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Fintechs Need to Invest in Systemic Risk Management and Compliance

There is more need than ever for Indian fintechs to invest in systemic risk management and compliance. Firms fear stifled innovation and compliance challenges. How can the industry reassess and build a resilient future? What do experts say? Read on!

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Swati Dayal
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Fintech Dilemma

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A recent study by the World Economic Forum (WEF) has positioned India as one of the major hubs for fintech operations globally. The report highlights vibrant fintech clusters in countries like Singapore, the UK, the US, and India, emphasizing their role as thriving centers for fintech corporate headquarters.

In the midst of heightened scrutiny in the fintech sector, Paytm's recent regulatory challenges have sent shockwaves through the industry. The banking regulator's actions against Paytm Payments Bank, a Paytm affiliate, have not only surprised the broader fintech community but have also underscored an increasingly stringent regulatory landscape.

While the regulatory order may target the payments bank, its repercussions extend to the entire fintech sector.

Fintechs, once lauded as luminaries in the startup realm, find themselves taken aback by the RBI's stern stance, signaling zero tolerance for financial sector irregularities or procedural lapses.

Responding to this unexpected regulatory move, fintechs have joined forces and issued a collective statement expressing concern. They caution that the RBI's actions could potentially stifle innovation and hinder the progress of technological advancements in the sector.

The fintech community, now in a huddle, is grappling with the implications of this regulatory message and its potential impact on their ability to drive innovation and embrace technological upgrades.

Let's have a look at what the Fintech players are fearing about:

Regulatory Tightrope - Paytm's Impact on Fintech Confidence

The recent regulatory actions against Paytm Payments Bank, an associate company of Paytm, have sent shockwaves through the fintech community in India. While initially targeted at the payments bank, industry experts suggest that the implications could extend to the broader fintech sector. Fintech founders, once confident in regulatory compliance, now express the need for proactive measures to navigate an increasingly stringent regulatory environment.

Financial Inclusion and Government Initiatives

Despite the challenges, fintech has played a pivotal role in enhancing financial inclusion in India. Collaborative efforts between traditional banks, fintech companies, the government, and NBFCs have contributed to positive developments. The adoption of digital and tech-first approaches has led to significant changes in consumer preferences for financial services, reflecting the evolution of the fintech ecosystem.

Fintech Response - Caution and Adaptation

Prakash Chawla, an Independent Business Journalist, notes the fear gripping the fintech industry post the Paytm crisis, emphasizing the need for fintechs to proactively invest in systemic risk management and compliance.

He remarks that the RBI action may discourage innovation and technology upgradation," indicating a collective concern among fintech players.

“The Paytm crisis arising out of RBI's stringent action against the pioneer of payment bank which had built the powerful brand in the digital financial services ,has created an environment of fear amongst the entire fintech industry. The fintechs, celebrated as stars of the Startup ecosystem are caught unaware by RBI which has sent a strong message that it would brook no leniency for irregularities or procedural non-compliance in the financial sector. The fintechs have teamed up into a huddle, and came out with a statement cautioning that the RBI action may discourage innovation and technology upgradation. Worried fintech do have a point! 

But then RBI too has a point and a stronger one. While fintechs witnessed a remarkable growth and took formal credit to individual entrepreneurs, roadside vendors and small traders, rationality of being prudent and strictly compliant with the financial regulatory environment was somewhat being lost sight of.  They did not realise; banking and finance business is not like selling beverages; it is a highly regulated sector anywhere in the world. Is it over-regulated in India? One may argue so, but the sheer nature of borrowing and lending demands strict regulation. 

I suspect some of the new age promoters did not realise the gravity of the risks if foolproof systems are not built into their businesses. Post Paytm saga, they will have to invest heavily into building resources for regulatory compliance and systems. They need to take cues from public sector banks or some of the large well established private sector lenders. The PSBs and private banks have transformed themselves into excellent technology platforms along with their traditional systems. 

It is not the end of road for fintechs, but sooner they fall in line with the RBI regulatory regime, better for their forward journey.”

Lessons for Fintech Startups

Yatish Rajawat, Senior Policy Commentator, emphasized on the importance of good governance practices, urging startups to build compliant and robust systems from their inception to avoid long-term regulatory pitfalls.

"This crisis is a lesson for fintech startups. Paytm, as a listed and regulated entity, highlights the importance of good governance practices. Startups must build compliant and robust systems from day one to avoid regulatory pitfalls in the long term," he says.

While the recent regulatory actions have induced fear and caution within the Indian fintech ecosystem, it also presents an opportunity for the industry to reassess its compliance mechanisms and build a more resilient and responsible future.

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