Page 1534 - 1542 DOI: https://doij.org/10.10000/IJLMH.

115928

INTERNATIONAL JOURNAL OF LAW

MANAGEMENT & HUMANITIES
[ISSN 2581-5369]
Volume 6 | Issue 5
2023
© 2023 International Journal of Law Management & Humanities

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 1534 International Journal of Law Management & Humanities [Vol. 6 Iss 5; 1534]

Fintech: Regulatory Framework in India

PRAKHAR PRAJAPATI1

ABSTRACT
Fintech refers to businesses that enhance or automate financial services and operations
through the use of technology. The words "finance" and "technology" are combined. The
expression alludes to a swiftly developing industry that offers numerous advantages to both
businesses and consumers. Fintech has a wide range of uses, including bitcoin, investing,
insurance, and mobile banking apps. Currently, a wide range of industries and professions
are referred to as "fintech," including nonprofit fundraising, retail banking, investment
management, and education. Modern fintech is primarily driven by AI, big data, and
blockchain technology, which have profoundly altered how organizations move, store, and
protect the digital currency. FinTech's introduction of crowdfunding platforms has
enhanced consumer interactions. It makes it possible for small businesses, entrepreneurs,
charities, and artists to raise money without the aid of traditional investors. Social
transformation is a key goal shared by many Fintech companies, particularly those
operating in poor nations. Government support has been crucial in providing both
necessary enabling support and regulation. Numerous government initiatives have fueled
the growth of the Fintech industry in India, whether they be broadband infrastructure to
promote internet access in rural areas or digital literacy and financial programs. The
primary regulator of the fintech sector is the RBI, which is responsible for regulating
payments and settlement procedures in India. The RBI is in charge of regulating
international and foreign exchange transactions. In addition, the RBI regulates banks,
NBFCs, and other financial participants in the ecosystem, including credit reporting
agencies. ("CICS"). Given the nature of fintech offerings, additional regulators including
SEBI, IRDA, the Ministry of Electronics and Information Technology ("Meity"), and the
Ministry of Finance may also be pertinent.
Keywords: Fintech, SEBI, IRDA.

I. INTRODUCTION
Financial technology (better known as Fintech) is used to define cutting-edge technology that
aims to enhance and automate the provision of financial services. The financial industry is
changing drastically. The COVID-19 epidemic has expedited the transformation of payments,
loans, insurance, and wealth management brought about by digital technologies. Fintech, at its

1
Author is a student at School of Law, Galgotias University, India.

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1535 International Journal of Law Management & Humanities [Vol. 6 Iss 5; 1534]

core, helps organizations, business owners, and individuals better manage their financial
operations, processes, and lives by using specialized software and algorithms that are used on
computers and, increasingly, smartphones. The term "financial technology" is combined with
the word "fintech." Fintech refers to companies that utilize technology to improve or automate
financial services and operations. It is a mix of the terms "financial" and "technology." The
phrase refers to a quickly expanding sector that benefits both consumers and companies in
various ways. Fintech has a wide range of applications, including mobile banking, insurance,
and investment apps as well as cryptocurrency. Currently, the term "fintech" is used to describe
a wide range of professions and businesses, including investment management, retail banking,
education, and nonprofit fundraising, to name a few. The creation and application of
cryptocurrencies like Bitcoin are also a part of fintech. Today, the fintech industry is huge. And
if recent venture capital investments in fintech startups — which reached an all-time high in
20212 can be considered a vote of confidence, the industry will continue to expand for years to
come. The fintech sector has evolved and experienced exponential expansion over time.

Fintech, often known as financial technology, seeks to modernize and automate the usage of
financial services. It makes it possible for enterprises, corporations, and individuals to
efficiently manage their financial operations and payments. By implementing fintech laws and
regulations, financial institutions, service providers, and customers are all protected from harm.
One motivating aspect is the fact that many conventional banks actively assist and adopt cutting-
edge fintech, buying or partnering with fintech businesses. Those are strategies that established
banking institutions can use to satisfy the demands of customers who are tech-savvy while also
advancing the sector and remaining current. The traditional international banking sector, with
its multi-trillion dollar market capitalization, continues to be where the big money is, even
though that fintech sector may garner the majority of headlines.

