The fragmented and bipolar Indian fintech industry faces a regulatory problem. The industry needs a strong regulatory framework.
Current debate on forming a self-regulatory organization (SRO) to supervise FinTech industry in the country reminds us of the latest multi-crore gambling scandal uncovered a few weeks ago. Even though the gaming industry has yet to agree on an SRO, this massive fraud has highlighted the extent of identity theft, money laundering, data breaches, and phony accounts in the financial sector. While we debate how to form an SRO for the FinTech sector, the real question is whether the SRO will be adequate for the current market structure of the FinTech industry in India and will it be effective in steering the sector’s growth in the right direction for the people.
Fragmented and bipolar market structure: The 2004 SEBI (Self-Regulatory Organizations) Regulations define a Self-Regulatory Organization as a group of securities market intermediaries.
An SRO is a group of industry leaders that creates and enforces a complete set of rules and regulations. But who represents FinTech in India? The collective registration of an intermediary association as a company under Section 25 of the Companies Act, 1956 is essential to establishing an SRO. Interestingly, the RBI sought industry representatives to lead the SRO’s formation months earlier. A unified decision was elusive, and the problem remains unresolved. The industry’s fragmentation makes consensus creation for the SRO difficult.
Many reports divide the FinTech sector into five main markets: Digital Payments, Digital Investments, Digital Capital Raising, Digital Assets, and Neobanking, with subsegments like Digital Commerce, Mobile POS Payments, Digital Remittances, Cryptocurrencies, NFTs, and DeFi. In theory and practice, anything online can fit into the FinTech industry, as every activity in today’s virtual world involves financial transactions. casino fraud showed that investments in the casino business linked FEMA, money laundering, and black money. Like an amoeba, this sector is fluid and ever-changing, making industry representation impossible to agree on. Some FinTech firms have suggested creating SROs for each industrial group to solve this problem.
This strategy ignores the regulatory intricacy of India’s bipolar FinTech market. Highly imbalanced Indian FinTech market. Google and Walmart are multinational titans, but hundreds of FinTech start-ups grow and die daily in venture capitalists’ shark pool. Walmart and Google Pay control over 80% of Indian FinTech businesses. This supremacy is backed by NPCL’s UPI system. NPCL aims to cap important players’ market share at 30% by 2025 to prevent oligopoly. PhonePe, Google Pay, and Paytm are financial super-apps with over 97% of the UPI market share and integration of just about every financial service, including banking, merchant loans, credit cards, insurance, stock and commodity, mutual fund investments, buy now pay later (BNPL) services, and cashback programs. We must understand that a fragmented market and product differentiation present regulatory challenges, but the non-competitive market structure is most significant.
FinTech and society: Regulators in many nations have debated whether to use SROs. Self-regulation combines private interests with government control, letting sector experience and practices shape regulatory regulations. However, industrial influence on regulatory policy and conflicts between regulatory and commercial operations are common concerns. India has several successful SROs, including the Institute of Chartered Accountants, AMPHI, and other media and registrars’ groups. FinTech differs from these sectors. FinTech is all-pervasive, bizarrely similar to 1984, only that the “big brother” is replaced by “big data.”
Statista estimates that in 2022, the FinTech market in India would be worth 133.4 billion USD, with digital commerce accounting for 109.4 billion USD. Mobile POS payments total 22.1 billion USD and digital remittances 1.5 billion USD. We expect 739.5 million mobile POS users in India soon. Everyone, regardless of class, caste, religion, or philosophy, must use FinTech services and products. It affects millions of Indians, whether they choose to or not, because they are part of the system.
FinTech’s pervasiveness and societal necessity make it unsuitable for SRO control. Given that FinTech affects billions of people without their consent or choice, establishing an SRO is not just a matter of modality but of ideology: should governmental capacity be used to channel its power?
Beyond police: The SRO may prevent fraud and uphold standards. But is this enough? FinTech’s rapid expansion is changing financial services and banking and financial market structure, potentially compromising systemic stability. FinTech, ‘BigTech,’ and ‘open banking’ bring new competitors and dangers to the banking and financial system. Collectively, these events could have major impacts.
Remember that the FinTech SRO conversation, debate, and decision is about who wins, not merely defining the rules. Will an SRO be enough to handle FinTech’s volatility and systemic risk, or will the regulator need to act occasionally? Will the SRO limit this new sector’s rent-seeking and oligopolistic resource waste? Will the SRO coherently represent diverse voices?
Recent instances like widespread gaming fraud and illicit cryptocurrency transactions demonstrate the necessity for strong FinTech regulation. Due to its pervasiveness, firefighting will cost more than a whole regulatory system. Despite the market’s dread of state interference, the government must establish a FinTech apex statutory body with departments for each major business segment. Such a government organization working with RBI, SEBI, and IRDA will create and implement a coherent regulatory framework. This framework will guide FinTech to serve the base of the pyramid and avoid systemic dangers.
Conclusion
Due to its fragmented and bipolar industry, Indian FinTech confronts major regulatory obstacles. Digital Payments, Digital Investments, Digital Capital Raising, Digital Assets, and Neobanking are the five main markets, with subsegments including Digital Commerce, Mobile POS Payments, Digital Remittances, Cryptocurrencies, NFTs, and DeFi. Non-competitive market structures like the NPCL-developed UPI system make SRO formation difficult. The SRO debate is vital to sector growth and compliance with rules. FinTech volatility and systemic risk make SRO creation an ideological concern. The government should create a FinTech top statutory body with segment-specific ministries in partnership with RBI, SEBI, and IRDA.
