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Financial Regulation of Consumer-facing Fintech in India:Status Quo and Emerging Concerns

This paper attempts to answer the question, how is fintech regulated in India? The paper first analyses the types of consumer-facing fintech activities that are currently prevalent India. It identifies fourteen types of consumer-facing fintech activities in India. Together these fourteen types of activities constitute a typology of consumer-facing fintech activities in India. The paper further examines and compares the extent of financial regulation applicable to each fintech activity in the typology. A simple index of regulatory oversight is used to rank each fintech activity according to the financial regulation they attract. These rankings are summarised in a schematic to create the regulatory landscape of consumer-facing fintech activities in India. This regulatory landscape presents the status quo of financial regulation applicable to fintech in India. Clarity of the financial regulation applicable to fintech may help policymakers and regulators assess the appropriateness of their regulatory stance. The paper concludes with a discussion on some ways in which the financial regulator’s toolkit may be recalibrated to address the risks and preserve the opportunities attendant to fintech. Finally, by outlining how fintech is regulated in India, the paper hopes to start a discussion on the more pressing policy imperative of how fintech should be regulated in India.

Globally, there is a veritable explosion in the interest in and around fintech2 and India is no excepon. This interest in fintech is reflected in the venture-capital funding that the sector receives. Esomates for India suggest that ~USD 1.83 bn were invested in various fintech enƟƟes through venture capital and private equity (Medici PaisaBazaar Fintegrate, 2019) in 2018 alone. The regulators have also been keenly observing the space, examining fintech for its implicaƟons on the financial sector. In April 2018, the Reserve Bank of India (RBI) published the report of the Inter-Regulatory Working Group on FinTech and Digital Banking in India (hereaŌer referred to as the 'Sen Committee Report', aŌer its chairperson Mr Sudarshan Sen). This is the first aƩempt to gauge the spread of fintech in India and look out for new regulatory consideraƟons that may arise from its expansion. It takes stock of dominant innovaƟons within the remit of the RBI and compiles innovaƟons occurring across other (i.e. non-banking) sectors such as insurance and investment. Considering that fintech in still remain largely underexamined, the Sen Committee Report's first recommendaƟon is to create a deeper understanding of the spread of fintech, its various types and its interacƟon with the exisƟng financial sector (Reserve Bank of India, 2018). Financial sector regulators beyond the RBI are also invesƟng in understanding the developments in fintech and devising appropriate regulator responses to them. They are experimenƟng with new regulatory tools such as the regulatory sandbox to help them respond to innovaƟons in fintech, proporƟonately (Reserve Bank of India, 2019), (Pension Fund Regulatory and Development Authority, 2019). Governments at both the centre and state-level3 are also trying to gauge the implicaƟons of emerging fintech innovaƟons for the financial sector and devise proportionate legislative responses to it. The Department of Economic Affairs (DEA) under the Ministry of Finance also set up a Steering Committee on Fintech Related Issues in India in 2018 (Press InformaƟon Bureau of India, March). Despite the almost euphoric market senƟment around fintech and an intensifying regulatory preoccupaƟon, a clear snapshot of fintech acƟviƟes which currently dominate in the country remains elusive. Currently the answer to the hypotheƟcal but perƟnent quesƟon, "how is fintech regulated in India?", remains unclear. The first recommendaƟon of the Sen Committee Report emphasising "the need to have a deeper understanding of various FinTech products and their interacƟon with the financial sector and, thereby, the implicaƟons on the financial system, before regulaƟng this space" [sic] (Reserve Bank of India, 2018) succinctly highlights the gaps in knowledge in the prevalent understanding of fintech in India.

This paper attempts to bridge this gap in knowledge. The paper examines the most prevalent consumer-facing fintech activities in India and analyses financial sector regulation applicable them. This analysis contributes to the existing literature by: (i) creaƟng a typology of consumer-facing fintech acƟviƟes currently prevalent in the country, and (ii) analysing the financial regulaƟon applicable to each type. Remainder of the paper is organised into six sections. Section 2 elaborates on the research question and motivation for undertaking this analysis. Next, section 3 discusses the methodology adopted to answer the research question. The paper avails of the Preferred Reporting Items for Systematic and Meta-Analyses (PRISMA) framework to construct a typology of consumer-facing fintech dominant in India. This section also discusses the creation of a simple index of regulatory oversight, which helps in quantifying the financial regulation applicable to each type of fintech activity identified in the paper. Section 4 identifies 14 types of consumer-facing fintech activities , creating the typology of consumer-facing activities in India. Section 5 examines financial sector regulation applicable to each of these fintech activities by undertaking extensive secondary research. It avails the index of regulatory oversight to quantify financial regulation into numeric score ranging from 0 to 5. These findings are arranged to visually represent the regulatory landscape of consumer-facing fintech activities in India. This landscape is an ordinal representation of fintech activities according to the regulatory oversight they currently attract. It is not a commentary on how these fintech activities ought to be regulated. This regulatory landscape serves as an important tool to begin examining the question of how fintech should be regulated? Section 6 discusses some of salient features of these fintech activities and reflects on what it could mean for future course of regulation. The paper concludes by comparing the regulatory treatment with the risks inherent in some of the models to highlight some emerging questions for regulators.