Regulators are finding it challenging to stay up with the most recent technological
advancements to tailor the fintech rules appropriately as a result of the rapid advancement of
technology. Regulators and policymakers must be aware of the most recent advancements in
fintech to adopt policies that will improve service without jeopardizing security. Potential
hazards like fraud, breaches, and cybersecurity risks are on the rise as fintech expands. Security
and market integrity may be compromised by new payment systems and models. Customers
who are unaware of the hazards or unable to accept them may be sold new products and services.
The risks of fraud and hacking are growing for distributed ledger technology (DLT), blockchain,

2
Sam Daley, Fintech- What is Fintech? Financial Technology Definition, Builtin, (Aug. 18, 2022)
https://builtin.com/fintech

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and crowdfunding. Financial services are the most strictly regulated industry in the world as a
result of these hazards that are inherent in the finance industry. The internal workings of various
financial technology products and services vary. Some of the most recent innovations use
machine learning algorithms, blockchain technology, and data science to handle credit risks,
manage hedge funds, and do other things. Concerns concerning cybersecurity have grown along
with the finance industry. The tremendous growth of fintech enterprises and marketplaces on a
global scale has made fintech infrastructure increasingly exposed and a target for
cybercriminals. Thankfully, technology is always developing to lower current fraud risks and
neutralize new threats.AI, big data, and blockchain technology are the main forces behind
modern fintech, and they have all fundamentally changed how businesses move, store, and
safeguard digital currency. In particular, AI may help firms better understand their clients by
giving them insightful data on consumer behavior and purchasing patterns. Big data analytics
can assist businesses in forecasting changes in the market and developing fresh, data-driven
business plans. Blockchain, a more recent financial technology, enables decentralized
transactions without the involvement of a third party by using a network of users to monitor
prospective additions or modifications to encrypted data. Consumers trust fintech businesses
generally; according to Forbes, 68% 3of individuals are eager to use financial instruments
created by non-traditional (e.g., non-finance, non-banking) institutions. However, because
many fintech applications are still in their infancy, they are not currently governed by the same
safety standards as banks. This is not to say that customers shouldn't put their trust in fintech
companies; it just means that exercising caution can be advantageous. The advantages of
cooperating with a fintech company outweigh the perceived risks for the majority of consumers.

In addition to facilitating faster and easier banking, technological advancements have a wide
range of effects. FinTech has improved customer relationships by introducing crowdfunding
platforms. Without the help of traditional investors, it enables small enterprises, entrepreneurs,
charities, and artists to gain funding. Another major objective that many Fintech companies,
particularly those in the developing world, strive to achieve is social transformation. People in
underdeveloped countries increasingly have access to digital lending platforms including
microlending. Payment services can now be used in parts like Africa, Asia, and India which had
a huge population of people who were underserved by conventional banks. The insurance sector
was also affected by fintech (sometimes known as "InsureTech"), which included everything
from online. Up until recently, financial services organizations provided a range of services

3
What is Financial Technology (FinTech)? A Beginner’s Guide for 2022,Columbia Engineering Boot Camps,
(2022), https://bootcamp.cvn.columbia.edu/blog/what-is-fintech/

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under one roof. These services covered a wide range of things, from conventional banking
operations to mortgage and trading services. Fintech unbundles these services into separate
offerings in its most basic form. Fintech companies can be more effective and reduce transaction
costs by combining technology with solutions that are simplified. The word "disruption" best
captures how many fintech innovations have changed traditional trading, banking, financial
advice, and products. Financial services and products that were previously only available
through branches, salespeople, and desktop computers are now available through mobile
devices or simply move away from powerful, entrenched institutions. Many people believe
fintech to be a relatively recent invention, however, this is not true. Although it has changed a
lot in the previous ten years, most of that can be attributed to advances in technology that are
now being used in the banking industry. Since the introduction of the first automated teller
machine (ATM) in the 1960s, financial institutions have used technology to streamline service
delivery and reduce costs. Even in comparison to cash and checks, credit cards—which exist
before ATMs—was a revolutionary technological development in the payments industry. Many
different technologies are supporting different fintech, business models. They consist of robotic
processing automation, AI, machine learning, and blockchain technology, among other big data
applications (RPA).

