When technology and finance intersect, they bring forth ethical issues and cybersecurity risks
Indian fintech companies have become frontrunners in transforming financial services. They’ve reimagined how financial transactions are conducted, investments managed, and products accessed. This shift is largely driven by advanced technologies such as artificial intelligence, blockchain, and data analytics. According to estimates, India’s fintech sector could be valued at $1 trillion, generating over $200 billion in revenue by 2030.
Embracing Innovation & ESG Trends
With innovation comes the crucial need for good governance. The 2023 Global Innovation Report by FIS highlights that 84 per cent of Indian organisations are preparing for significant impacts from Environmental, Social, and Governance (ESG) trends. Banks and fintech companies are increasingly aligning with ESG goals. Many banks are striving for net-zero emissions and offering ESG-linked loans, while fintech companies are promoting sustainable choices among consumers. They are helping reduce carbon footprints by supporting eco-friendly brands and practices.
One notable innovation is Doconomy’s DO Black credit card, which tracks the carbon emissions of purchases and sets a cap on the user’s carbon footprint. Once the cap is reached, the card cannot be used until the user reduces their carbon emissions. This unique approach encourages consumers to be more environmentally conscious with their spending.
Innovation Driving Integrity In Fintech
The Reserve Bank of India (RBI) has been actively addressing data privacy concerns through regulatory measures. At the Global Fintech Festival 2022 in Mumbai, RBI Governor Shaktikanta Das emphasised the importance of customer protection, cybersecurity, and data integrity for sustainable fintech growth. As Indian fintechs target a vast client base of 1.4 billion people, they face heightened risks affecting both businesses and their customers.
Fintech companies are leveraging advanced analytics and machine learning techniques to combat these challenges. Techniques such as network graph analysis for fraud detection and device spoofing prevention are being employed. Accenture research indicates that financial institutions are increasingly using graph databases and analytics to identify fraud and money laundering patterns in real time. The Association of Certified Fraud Examiners (ACFE) found that businesses using sophisticated analytics, such as graph analysis, can detect fraud 40 per cent faster than those relying on traditional methods.
Sameer Aggarwal, CEO & Founder, Revfin highlighted “Balancing growth with responsible lending is essential for fintechs aiming to enhance financial inclusion, especially in Tier 3 and 4 cities. This balance can be achieved through a combination of innovation, compliance, and education.Fintechs should leverage advanced technologies to assess creditworthiness beyond traditional metrics, ensuring a comprehensive understanding of the borrower’s ability to repay.
Additionally, educating borrowers about responsible financial behavior and providing them with tools to manage their finances is key. By creating an ecosystem of support and financial literacy, fintechs can ensure sustainable growth while promoting financial inclusion.”
Regulatory Challenges
The rapid shift to digital platforms has increased the complexity of regulatory challenges. Fintech companies must navigate a maze of financial regulations, including crucial requirements like Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance. These regulations serve as guiding principles, providing fintechs with a clear path to follow.
Mr.Rishi Agrawal CEO & Co-Founder Of Teamlease Regtech said “FinTech companies must conduct compliance applicability assessments to identify the specific regulations applicable to their operations. They need to regularly monitor circulars, directions, advisories, notices, and orders issued by sectoral regulators like the RBI and the Ministry of Corporate Affairs to stay informed about regulatory changes. This is a complex task, as these businesses must also comply with other regulations, including those related to labour law, environmental law, finance, and taxation. Catering to these requirements can be arduous as the Indian business regulatory framework consists of 1,536 acts and rules and 69,233 compliances. Additionally, they must monitor over 2,200 government websites that publish regulatory updates.For compliance teams that rely on manual, paper-based, and people-dependent methods, maintaining continuous compliance can pose a significant challenge. These ad-hoc processes often lead to lapses, delays, and defaults, increasing the cost of poor compliance. To address these issues, FinTechs need to adopt digital technologies that can track regulatory updates in real-time and manage compliance obligations. These solutions enhance visibility and control over compliance functions, allowing senior management to ensure accountability, transparency, and the timely fulfilment of regulatory obligations. RBI has already mandated financial institutions to adopt and implement digital compliance management solutions. These digital compliance solutions will allow RBI-regulated entities to keep track of their compliance obligations and ensure that there are no delays, lapses, or defaults”.
RBI & Government’s Role In Data Protection
When technology and finance intersect, they bring forth ethical issues and cybersecurity risks. The RBI has strongly advocated for ethical data practices. For instance, only card issuers and networks are authorised to store Card-on-File data. Furthermore, the Personal Data Protection Bill, 2023, recently passed by the Rajya Sabha, aims to address the processing of digital personal data.
The bill seeks to balance individual data rights with legitimate data usage requirements. Businesses will need to respect individuals’ rights to access, modify, and delete their data. The legislation proposes a penalty of INR 250 crore for organisations that violate these standards, along with a mandatory fine of at least INR 50 crore. Additionally, entities are required to delete user data if it is no longer needed for its intended purpose.
Bhuvan Rustagi, Co-Founder & COO Of Per Annum said “To balance growth with responsible lending and enhance financial inclusion, fintechs in India can take several strategic steps. They can offer tailored products by unbundling services, allowing customers to select the specific services they need and want, thus meeting diverse financial needs. Enhancing financial literacy through technology platforms by providing educational materials and personalized financial counseling services is crucial. Additionally, fintechs can leverage technology to extend increased financial access by providing microloans to small-scale entrepreneurs and women in rural areas, utilising non-conventional data to assess creditworthiness. By reducing financial service costs through the elimination of physical infrastructure and operational overheads, they can make services more affordable. Hyper-personalisation can be embraced by tailoring financial products and services to meet individual preferences using advanced data analytics and artificial intelligence. Implementing robust consumer protection rules and establishing clear regulatory frameworks ensures the safe and responsible growth of the fintech sector. Addressing research gaps in financial inclusion by focusing on technological solutions for underserved populations is vital. Conducting empirical research to identify key factors for the success of technology-driven financial inclusion initiatives can provide valuable insights. Lastly, developing good practices for policy-makers to alleviate poverty in less developed areas will contribute significantly to the overarching goal of financial inclusion and economic empowerment”.
Toward Responsible Fintech Ecosystem
The RBI’s Payments Vision 2025 outlines a roadmap for India’s payment systems. The report reveals a significant increase in digital payments, with a 216 per cent rise in volume and a 10 per cent rise in value from March 2019 to March 2022. Meanwhile, the use of paper instruments has declined, with its share in total retail payments dropping from 3.83 per cent to 0.88 per cent in volume and from 19.62 per cent to 11.47 per cent in value over the same period.
In light of these developments, the importance of good governance in fintech cannot be overstated. It acts as a guiding compass, helping companies navigate challenges and seize opportunities. By upholding values of integrity and accountability, governance not only safeguards fintech operations but also enables them to manage risks effectively.
