By Srinath Sridharan
Act 2, Scene 2. Actors: The regulator, banks, FinTechs, NBFCs, private investors, consumers. Venue: Digital India in 2022 Enter the financial regulator. The usher announces calling off few regulatory gaps (arbitrage) and mayhem in the media and markets about perceived hurt. The consumer is still unaffected.
“As I realised,
The day before there was a gap in them
Of this I, now call it off.”
“No, you cannot,
This will be the end of me.”
(With certain liberties taken with a Shakespearean piece)
Technological innovations are disrupting the traditional financial sector. Sandboxes give regulators a chance to work with fintech innovators, and understand and mitigate risks better. Innovation, especially through technology for transforming financial markets and consumers’ interaction with the fiscal framework is both a risk and an opportunity. The stability of monetary systems and the fiscal framework have to be maintained. Allowing innovation and managing systemic risks are two sides of the same coin, which the regulators design!
Globalisation, digital literacy amongst citizens, and technology have led to a dramatic transformation in finance. This brings in the clash for consumer attention between incumbent financiers and new-age aspirants or competitors. Regulatory capability-building around emerging topics, as well as capacity enhancement in dealing with digital finance is a must. Until then, we might find regulations unwillingly becoming a competitive moat for sectoral-incumbents.
As the recent plugging of PPI and cards arbitrage showed, regulatory arbitrage cannot be termed as innovation. Innovation has to disrupt the status quo and bring a large delta of change towards solving problems, and not just hyped incrementalism. Many disruptors do challenge the status quo of old-school rent-seeking entities. But, what if it disturbs those incumbents? Will they react to stifle it? Will they continue to enjoy the regulatory umbrella that shields them from changes? Will any of these regulatory actions plug arbitrages for one set of players and pass the benefit to others?
We must be rational and not villainise digital financial players for the fault of a few who may be exempt from regulatory scrutiny. Regulators have to define the borders of regulatory coverage. Most large fintechs are well-capitalised, run by smart young professionals and known board members. Regulations can steer technological choices and platform preferences. The larger question is, should regulators actually steer or stonewall such specific choices? Should regulations influence products or product guidelines?
The regulatory role is to ensure consumer protection. If a regulator acts, it is because they might be observing a buildup towards systemic risk to worry them or become a communication nuisance that consumers would complain loud enough or that it is politically sensitive. Financial regulators in large populous markets like ours have to also worry about creating a society with high indebtedness.
Over the past few years, the government has been shaping its governance ideologies with the digital mode as a foundation. This includes not only citizen outreach but also social and financial impact efforts. This has necessitated encouraging and bringing new and first-time entrepreneurs to the fold; any solution must address the larger challenges for a demography of nearly 80 crore youngsters. India, over the last decade, shaped its tech stack–the Digital India movement; Aadhaar; mobile connectivity and internet access; UPI; RuPay, which enabled a domestic and resilient payment network; and currently, the scaling of ONDC. So, one assumes that being young will not be held against an individual’s capacity to reimagining financial solution-ing and delivery. After all, age and maturity do not have a direct positive correlation. Only experience and exposure do. This ask might be an important one considering the rigour of the regulatory test in assessing a promoter of a financial entity.
Collaboration or competition
Globally, the financial regulators worry that easy access to credit, especially for discretionary spending, without adequate financial literacy, might push the borrowers into a debt trap. Rightfully, RBI is examining it closely as our consumer market has many layers of social-economic strata. In a social democracy, the onus of consumer protection rests with the regulators, and despite their efforts, if consumers get into financial issues in spite of repeated warnings, the issue makes life difficult for regulators. A regulator wants to have regulations that offer consumer protections to ensure users can afford the credit that they are actually offered.
The recent regulatory updates around tightening what only banks can do and what non-banks (including fintechs) cannot do, in the context of tech-led finance space, are interesting. If the banks and non-banks are targeting the same set of consumer segments, why would banks fund the non-banks? Trust deficit between banks and fintechs is increasing. Is the idea of co-lending between banks and non-banks a distant hope? Will some of these changes force fintechs into being mere digital banking correspondents?
Over time, the financial regulators brought in different licensing categories to solve for then-financial-impact-need. With the current digital wave and adoption, especially pushed forward with our official policies, it would be useful to assess if those licence categories are useful, relevant, impactful, and productive at all.
Regulatory upgrades ahead
With digital finance, the regulator must strike a balance between innovation and safeguards, including consumer protection, systemic-risk prevention, privacy, data sanctity, etc. This is only the start of the digital era. With evolving technologies, more such developments will test the concept of regulatory proactiveness and who defines what is right for society. Even financial regulators will have to expand their hand-holding of innovation—they have to work with the contours of innovation in mind, to allow for regulations with inputs from the industry as well as external knowledge experts.
Forget fintechs for a moment. Techfins are far worrisome for regulatory scrutiny than the current players in the set. Regulators exist to protect consumers and markets and to promote healthy competition. Regulatory actions are like the acts of a parent. They have to steer values and expected behaviour and not create bias amongst members of the same family. Tough one, considering that there is no regulatory playbook for the digital world we are in already.
The regulatory role, like that of a parent, will keep evolving with time. And there is no fixed formula. The parent will state their mind from time to time to keep the brood in shape, even if the brood broods about the parents’ actions.
The author is a corporate advisor Twitter: @ssmumbai