While fintech innovation could potential occur across the value chain of financial services, this paper concerns itself with consumer-facing innovations. This analysis excludes any innovations which in the value-chain of financial services, which do not directly interface with the consumer. This self-imposed limitation offers a sound starting point for the analysis and helps navigate the vast swathe of fintech activities. Anchored in this context, the paper attempts to the hypothetical question How is fintech regulated in India? The paper answers this question by deconstructing it into two distinct research exercises: • ConstrucƟng the typology of consumer-facing fintech acƟviƟes prevalent in India: This exercise identifies the types of consumer-facing fintech activities currently prevalent in India. As a first step, this part focuses on undertaking a literature review to identify a viable definion of fintech which of the many technological innovations in finance qualify as 'fintech'. The theoretical foundation provided by the definition becomes a basis for determining which of the many technological innovations in finance get qualified as fintech. The vast sea of diverse technological innovations is idenfied through a second literature review. Both the literature reviews for identifying a definition of fintech and for identifying the various technological innovations using the PRISMA framework. The section on Methodology discusses this in greater detail. • IdenƟfying the financial-sector regulaƟons applicable to these fintech acƟviƟes: Once the relevant categories of consumer-facing fintech activities have been recognised, the paper undertakes intensive desk research to gauge the regulatory treatment applicable to each category. These financial regulations are then converted into numeric scores using an index of regulatory oversight. These scores are used to rank the fintech activities in a decreasing order of financial regulation applicable to them, creating the regulatory landscape of consumer-facing fintech activities in India. The nature of these question lends a descriptive character to the paper. The paper concerns itself with answering the positive question of how the financial sector regulates consumerfacing acƟviƟes in India as opposed to the normative question of what should be the opƟmal regulatory treatment of consumer-facing fintech acƟviƟes in India. By painting a picture of the landscape though, the paper serves as an important tool to answer the latter. In the absence of a clear understanding of the (financial) regulatory response towards the development of fintech in India, it is difficult to comment on its adequacy, effectiveness and proportionality. In conclusion, the paper reflects on regulatory incongruence in terms of choice of tools and objective which emerge from a preliminary analysis of regulatory landscape. It ends with some headlines on the desirable regulatory stance towards fintech. By outlining how fintech is regulated in India, the paper hooks to start a discussion on the more pressing policy imperatives of how fintech should be regulated in India.

Currently, there is no consensus on which technological innovaƟons in finance qualify as fintech, which is in part due to a muddled understanding of the term fintech itself. Therefore, in order to construct a typology of consumer-facing fintech, it becomes criƟcal to idenƟfy a definiƟon of fintech. Methodologically, construcƟng a typology of fintech requires answering two disƟnct sub-quesƟons: (i) What is fintech? (ii) What are the types of consumer-facing fintech acƟviƟes in India? In order to idenƟfy a viable definiƟon of fintech, this paper reviews the emerging academic and regulatory literature on the subject. The paper undertakes a comprehensive & systematic review of literature using the Preferred ReporƟng Items for SystemaƟc Reviews and Meta-Analyses (PRISMA) framework (Moher D, LiberaƟ, Tetzlaff, Altman, & (The PRISMA Group), 2009). To answer the second quesƟon, the paper repeats a similar PRISMA-led review exercise, this time focusing on regulatory and commercial literature discussing technological innovaƟons in finance in India. PRISMA is a tool used to undertake systemaƟc review of literature, especially in healthcare to minutely and comprehensively record discrete developments in the area of research interest. The validity and robustness of the framework depends on the quality of databases used and the criteria used to include studies in the review.

The primary objective of this work is to analyse the types of fintech acƟviƟes that are prevalent in the Indian financial landscape and the extent of financial regulaƟon applicable to them. Therefore, this paper concerns itself with literature focusing on (i) theoreƟcal underpinnings of fintech; (ii) the types of fintech acƟviƟes currently prevalent globally; (iii) the regulaƟon of fintech; and (iv) the exisƟng fintech ecosystem in India. Studies that focus exclusively on (i) a parƟcular type of fintech, for instance crypto exchanges; (ii) the evoluƟon of fintech in a parƟcular geography except India, say the Netherlands; and (iii) business and operational aspects of fintech are excluded from the literature review. Research strategy includes using the search terms ''what is fintech?'', ''fintech'', ''fintech typology'', ''fintech in India'' and ''regulaƟon of fintech in India'' on two academic databases, i.e. Google Scholar and Ideas RePec. The selecƟon criteria for literature, and the total number of arƟcles studied are captured in Annexure 1. As depicted in Figure A-1 in the Annexure, 69 pieces of academic work and consultancy reports were scanned across the two sources, i.e. Google Scholar and Ideas RePec. After accounting for duplicates and records that were not accessible at the point, 52 entries were filtered. The abstracts of these 52 entries were analysed for relevance to the research themes, leaving 24 disƟnct academic pieces for the final analysis.

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