Deputy Governor T. Rabi Sankar stated on Tuesday that the Reserve Bank of India’s (RBI) regulation of fintech should be more entity-based than activity-based.
Following Google and Amazon’s announcement that they will be working together to facilitate deposit products, a significant area of concern for the banking regulator, this is the first time a top RBI official has spoken on regulations surrounding big tech.
In his lecture, he explained why fintech companies should only be allowed to offer payment services rather than deposit goods. He argued that if an fintech company offers liquidity services, like as credit and deposit products, they ought to be subject to the same stringent regulations as other liquidity service providers, like banks.
In reality, Rabi Sankar’s keynote speech at the Global FinTech Fest 2021 made multiple references to big tech and its rules.
According to the deputy governor, fintech is revolutionizing the whole banking industry, and rules must change to keep up. Fintech companies are currently assuming the roles played by banks, and new roles are also emerging.
According to the deputy governor’s inaugural address, this calls for expanding the scope of regulation as well as its method and type.
The regulation must be activity-based rather than entity-based, as is the case with major tech companies or large non-financial enterprises, for instance (but engaged in finance). According to Rabi Sankar, dealing with large tech requires taking into account risks to cyber security, systemic risk, and competition. The approach to regulation must change as fintech grows in size.
The borders between financial and non-financial organizations are becoming increasingly hazy as a result of big technology, and they no longer adhere to them.
Given that all laws are created via a thorough consultation process, it is practically hard to keep up with the legislation surrounding these businesses. However, regulation must catch up in the interim.
According to the deputy governor, regulation is often a process of slowing down constantly changing value chains so that legislation has time to catch up.
According to Rabi Sankar, the greatest method to safeguard customers is frequently to slow down the process of change. This might lead to allegations that the regulator is stifling innovation.
Big tech raises concerns about concentration and competitiveness in this scenario. Limiting the number of players on the market may provide opportunities for new entrants, but it may also stifle innovation.
Neither in India nor overseas, is a clear regulatory strategy available. Regulations must change as well, he said, because markets are evolving.
Banks cannot be fintechs
The deputy governor of the RBI frequently emphasized the value of banks in the process of financial intermediation. A bank acts as a link between depositors and borrowers, creating new money in the process.
Banks bridge the temporal gap and offer liquidity services. Credit and money can be created by banks. Banks are also in a unique position when it comes to payments because all digital payment transactions include money transfers from one bank to another, according to him.
It is simpler to understand why financial technology cannot replace the fundamental elements of financial intermediation. Due of their reach, it can close the spatial gap but not the time one, he claimed.
Any fintech that offers liquidity services is essentially a bank and should be subject to the same rules and oversights as banks. The RBI deputy governor stated that IT businesses are not permitted in deposits and deposit products but did not name any specific companies.
The country has benefited greatly from fintechs, which have also presented incumbents with a challenge and compelled them to adopt and alter their methods of financial intermediation in response.
The best course of action is to recognize fintech companies as partners and enablers. Fintech firms do not truly compete with banks. Banks that can use fintech are still in competition with others that can’t.
Although digital fraud rates in India are among the lowest in the world, there should be more attention paid to data storage, data security and privacy, and customer protection against cybercrime.
Fintech companies frequently oppose RBI initiatives like two-factor authentication and tokenization because they prioritize user convenience over attempts to protect customers.
The deputy governor added that the RBI continues to place a high priority on cross-border payments, where central bank digital currency (CBDC) might be useful.
Smooth cross-border payments are still ineffective because of problems with the exchange rate, time zone differences, and various laws. Fintechs and CBDCs can find a solution to that issue. Payments, especially with CBDCs, can be made almost instantly without the need for additional settlements because these are currencies that are supported by the central banks of two different nations.
Recently, on a reciprocal basis, the RBI partnered with the Monetary Authority of Singapore to provide one such cross-border payments service.