In general, India offers a large variety of fintech products. Based on these offerings, the sector
has seen the growth of several sub-sectors, including online payments, digital lending, wealth
management (invest-tech), personal finance management, insurance technology (InsurTech),
etc. The regulatory focus of the RBI in the fintech ecosystem can be focused on the following
fintech entities in the ecosystem, even though these are broad categories that tend to change
with innovation in the industry: payment system operators ("PSOS"), which include PPIs, and
National Payments Corporation of India ("NPCI"), a payment system that runs several well-
known payment systems. In India, such as payment aggregators, RuPay (a card payment
network), and Unified Payment Interface ("UPI"). There are over 2100 Fintech companies in
India, out of which more than 67 percent have been set up in the last five years.

India’s Fintech segment has also seen exponential growth in funding; investments worth more
than US$8 billion were received across various stages of investment in 2021.4 Some of the main
forces influencing the Fintech revolution in India are supply-side enablers like exponentially
growing computing power, widespread internet penetration, and increased internet speed and
coverage, combined with demand-side stimulants like the need for inclusive financial services,

4
Naina Bhardwaj, What Trends are Driving the Fintech Revolution in India?, India Briefing,(June. 9, 2022),
https://www.india-briefing.com/news/what-trends-are-driving-the-fintech-revolution-in-india-23809.html/

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customer expectations, and the business need to reduce costs while providing faster, safer, and
more reliable services. Super applications have also emerged as a result of the increased
prospects for income diversification that have been identified as Fintech platforms and services
developed with a strong user base and product-market fit. Super applications combine a variety
of services under one roof to enable numerous daily use cases. Super applications are gaining
ground on the Indian market thanks to rising levels of digitization, cheaper cellphones, and a
COVID-induced demand for digital services. It's also important to note that BigTech companies
like Google, Amazon, and WhatsApp have adjusted their offerings to offer customized services
in India, such as Google Pay, Amazon Pay, and WhatsApp Payments, respectively. 5 payment
app Paytm is also expected to develop into a Super app. On the same platform that also
integrated e-commerce, value-added services for merchants, and consumer internet services
(such as gaming and entertainment), Paytm has included financial service products and services,
including payment, lending, investment, and insurance. There are currently 187 unicorns in the
fintech sector worldwide, 21 of which are located in India. The names of these companies are
Acko, BharatPe, BillDesk, Chargebee, Paytm, Oxyzo, PhonePe, Pine Labs, Coin DCX,
Coinswitch Kuber, CRED, Slice, Razorpay, Cred Avenue, DIGIT, Groww, Policy Bazaar,
Zerodha, Zeta, and Open. The newest members of the unicorn club in 2022 were Open (a fintech
neo bank) and Oxyzo (a fintech marketplace and SME loan platform).6 To monetize the data
and user base, the majority of these platforms have now adopted financial services re-bundling
by combining several services under one roof. These businesses cross-sell various financial
services and products.

For instance, Pine Labs, formerly a POS/Payment gateway company, has expanded into
merchant lending, rewards and loyalty programs, consumer finance, net banking, and value-
added services for retailers. Similar to Yono, which was originally primarily a digital banking
platform, the business today also offers pre-approved consumer loans, insurance, and online
shopping. The first consumer-focused fintech product in India was internet-based banking.
While Internet banking developed over time to become a classic fintech product, client adoption
of fintech solutions in India did not pick up steam until demonetization in 2016.7 Due to this
disruption, fintech businesses were able to expand and provide customers digitally first financial
goods like digital lending, digital insurance, discount brokerage, wallets, and payments.

