintenance of a regulated escrow account for pooling funds, due diligence of merchants, manner of facilitation of refunds, etc.
3. Payment Aggregators for Cross Border Transactions: The RBI has recently brought entities that facilitate cross-border payments for import and export of goods and services in online mode, conceptualised as “Cross-Border-Aggregator” under its direct regulation, through its circular “Regulation of Payment Aggregator – Cross Border” (“Cross-Border Regulations”). The Cross-Border-Aggregator is required to obtain an authorisation as a payment system from the RBI under the Cross-Border Regulations.  These can operate for import only or export only transactions or even both.  Once authorised, the Cross-Border-Aggregators can facilitate collection and settlement of payments for import or export through the use of regulated accounts, namely import collection account and export collection account, respectively.  The Cross-Border-Aggregator is required to comply with conditions pertaining to governance, merchant onboarding, customer grievance redressal and dispute resolution framework, baseline technology recommendations, security, fraud and risk management framework, as prescribed under the Aggregator Guidelines.  Besides this, the Cross-Border Regulations also prescribe certain transaction control conditions, which include maximum value of the transaction.
4. Prepaid Payment Instruments: Another prominent form of a payment system operator recognised under the Payment Systems Act is a Prepaid Instrument Issuer (“PPI Issuer”) which is regulated by the RBI through Master Direction on Prepaid Payment Instruments dated August 27, 2021, updated as of February 23, 2024. The Prepaid Instrument can be used by the holder for the value stored against it for transfer to other holders or for making payments to merchants that accept such Prepaid Instrument based on arrangements with the PPI Issuer.  Similar to other payment systems, an entity that intends to operate a payment system for issuance of Prepaid Instruments is required to obtain an authorisation from the RBI under the Payment Systems Act.
5. Digital lending: In India, digital lending activities are regulated by the RBI through the Digital-Lending Guidelines, which apply to lenders, such as commercial banks and non-banking financial companies, etc. Besides Banks and NBFCs, which are the regulated entities that provide capital for lending, the Digital-Lending Guidelines recognises “Lending Service Provider” (“Lending SPs”), as a participant in the ecosystem.  Lending SP is an agent of lenders (which are regulated by the RBI), that carry out one or more of a lender’s functions or a part of such functions, in customer acquisition, underwriting support, pricing support, servicing, monitoring, recovery of specific loan or loan portfolio.  Under the digital lending ecosystem, financial products are offered through “Digital Lending Apps/Platforms” (“Lending Apps”), which are mobile or web-based applications that provide the user interface and facilitate digital lending services.  The Digital-Lending Guidelines provide conditions relating to transparency in fees and terms of the loans, data privacy, due diligence of Lending SPs, access of customers’ data by Lending SPs, etc.  The lenders are bound to ensure compliance of the Lending SPs with the Digital-Lending Guidelines, through appropriate contractual arrangements.  Further, the RBI, in June 2023, issued guidelines to regulate first loss default guarantees, which has been a predominant market practice in the digital lending space, and refers to guarantees provided to compensate a regulated entity for certain losses due to loan defaults.
6. Peer-to-peer lending: The RBI issued the Master Directions – Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017 to regulate platforms that enable individuals to offer loans to other individuals, as well as the resulting peer-to-peer lending that happens on these platforms.
7. Digital Payment Security Controls: Through the Master Direction on Digital Payment Security Controls, 2021, the RBI has mandated banks and credit-card issuing NBFCs to implement a robust governance framework for digital payment products and services, which must include implementing minimum security control standards and undertaking risk assessments.
8. Customer due diligence: The legal framework on the know-your-customer (“KYC”) checks, i.e. customer due diligence, is contained under the Prevention of Money Laundering Act, 2002. These legal requirements are then prescribed as regulations by various regulators for their sector.  For instance, the RBI has issued the Master Direction – KYC Direction, 2016, for the  entities that the RBI regulates, and these directions require implementation of comprehensive procedures for customer identification, due diligence, risk management, transaction monitoring, record keeping, regulatory reporting, periodic update of customer information and robust internal control systems, to combat money laundering and terrorist financing.
9. Retail payment systems: The NPCI issues circulars and guidelines for the conduct of retail payment systems operated by it, such as UPI and Bharat Bill Pay, and requires adherence by its members (PSP banks) that participate in these payment systems.
10. WealthTech: The SEBI has issued regulatory frameworks for the governance of the WealthTech players and these include the Securities and Exchange Board of India (Investment Advisers) Regulations, 2013 for activities in the nature of investment advice, the Securities and Exchange Board of India (Research Analysts) Regulations, 2014 for research based activities, the Securities and Exchange Board of India (Stock-brokers) Regulations, 1992, for offering services in the nature of stock broking.
11. InsurTech: The IRDAI has issued IRDAI (Insurance Web Aggregators) Regulations, 2017 to regulate the activities of web-aggregators. Besides these, any InsurTech player that intends to operate as a corporate agent needs to function in accordance with the IRDAI (Registration of Corporate Agents) Regulations, 2015.
12. Virtual Asset exchanges: In one of the most critical regulatory developments regarding virtual Assets, the Indian Government categorised entities that enable: (i) exchange between Virtual Assets and fiat currencies; (ii) exchange between one or more forms of Virtual Assets; (iii) transfer of Virtual Assets; (iv) safekeeping or administration of Virtual Assets or instruments enabling control over Virtual Assets; and (v) participation in and provision of financial services related to an issuer’s offer and sale of a Virtual Assets (collectively, “Virtual Asset SPs”), as “reporting entities” for the purposes of the Prevention of Money Laundering Act, 2002. The Government imposed various obligations on the Virtual Assets SPs such as undertaking customer due diligence, maintenance of records, reporting requirements and registering with the FIU-IND.

