This article is written by Athul Roshal Kumar.

Introduction

Fin-tech has been making a lot of buzz in recent years; attracting the largest sums of FDIs, holistic governmental responses and even widespread market adoption. However, the term ‘Fin-Tech’ as understood today – payment systems that use technology such as PayTM and Gpay- doesn’t necessarily do right by its genesis.

Originally, Diners Club Cards (early iterations of Credit Cards) were hailed as the pinnacle of Fin-Tech, a common pattern with the Fin-Tech in the 20^th Century was that like Diner Club Cards these technological advancements were pioneered by legacy institutions (conventional banks, NBFCs, clearing houses etc.) and solely due to this fact the Fin-tech advancements of the 20^th Century were regulated from their very inception as Banks and were heavily regulated compared to the rest of the industry.^[1]

On the other hand, the Fin-Tech book that has been seen in recent years have come from Payment Aggregators and Payment Getaways (hereinafter referred to as PAs and PGs). These organisations aren’t regulated as much as Financial Institutions and are able to provide quality services to the end-customers at an attractive price due to their low cost of compliance.

Indian Legal Scenario

The payments space is one wherein the regulatory framework is relatively well-developed. Digital payments in India are primarily executed via pre-paid payment instruments (PPIs), debit cards (by volume), and the RTGS and NEFT system (by value). The Payment and Settlement Systems Act, 2007 is the principal legislation prevailing over the payment systems in India. Nevertheless, the RBI also issues rules and regulations pertaining to diverse facets of the payments network occasionally.

On the other hand, PPIs are overseen chiefly by the RBI’s Master Direction on Issuance and Operation of Prepaid Payment Instruments. The same divide PPIs into three categories:

1. Closed System Payment Instruments: These payment mechanisms are issued to enable the purchase of goods and/or services within the service provider’s ecosystem. CSPIs do not authorize cash withdrawal. As CSPIs do not enable payments and settlement for 3^rd party services, they are not classified as payment systems. For example, Ola Money, MakeMyTrip Wallet, BookMyShow Wallet.
2. Semi-Closed System Payment Instruments: These are payment mechanisms that can be utilised to purchase goods and services, as well as to avail financial services at a group of itemised identified merchant locations/ establishments which have undertaken a specific contract with the issuer to accept the payment instruments. For example, Paytm Wallet.^[2]
3. Open System Payment Instruments: These are payment mechanisms which can be utilised to purchase goods and services, as well as to avail financial services like funds transfer at any merchant location that accept the same and also authorize cash withdrawal at ATMs. For example, Poga.

Marketplaces that direct payments from customers to suppliers, such as Uber and Oyo, are also subject to the conditions laid down under the PSSA and related rules and regulations of the RBI.

Payment Aggregators are bodies that enable e-commerce sites and/or merchants to receive several payment instruments from customers upon the completion of their payment obligations without the need to craft a distinct payment-integration system per merchant. PAs empower merchants to connect with customers. Payment Gateways are bodies that arrange for the underlying technological framework to direct and expedite the processing of an online payment transaction without any participation in the handling of such funds. The RBI recently issued the Guidelines on Regulation of Payment Aggregators and Payment Gateways (PAPG Guidelines); the same is considered to be a positive step taken in the path towards better regulation of Fintech companies.

Following the stricter norms of the Prevention of Money Laundering Act, 2002, the Fintech companies were required to conduct KYCs – however e-KYCs were done via Aadhaar^[3] due to its significant reduction in cost. However, the Hon’ble Supreme Court of India in the landmark case of Justice Puttaswamy (Retd.) v. Union of India^[4], struck down parts of the Aadhaar Act that legalized the use of an individual’s Aadhaar number to prove his/her identity by private organisations. As a direct consequence, companies were no longer able to use the verification services sanctioned under the Aadhaar Regulations.

Another important development in the Fintech world is the advent of cryptocurrencies. Cryptocurrency is a digital form of currency that is secured by cryptography; most being on decentralized networks based on the blockchain technology—a distributed ledger applied by a distinct network of computers. A crucial trait of cryptocurrencies is that they aren’t issued by any central authority, making them – in theory – immune to government interference.^[5]

However, the RBI has always held a negative view of cryptocurrencies, virtually banning them via its many notices. Nevertheless, the Hon’ble Supreme Court of India in the case of Internet and Mobile Association of India v. Reserve Bank of India^[6], struck down the RBI Circular and in so doing lifted the restriction on cryptocurrency trade in India. However, it is to be noted that while striking down the RBI Circular, the Hon’ble Court held that ‘anything’ that may possibly pose a threat to or have an bearing on the financial system of India can be regulated or banned by the RBI, even though the said activity does not form a part of the credit system or the payment system.

Regulations

The fintech industry is primarily regulated by existing regulators such as the RBI or other regulators such as SEBI or the IRDAI. Even though there have been multiple applications for the institution of an independent authority to oversee the payments industry, all such applications have been rejected.

Moreover, the concepts of regulatory concepts have been gaining momentum in the global landscape.^[7] In furtherance of the same, RBI had issued an Enabling Framework for Regulatory Sandbox. As per the Framework, the organisations eligible to participate in the sandbox are FinTech companies, inclusive of start-ups, financial institutions and any other corporation affiliating with or providing support to financial services. The regulatory sandbox is meant to inspire innovations proposed for deployment in the Indian market in areas where:

• there exists an absence of regulations;
• there exists a requisite need to provisionally ease regulations to enable the proposed innovation;
• the suggested innovation promises smooth and effective delivery of financial services in a substantial manner.

Conclusion

The Indian financial services market is rather different from its western counterparts; it is the need for financial inclusion that has spurred the growth of financial service providers and associated services in the home turf than a want of convenience. Consequently, despite the fact that the total penetration of financial services is still low, the adoption rates are much higher – making available attractive business opportunities. Furthermore, low data costs in India and ever diminishing cost of smartphones greatly assist in amplifying the success of Fintech companies.

Nevertheless, the presence of multiple regulators and nascent legislation that make the Indian fintech landscape challenging for foreign players to navigate. However, the sheer size of the market and multiple lacunas in the current laws make the same a highly viable opportunity. One can only imagine how the industry will develop with the extension of indigenous services like UPI being on-track to become international services – needless to say it is a rather exciting time for the Fintech space and the legislations revolving around the same.

References

[1] Vinod Joseph, Deeya Ray and Protiti Basu, Fintech Laws In India – A Primer, Mondaq https://www.mondaq.com/india/fin-tech/914612/fintech-laws-in-india–a-primer

[2] Mansukhlal Hiralal & Company, Digitalization Of The Indian Economy|Payment Systems, Mondaq https://www.mondaq.com/india/finance-and-banking/625252/digitalization-of-the-indian-economypayment-systems?type=mondaqai&score=67

[3] Section 57 of the Aadhaar Act 2016

[4] Justice Puttaswamy (Retd.) v. Union of India, Writ Petition (Civil) No. 494 OF 2012

[5] Jake Frankenfield, Cryptocurrency, Investopedia https://www.investopedia.com/terms/c/cryptocurrency.asp

[6] Internet and Mobile Association of India v. Reserve Bank of India, Writ Petition (Civil) No.528 of 2018 with Writ Petition (Civil) No.373 of 2018

[7] Probir Roy Chowdhury and Vishnu Nair, FinTech Comparative Guide, Mondaq https://www.mondaq.com/india/technology/885572/fintech-comparative-guide?type=mondaqai&score=68

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