5
Ibid
6
Emmanuel Christi Das, Spotlights, with Fintechs Leading the Pack, Silicon India Starup City,
https://startup.siliconindia.com/editorial/spotlights-with-fintechs-leading-the-pack-nwid-33610.html
7
Jaikrishnan G, Fintech Regulations: A No Man’s Land, Financial Express, (July. 5, 2022, 6:33pm)
https://www.financialexpress.com/money/fintech-regulations-a-no-mans-land/2583873/

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Additionally, important factors in boosting consumer adoption of these digital-first business

models were the India stack and the Pandemic. This modern fintech serves its consumers
through strategic partnerships with banks, NBFCs, and insurance firms. They were not and still
are not licensed by India's Central Bank. The RBI Governor's denial of the requirement for such
a license framework further lessens their last remaining chance of eventually transitioning to a
fully digital bank under a different license regime. The fintech industry in India has brought
about a wide range of changes in how the general public transacts and how financial service
institutions operate. Fintechs were able to reduce the inherent friction in the India Financial
Services ecosystem by using cutting-edge technology and new people. To expand credit, banks
and NBFCs have teamed with digital lending-focused fintech startup distribution across the
various strata’s population by leveraging technology to create smoother customer journeys and
shorter turnaround times.

Government support has been essential, both in terms of regulation and in terms of offering
vital enabling support. Whether it is digital literacy and financial programs or broadband
infrastructure to improve internet access in rural regions, numerous government initiatives have
propelled the expansion of the Fintech business in India. These include the National Common
Mobility Card (NCMC), Startup India, Digital India program, India Stack, E-RUPI, licenses for
payments banks, Jan Dhan Yojana, recognition of peer-to-peer lenders as NBFCs, regulatory
sandboxes by the RBI, and IRDAI for Fintech. Additionally, a strong public digital
infrastructure supported by Aadhar, UPI, account aggregation, etc. as well as a favorable
regulatory environment have facilitated and accelerated India's technological revolution.
Numerous actions have been taken by regulators (RBI, IRDAI, and SEBI) to guarantee
improved accountability and the constant accessibility of low-cost, secure digital financial
systems.

India's Unified Payments Interface (UPI) had 261 banks participating as of October 2021, and
it had recorded 4.21 billion monthly transactions totaling more than US$100 billion.8 As part
of the second cohort under its regulatory sandbox framework, the Reserve Bank of India
recently chose Open Financial Technologies Pvt Ltd to develop a blockchain-based cross-
border payment system. The start-up would employ Hyperledger Fabric, a Linux-based open-
source blockchain, for the cross-border payment system covered by the RBI's regulatory
sandbox. Cross-border payments currently come in two flavors: Rupee Drawing Arrangement
(RDA), which is used for individual remittances, and Online Payment Gateway Service

8
Supra note 4

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Providers (OPGSP), which is utilized for exporters' financial transfers. In 2020, the
International Financial Services Centre Authority (IFSCA) was also founded. India's
International Financial Services Centre serves as a single authority for the development and
supervision of financial products, financial services, and financial institutions in India’s
International Financial Services Centre (IFSC). According to data from the Telecom Regulatory
Authority of India, the total number of internet users in India climbed from 795.18 million at
the end of December 2020 to 825.30 million at the end of March 2021, registering a quarterly
growth rate of 3.79 percent (TRAI). India's active internet user base is anticipated to grow even
further, mostly due to the high rate of rural adoption. According to other projections, India will
gain 140 million middle-class and 21 million high-income families by the year 2030, fueling
demand and expansion in the country's Fintech sector.9 The development of the fintech
department at India's Reserve Bank of India is another stark indication of the sector's
significance (RBI). A fintech division was established by the RBI in 2018 under its regulation
department. In 2020, this division was transferred to the department of payments and settlement
systems, where the majority of fintech-related operations were regulated. The RBI established
a specialized fintech department in early 2022 with an emphasis on supporting innovation,
recognizing potential and difficulties, inter-regulatory coordination, and so forth. Additionally,
it manages projects for the Reserve Bank Innovation Hub's secretariat, the Central Bank Digital
Currency ("CBDC"), and the Regulatory Sandbox. The RBI has been attempting to stay up with
fintech advancements in India, and its declared approach to regulation has always been centered
on the needs of the client. The majority of Indian "regulated entities," such as banks and non-
banking financial companies (or "NBFCs"), are typically tech-focused organizations that are
subject to distinct regulations. Over several years, the RBI has developed several rules and
directives that control the product offerings of fintech companies. The financial regulators in
India are dispersed. The RBI, which oversees payments and settlement activities in India, is the
major regulator of the fintech industry. The RBI also oversees the regulation of cross-border
and foreign exchange operations. Additionally, the RBI oversees credit reporting agencies as
well as other financial players in the ecosystem, including banks, NBFCs, and others. ("CICS").
Other authorities, such as SEBI, IRDA, the Ministry of Electronics and Information Technology
("Meity"), and the Ministry of Finance, may also be relevant given the nature of fintech
offerings. Separately, NPCI, a not-for-profit organization that the RBI has authorized as a PSO
for numerous well-known payment systems, is not a governmental body.10 Separately, while

