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How Indian fintechs can address compliance issues

Fintechs will need to bolster their know-your-customer practices and establish self-regulatory mechanisms, among other measures, to address compliance issues that have come under the spotlight

India’s central bank has barred Paytm Payments Bank from accepting customer deposits, after an audit revealed “persistent non-compliances” and “continued material supervisory concerns”.

The regulatory move by the Reserve Bank of India (RBI) effectively prevents Paytm users from using their Paytm wallets, FASTags for paying highway tolls and mobility cards after 15 March 2024.

With the move, Paytm Payments Bank will not be able to provide banking services such as fund transfers and bill payments. Its customers also cannot deposit or credit money into their accounts, but will still be able to receive interest, cashback and refunds.

RBI’s announcement raises concerns over compliance issues with financial technology (fintech) firms, which have been promoting financial inclusion through mobile banking, digital wallets and microfinancing, driving the rapid growth of both non-banking and traditional financial services in India.

“RBI’s new regulatory regime, to prevent the proliferation of unorganised loans as card payments coming from such sources, raises concerns,” said Meit Money founder Jasmin B Gupta during a recent webinar on how fintechs and non-banking financial companies are tackling regulatory shifts.

She noted that fintechs can verify customer identities through know-your-customer (KYC) processes using a combination of digital and physical methods. “KYC can be done digitally, and the verification can happen through a video call,” said Gupta. “If possible, in-person verification can also be an option.”

Besides customer verification, fintechs could also foster transparency over transactions using technologies such as blockchain, and ensure that customer data is protected.

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However, Keshav Rao Evani, president of digital banking at Yes Bank, noted that data security in the fintech sector is not as regulated as it is in banking, which could lead to some fintechs compromising data protection.

Employees of fintech firms have a role to play as well. “The entire workforce needs to be trained to handle customer credentials and execute transactions securely to avoid fraud,” said Madhu Srinivas, partner at Signzy, a digital banking infrastructure provider. “Once you onboard a customer, tech tools and algorithms can be used to categorise and vet customers for their credit worthiness.”

While fintechs will have to comply with regulations, it remains to be seen how they will regulate themselves in areas that fall outside the scope of regulatory regimes.

Sudip Mondal, founder of Startupholic Catalyst, said: “For regulators, the customer is the top priority. For fintechs, a common-sense approach could be that when the volume is low, it is better to adhere to compliance and for them to have self-regulatory mechanisms.”

Indeed, the RBI has called on fintechs to establish self-regulatory organisations (SROs) to achieve a healthy balance between facilitating innovation and meeting regulatory priorities in a manner that protects consumers and contains risk.

Earlier this year, it released a draft framework that outlined the roles and responsibilities of SROs, how the organisations would be governed and managed, and their obligations towards the central bank.

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