The growing presence of large technology companies, or BigTech, in the financial services space poses risks around competition and data protection, Reserve Bank of India (RBI) governor Shaktikanta Das said on Friday. The regulator is, therefore, working to evolve an appropriate approach to regulating fintechs, which could be activity-based, entity-based, outcome-based or a mix of all three, Das said, speaking at financialexpress.com’s Modern BFSI Summit.
BigTech companies (BigTech) with a non-financial background who have entered the financial services space could potentially be a source of disruption to the financial system, the governor said. “As you would be aware, such companies, whether from e-commerce, social media and search engine platforms, ride hailing and similar businesses have started to offer financial services in a big way on their own or on behalf of others,” Das said. These companies have an enormous amount of customer data which has helped them to offer tailored financial services to entities and individuals lacking credit history or collateral.
The governor took issue with the trend of banks and other traditional lenders utilising platforms provided by fintech companies in their internal processes for credit risk assessment. “Such large scale use of new methodologies in credit risk assessment can create systemic concerns like over-leverage, inadequate credit assessment, etc,” Das said, adding that authorities and regulators will have to strike a fine balance between enabling innovation and preventing systemic risks.
The BigTechs also pose concerns related to competition, data protection, data sharing and operational resilience of critical services in situations where banks and non-banking financial services (NBFCs) utilise the services of big tech companies. These concerns could even materialise in sectors other than financial services, Das said.
“The provision of financial services through the digital channel, including lending through online platforms and mobile apps, have brought in issues relating to unfair practices, data privacy, documentation, transparency, conduct, breach of licensing conditions, etc,” Das said, adding that the RBI will soon issue suitable guidelines and measures to make the digital lending ecosystem safe and sound while enhancing customer protection and encouraging innovation.
The regulator’s approach to BigTech regulation is to closely watch the terms of partnerships between banks, NBFCs and fintechs, as there must be dos and don’ts with regard to what regulated entities can and cannot outsource to fintechs.
The central bank does not, at this stage, intend to issue regulations for neobanks. At the same time, it is also not in favour of existing banks launching digital-only banks. “I feel there is no need for any bank to set up a separate digital bank, to have a sort of parallel entity in the same business. What they can achieve with a parallel entity I think they can very well achieve in their own organisation,” Das said. He said there had been some proposals to set up separate digital banks, but the RBI had turned them down.
In November 2021, the Niti Aayog had floated a discussion paper offering a roadmap for a regime for licensing and regulation of digital banks in India. The paper had caused a stir among large banks, who then devised plans to build digital banks of their own to prepare for a likely licensing regime.
While making a case for better management of risks by fintechs, Das observed that the RBI does not want to stifle innovation in the early stages of development of an ecosystem like Buy Now, Pay Later (BNPL). “Our job as a regulator is to keep assessing what kind of leverage is being built up in the system and if it will pose a challenge at the systemic level. We watch very clearly what kind of BNPL products the major players are offering and what kind of leverage they are building up,” Das said, adding, “As and when required, we will come up with guidelines, but at a very incipient stage, we should not interfere and kill some new business methods or models.”