9
Ibid
10
Vaibhav Kakkar, Sahil Arora, Gangesh Varma, Keshav Pareek, Fintech Laws and Regulations 2022 India,
Global Legal Insights, https://www.globallegalinsights.com/practice-areas/fintech-laws-and-

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though NPCI is a not-for-profit organization that is not a statutory authority and has been
approved by the RBI as a PSO for several well-known payment systems, including RuPay (a
card payment network) and UPI, its function is now equivalent to that of a quasi-regulatory
body. There are numerous system participants and third-party technology app providers in the
aforementioned payment systems run by NPCI. (TPAPS), which are controlled by NPCI's
procedural directives, circulars, and instructions. Cross-border payments are a priority of the
RBI Payments Vision 2025, which was released by the central bank in June 2022. NPCI
International Payments Limited ("NIPL"), a wholly owned subsidiary of NPCI, was founded to
deploy Rupay and UPI outside of India to increase its worldwide influence.11 Agreements with
France, Singapore, the UAE, and the UK have developed from bilateral cooperation to promote
UP in other nations. The NPCI is also aggressively working to connect UPI to other nations and
hopes to give ex-pats a convenient and affordable way to send money home. To control the
processing of payments for cross-border transactions of goods and services, the RBI published
Guidelines for Online Payment Gateway Service Providers in 2015. ("OPGSP Guidelines").
Recently, in April 2022, the RBI decided to review the aforementioned OPGSP Guidelines and
issued proposed guidelines titled "Processing and Settlement of Small Value Export and Import
Related Payments" facilitated by Online Export-Import Facilitators ("OEIF Guidelines"), which
aim to update the legal framework governing online cross-border payments for the purchase of
goods and services. The OPGSP Guidelines are still in effect because the OEIF Guidelines are
still only in draught form and have not yet been officially announced by the RBI. Furthermore,
the provisions of Indian exchange control regulations apply to cross-border transactions and
notifications and directions issued by the RBI also assume relevance. The Framework for
Recognition of Self-Regulatory Organizations for PSOs, developed by the Reserve Bank of
India, is projected to play a significant role in ensuring the safety and caliber of PSO services
in India. The implementation of NUEs in the retail industry is also expected to have an impact
on how FinTech is implemented in the retail industry.

The Government established a committee to develop a framework for controlling non-personal

data, and it just released its Report on Governance of Non-Personal Data, which suggests
legislation for controlling non-personal data as well as the establishment of a new statutory
authority. It is intriguing to learn that one of the report's main recommendations is to require
the sharing of non-personal data for political, societal, and commercial objectives. Additionally,

regulations/india#:~:text=Regulatory%20bodies,-
Back%20to%20top&text=India's%20financial%20regulators%20are%20fragmented,exchange%20and%20cross
%2Dborder%20transactions.
11
Ibid

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the Digital Personal Data Protection Act, 2023—India's comprehensive data protection
framework—is now being passed by legislators. Since financial information is now covered by
the Act, once it becomes law, FinTech companies and financial institutions will likely face
stricter duties for data protection.

*****

© 2023. International Journal of Law Management & Humanities [ISSN 2581-5369]