Regulatory sandbox: Besides the above key regulations, the RBI has also implemented a regulatory sandbox, where the RBI provides an environment for real-time testing of innovative products, services, and approaches, to support India’s rapidly evolving FinTech industry.  The RBI issues various cohorts of regulatory sandbox time and again, with certain identified FinTech offerings, inviting the participation from relevant players.

Reserve Bank Innovation Hub (“RBIH”): The RBI launched the RBIH in 2020 to promote innovation in the financial sector.  The RBIH is designed to create an ecosystem that encourages innovative ideas and solutions, supporting the development of new technologies and business models that can enhance financial inclusion, improve customer experience, and strengthen the overall financial system.

Together, these initiatives of regulatory sandbox and RBIH, underscore the RBI’s commitment to driving technological advancement and innovation in India’s financial regulatory landscape.

The RBI issued the Master Direction on Outsourcing of Information Technology Services in April 2023, which akin to the extant regulatory frameworks on outsourcing, reaffirm that the outsourcing of arrangements does not undermine the responsibility of the reporting and regulated entities.  While these directions permit outsourcing of non-core functions, and prohibit the outsourcing of core and critical functions, they mandate that the responsibility vis-à-vis the customers continue to vest with the regulated entities.  These directions impose requirements pertaining to establishing a grievance redressal framework, obligations of due diligence, monitoring and risk management.  The RBI has tightened its clutches on outsourcing arrangements, and the requirements of having a robust business continuity plan as well as enabling audits by RBI and the regulated entities for such service providers, which have been the most critical discussion points.

While the RBI expressly recognised the outsourcing of lender’s functions to Lending SP under the Digital-Lending Guidelines issued on September 2, 2022, the RBI has prescribed a host of restrictions on Lending SP.  These primarily relate to Lending SP’s use and access of customers’ data.  The Lending SPs cannot store personal information of customers, except some basic minimal data (viz., name, address, contact details of the customer, etc.) required to carry out the lender’s operations.  A specific prohibition on the storage of biometric data, often used for KYC measures, has also been envisaged.

In June 2023, the RBI issued guidelines to regulate the market practice of first loss default guarantees (“Default Guarantee”) provided by Lending SPs or other regulated entities.  Default Guarantee refers to contractual arrangements where the Default Guarantee provider guarantees to compensate a regulated entity for a percentage of losses occurring due to loan defaults.  While until now the regulation of Default Guarantee for digital lending arrangements were unclear, the new guidelines allow such arrangements but impose certain requirements regarding permissible structures for Default Guarantee, caps on coverage, invocation procedures, and due diligence and disclosure obligations.

With a view to disassociate registered intermediaries/regulated entities from unregistered entities including “finfluencers”, the SEBI released a consultation paper on August 25, 2023.  This is a step towards a clamp down on “financial influencers” or “finfluencers” operating as unregistered investment advisers without the requisite professional or educational qualifications or expertise.  In this context, the Advertising Standards Council of India also placed additional responsibility on financial influencers through its Guidelines for Influences Advertising in Digital Media requiring mandatory registration and prescribing disclosure requirements.  It will be interesting to see the manner in which SEBI tackles this problem.

With the objective of making cross-border payments seamless and efficient, like the domestic payments, the RBI and NPCI has given special importance to FinTech offerings that have witnessed immense success domestically, such as the offerings that have UPI, RuPay card network and the Bill Payment-System as the backbone.  The year 2023 was one of regulatory innovation and the introduction of regulations for new-age business models particularly in the cross-border remittances space, including through UPI or Aggregators.  The journey of UPI from its inception to its global expansion is a testament to India’s digital innovation.  Within India, UPI’s growth has been exponential, with transactions soaring from 920 million in FY 2017–18 to 83.8 billion in FY 2022–23, and transaction values rising from USD 12 billion to USD 1.67 trillion in the same period.^[xxii]  However, besides the prominence in the domestic market, the UPI ecosystem has made various cross-border strides in the recent years, marking a significant milestone, showcasing India’s technological advancements and setting the stage for a more interconnected global payment system.  Some of these key measures include:

1. One of the most crucial regulatory developments in the cross-border space by the RBI was the step of bringing “Cross-Border-Aggregator”, viz., the entities that facilitate cross-border payments for import and export of goods and services in online mode, under its direct regulation. The RBI prescribed an authorisation requirement for the Cross-Border-Aggregator’s and laid out certain operational conditions for facilitation of payments for cross-border transactions.
2. In February 2024, the RBI and the Nepal Rastra Bank executed Terms of Reference for integration of fast payment systems of India, viz. UPI, and Nepal, viz.  National Payments Interface.  This integration is aimed at facilitating cross-border instantaneous remittances between users of these systems in India and Nepal.
3. Yes, Bank, a private sector bank in India, and EBANX, a global FinTech providing specialised payment solutions, have announced a strategic partnership to process payments for the global digital economy. This collaboration in the digital payments space, is likely to streamline cross-border payment processing and global commerce opportunities for global merchants and Indian customers in India.^[xxiii]
4. In January 2024, Google’s India UPI entity, viz. Google India Digital Services Private Limited and NPCI’s International Payments arm, executed a Memorandum of Understanding to expand impact of UPI to other countries as well.  This will include broadening the use of UPI payments for travellers outside India and assisting with the establishment of UPI-like digital payment systems in other countries, as a model for seamless financial transactions.  UPI ecosystem statistics for June 2024 suggest that USD 84 billion worth transactions have occurred on the Google Pay app.^[xxiv]
5. In June and July 2024, NPCI’s International Payments arm has engaged in partnership with Network International, a leading enabler of digital commerce across the Middle East and Africa (MEA region). This partnership will enable acceptance of QR code-based UPI payments through Network’s point-of-sale (commonly, PoS) terminals in the UAE.
6. Continuing the expansion of the UPI-like model to other countries to enable deployment of a UPI-like real-time payments system, NPCI has partnered with Bank of Namibia in May 2024 for Namibia^[xxv] and the Central Reserve Bank of Peru in June 2024 (with Peru becoming the first country in South America to do so).
7. India has effected arrangements with countries such as Bhutan, France, Oman, Saudi Arabia, Singapore, the UAE and the UK to implement payment mechanisms to enable Indian travellers to make electronic payments through UPI for purchases made during the travel.
8. The RBI has collaborated with the Bank for International Settlements and central banks of four ASEAN countries (Association of Southeast Asian Nations) for a multilateral initiative to enable retail cross-border payments. This will interlink domestic payment systems of India with those of Malaysia, Philippines, Singapore and Thailand.^[xxvi]
9. The Government of India has executed agreements and memorandums with various countries (like Russia) to enable acceptance of electronic payments through RuPay cards, a proprietary card network developed by NPCI, in other countries.
10. The payment system for utility bill payments operated by the NPCI, viz., Bill Payment-System has also been opened for international payments, enabling a person residing in select identified countries to make bill payments for utility bills in India.

Besides the above initiatives on the regulatory front, the financial services sector in India has attracted the attention of foreign investors in the past year.  The banking and financial services sector received foreign investment inflow of USD 6.3 billion in 2023.^[xxvii]

With the implementation of regulations for the highly innovative FinTech products, India is poised for an interesting journey with both industry players and regulators likely to mature in their outlook and practices.  The FinTech industry stares at a bright future with higher capital inflows and more-than-ever technological innovation, including from the domestic industry.

Endnotes:

^[xxii]    Available at: https://pib.gov.in/PressReleasePage.aspx?PRID=1987764#:~:text=Unified%20Payments%20Interface%20(UPI)%20transactions,at%20a%20CAGR%20of%20168%25, last accessed on July 9, 2024.

^[xxiii]    Available at https://www.yesbank.in/about-us/media/press-releases-details/1481797793751-ebanx-announce-strategic-partnership-to-empower-_press, last accessed on July 8, 2024.

^[xxiv]     Available at https://www.npci.org.in/what-we-do/upi/upi-ecosystem-statistics, last accessed on July 8, 2024.

^[xxv]    Available at https://www.npci.org.in/PDF/npci/press-releases/2024/NPCI-International-Partners-with-Bank-of-Namibia-for-Deploying-India%E2%80%99s-UPI-Stack-in-Namibia.pdf, last accessed on July 8, 2024.

^[xxvi]       Available at https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=58197, last accessed on July 8, 2024.

^[xxvii]  Available at  https://economictimes.indiatimes.com/markets/stocks/news/fpis-return-to-fin-services-buy-over-rs-9000-cr-in-june/articleshow/111500718.cms?utm_source=email_pwa&utm_medium=social&utm_campaign=socialsharebuttons&from=mdr ., last accessed on July 8, 2024.