India has the highest fintech adoption rates in the world at 87% as compared to the world’s average of 67%. Fintech represents innovative use of technology to revolutionize financial services, from digital payments and online banking to lending platforms and investment solutions. This transformative shift aims to improve accessibility, efficiency, and inclusivity.
Fuelled by rapid technological advancements, evolving consumer behaviour, and a supportive regulatory ecosystem, fintech as a transforming force embraces cutting-edge technologies like neo-banking, digital lending, open banking, artificial intelligence, machine learning, and blockchain, rendering a diverse array of financial services.
Impressively, India is one of the world's fastest growing fintech markets, with the total addressable fintech market set to hit $1.3 trillion by 2025.
With great opportunities come great responsibilities, especially in managing regulatory risks and compliances. Fintech ventures must navigate a multifaceted and ever-evolving regulatory framework, shifting from a reactive to a proactive response. It is imperative to ensure robust compliance with diverse guidelines established by governmental bodies and regulatory authorities, including the Reserve Bank of India (RBI).
Effectively managing regulatory risk in India extends beyond mere compliance. It necessitates adopting a strategic and forward-thinking approach that seamlessly aligns with the dynamic evolution of the fintech landscape and its regulatory structure, since non-compliance especially foreign exchange-related non-compliance directly hinders investment.
Some of the key regulatory considerations for fintech ventures in India, emphasizing the need for compliance and risk management are as follows.
Payment System Compliance: India’s fintech ventures are mandated by the Payment and Settlement Systems Act, 2007 (PSS Act), to secure prior authorization from the RBI to operate payment systems, making this authorization a fundamental requirement for engaging in financial transactions and offering payment services.
Compliance with the PSS Act demands implementing stringent security measures and fraud and risk management protocols, transaction monitoring, customer protection, two-factor authentication, online dispute resolution and grievance redressal frameworks and filing the system audit report. It also included cybersecurity audit and anti-phishing mechanisms to protect against cybersecurity threats and other potential risks to ensure security and integrity of financial transactions.
Know You Customer, Anti-Money Laundering and Countering the Financing of Terrorism: In the financial services industry, risk-mitigation becomes both a regulatory requirement and a strategic necessity. As a part of the risk-based approach, board-approved policies, controls, and procedures must be established, with a key focus on implementing a customer due diligence program tailored to combat money laundering and terrorist financing risks.
Continuous monitoring and a commitment to enhance controls, ensuring ongoing effectiveness aligned with regulatory expectations, are required to safeguard the integrity and security of financial systems.
Capital Adequacy and Risk Management: Indian fintech ventures must comply with RBI-mandated capital adequacy and risk management guidelines by maintaining ample capital reserves and implementing robust risk mitigation frameworks. This requires regular risk assessments, periodic reviews, developing business continuity plans and disaster recovery policies.
Additionally, fintech companies must closely monitor financial and consumer credit exposures, establish contingency plans, to ensure financial stability and resilience.
Cybersecurity Compliance: Fintech companies must prioritize cybersecurity compliance through robust data protection measures, including encryption for sensitive information. Regular security audits are crucial for conducting vulnerability assessment, penetration testing and enhancing overall safety.
Establishing an information security audit, cybersecurity policies, an incident response plan, recovery, and risk management, and adhering to reporting requirements can protect against potential cyber threats.
Data Localization Compliance: Indian fintech ventures must also adhere to data localization regulations, mandating the storage of sensitive customer data within the country to enhance data security and ensure regulatory oversight. Enforced by bodies such as the RBI, the compliance requires in-country data centres, data migration controls and robust measures against cross-border data transfer. This also aligns with regulatory expectations and strengthens trust.
Reporting: Regular reporting with audits is a mandatory requirement to ensure compliance with financial regulations, anti-money laundering guidelines, and cybersecurity measures. Reports submitted to regulatory authorities require comprehensive adherence to operational norms and regulatory obligations including filing suspicious transaction reports to the Financial Intelligence Unit and maintaining a log of all transactions undertaken for at least 10 years.
Timely reporting of financial transactions, customer complaints and cybersecurity incidents in compliance with the Indian Computer Emergency Response Team (CERT-IN) requirements further ensures transparency and regulatory oversight.
Conclusion
The fintech industry envisions assets under management at $1 trillion and revenue at $200 billion by 2030, highlighting the enormous growth potential in India. Today, regulatory compliance is not just pivotal but a preliminary precondition, as non-compliance jeopardizes business continuity and investment prospects.
Non-compliance may trigger irreversible consequences and heavy penalties, potentially causing license cancellations. Additionally, violations of other applicable laws such as the PSS Act, Foreign Exchange Management Act, 1999 and the Companies Act, 2013, can present formidable challenges in raising investments and scaling operations.
Therefore, scrupulous compliance and legal expertise are imperative to navigate the evolving regulatory landscape from inception, offering protection against threats and strategically positioning fintech ventures for sustained growth in a fiercely competitive market.
Nidhi Killawala is Partner, Achint Kaur is Counsel, and Shreya Mishra is Associate at law firm Khaitan & Co. Views are personal.
