In the last few years, India has emerged as a global leader in the financial technology (fintech) sector. The country has the highest fintech adoption rate in the world and it is the second-highest funded sector (by new class investors) after e-commerce in the country. India has the world’s third-largest fintech startup ecosystem globally with billions of dollars flowing every year and new businesses being launched every month. India has overtaken China as Asia’s top Fintech funding target market with investments of around $7.1 billion (from January 2019 till the first half of 2021) across 375 deals.
The sector is growing at a rate of more than 20 per cent with different lending, payment services, investing services, and wealth management apps being launched every month over the internet. Due to the dominance of the Public Sector Banks (PSBs) in the Indian banking sector, the movement of Indian customers to fintech is very fast as these PSBs offer poor services to their customers.
Big Tech has capitalised on the lethargy of Indian PSBs. Companies like Google, Amazon and WhatsApp first grabbed the payments and money transfer sector. They are now eying the core business of Indian banks, like lending, insurance and investing.
This poses a threat to India’s financial security and stability.
RBI Steps In
The Reserve Bank of India is now preparing to regulate such BigTech firms, who are looking to create monopolies in the Indian financial sector by reducing domestic players into non entities. In its annual report for 2021-22, RBI said, “With increasing impact of the fintech segment on both macro (financial stability and cyber security) and micro levels (consumer protection and financial inclusion), it becomes pertinent to keep facilitating innovation, while also bringing regulatory order in the fintech space.”
RBI has specifically pointed out the risk posed by Big Tech companies’ involvement in banking, finance services, and insurance space. The Central Bank’s report said, “…it is the endeavour of the Reserve Bank to mitigate such risks through careful choice of technology and frameworks, while providing an impetus to fintech in a wide array of useful applications in the financial service industry.”
RBI On the Lookout for a Long Time
RBI has been keeping an eye on Big Tech firms operating in India for quite a long time. In April, RBI made a case for clearly demarcating responsibilities of various regulators in the context of large technology companies operating in India’s financial sector. The primary focus of the Reserve Bank of India is to create a level-playing field, where Indian fintech firms can compete with Big Tech behemoths.
The RBI’s report noted that such a demarcation may be made with the overarching goal of facilitating innovation through competitiveness while also ensuring a level playing field.
In its ‘Financial Stability Report’ report from July last year, RBI said, “Specifically, concerns have intensified around a level playing field with banks, operational risk, too-big-to-fail issues, challenges for antitrust rules, cyber security and data privacy.”
The RBI has identified three unique challenged posed by Big Tech to India’s financial sector. According to Inc42, first, they straddle many different (non-financial) lines of business with sometimes opaque overarching governance structures.
Second, Big Tech firms can use their money and muscle power to become dominant players in financial services. Lastly, big tech companies are able to overcome limits to scale in financial services provision by exploiting network effects.
RBI’s decision to step in and regulate the fintech sector has come at the perfect time. Big Tech firms operating without any regulation would have landed India in a sticky situation, much like that of China. The unregulated fintech sector of China had given rise to a burgeoning debt balloon which threatened the very foundations of China’s financial security and stability. China was very close to a complete financial collapse, because fintech firms decided they could lend money to anybody and everybody with little to no background checks.
To push forward their presence in the Indian market, Big Tech firms would have done the same. Indians would be indebted and the country’s financial sector would stand at risk. RBI’s decision to regulate Big Tech firms and to promote domestic companies in the sector will ensure that no operational risks arise.
India’s fintech sector is growing at a breakneck pace with everyone having bank accounts. Due payment cards under Jan-Dhan Yojana, digital payments services through UPI, and with account aggregators, lending will also be democratized in the next few years. Before that happens, RBI is doing the right thing by regulating the sector and ensuring that lending money does not become the distribution of candies to children in the country.