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Regulatory Challenges Create Major Steer in the Growth Trajectory of Fintech Players

India boasts one of the world’s largest financial service markets, with over 950 million individuals accessing banking services and approximately 10 million new digital payment users joining each month. This rapid expansion presents lucrative opportunities for fintech firms but also brings forth numerous regulatory hurdles.

The innovations are significantly reshaping core financial services for banks, compelling them to continually innovate to stay pertinent. However, these changes also elevate the stakes for regulators and supervisors. Despite the relatively small size of most individual FinTech firms, they possess the capacity to rapidly scale across riskier client bases and business sectors compared to traditional lenders. This blend of swift expansion and the growing significance of FinTech in financial intermediation brings about systemic risks, regulatory complexities, and impediments to growth. 

Additionally, the Paytm Payments Bank incident has served as a wake-up call for the entire financial industry, emphasizing the stark contrast between compliance and breach of regulations. According to research by Global Data, cash transactions have significantly decreased, with UPI transactions experiencing a meteoric rise since the demonetization of Rs 500 and Rs 1000 notes in 2016. Today, India makes as many digital payments in a month as America makes in three months.  India witnessed an exceptional surge in UPI transactions in 2023. In FY2022-23, 8,375 crore transactions were reported up from 92 crore transactions in FY 2017-18, showcasing a compound annual growth rate (CAGR) of 147% in terms of volume. UPI has emerged as a significant player in India’s digital payment sector, contributing to 62% of digital payment transactions in FY 2022-23. UPI-based transactions touched a total value of Rs 17.4 lakh crore in December 2023, RBI recently said in its monthly bulletin.

“Regulatory changes have been coming thick and fast in the capital markets space in the recent past. While the intent is always great and beneficial for the ecosystem particularly retail investors, there needs a lot of coordination between all the players to achieve the desired results. The impact of these on businesses is overheads on the systems,  processes, and resourcing. At times these can introduce risk in the system of unintended nature due to various reasons including aggressive timelines on the back of quick fixes, and limited impact analysis of changes brought in code. However, at the same time, these are making businesses agile and plug systemic risks leading to an overall improvement of business sentiments” expressed by Kartik Chhaya, COO, Rupeeseed on the ongoing challenges.

Among the foremost challenges confronting India’s fintech sector is the imperative to adhere to diverse jurisdictional laws. Firms must navigate the intricacies of regulations across different countries, including compliance with international standards such as Anti Money Laundering Regulation (AML) combined with the General Data Protection Regulation (GDPR). While prioritizing adherence to domestic laws, fintech companies must grapple with the additional complexities introduced by GDPR and AML regulations, particularly when handling EU data.

The future growth path of India’s fintech sector hinges on its ability to effectively incorporate international compliance standards while ensuring robust data protection and financial integrity. Given the rapidly evolving regulatory environment, fintech companies must remain attentive to emerging requirements to sustain their growth and maintain trust in the expanding digital financial sphere. The changing landscape of post-technology intervention undoubtedly presents a formidable challenge for emerging fintech ventures, but implementing the appropriate regulations from the outset will undoubtedly pave the way for future success and shield them from the sudden regulatory crackdowns that established players are currently experiencing in the industry.