Why Fintech Needs a Brand New QR (RegTech) Code?

For fintech to grow on a robust platform at a rapid pace, a quick response technology driven regulatory eco-system (RegTech) is a necessary condition

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By Vinay Kalantri


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Recent commentaries on the Financial Technology (Fintech) space often ends up with a prophecy like prediction about the next big thing to happen' in this ever-evolving vertical - the unplugging of blockchain version 2. But, the entire narrative seems to be missing the wood for the trees as the sector has been awash with `disruptive' innovations on an ongoing basis without waiting for the blockchain 2.0 to unwind. More, after a pause, governments less cash economy policy push has once again tipped the balance in favour of digital transactions. However, one missing link in this unwinding fintech episode is a regulatory eco-system that understands and responds quickly to the new innovations. It is my view that for the growth of a robust fintech platform a technology-driven regulatory platform or (RegTech) is equally essential.

The RBI's recently published "Report of the Working Group on fintech and Digital Banking' has laid out a clear road map for the fintech firms to grow seamlessly beyond the blockchain side by side with quick response (QR) regulatory technology (RegTech) code. This assumes significance since a rapidly growing crowd of financial entities and technology firms are experimenting with related technological and financial solutions as well as new products which either modify the way financial intermediation takes place or leads to disintermediation.

It is a truism that innovations related to payments, lending, asset management and insurance pose a challenge to business models and strategies of incumbents. It can create new risks for individual financial institutions, consumers of financial services, as well as the financial system as a whole. This makes regulating fintech space a slippery slope since the technology is ever evolving with different use cases and monitoring activity outside the regulated sector. Identifying and monitoring new risks associated with new products make it all the more difficult. In short, the regulatory uncertainty surrounding fintech could potentially hamper its development.

This is why financial innovation has become a focal point for regulators and some jurisdictions have decided to take a more active approach in facilitating this innovation. To do this, they have taken a variety of steps such as regulatory sandboxes, innovation hubs, innovation incubators or accelerators, among others. As a result, international standard-setting bodies including regulatory authorities of different jurisdictions are taking steps to actively monitor fintech developments both domestically and in association with international organizations. Over-regulation might hamper the growth of the industry; the followings points will help develop a good regulatory environment that will support the growth of fintech industry.

Organizational Structure

Against this backdrop the key recommendation made by the crack team on fintech set up by the Reserve Bank of India (RBI) merits attention. The RBI task force has underlined the need for a deeper understanding of various fintech products and their interaction with the financial sector and, thereby, the implications on the financial system, before regulating this space. The regulatory actions may vary from "Disclosure" to "Light-Touch Regulation and Supervision" to a "Tight Regulation and Full-Fledged Supervision", depending on the risk perception.

A dedicated organizational structure within each regulator needs to be created to make the oversight of these technologies easier. And they should follow an active engagement model with fintech firms before framing the regulatory codes. The RBI panel has also suggested setting up of an appropriate framework for "Regulatory Sandbox / innovation hub" within a well-defined space and duration where financial sector regulators will provide the requisite regulatory support, so as to increase efficiency, manage risks and create new opportunities for consumers in the Indian context similar to other regulatory jurisdictions.

Understanding Inherent Risk:

There is also a need to develop a more detailed understanding of risks inherent in platform based on fintech. For this, various financial sector regulators need to identify risks associated with sector-specific fintech products and frame regulatory codes accordingly. And as and when any securities market-related fintech products are rolled out regulators may assess the product and see whether it can be monitored by way of registering them as an intermediary or through the activity regulations. Similarly, insurance companies may collaborate with `Insurtech' entities or start-ups to provide better customer experience in a cost-effective manner.

Regulator Stakeholder Partnership:

Regulatory and legal reforms are essential to enable the sustained development of a digital financial industry for the future. Partnerships and engagements among regulators, existing industry players, clients and fintech firms will enable the development of a more dynamic and robust financial services industry. Regulators may explore the use of `RegTech' that may facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities.

Data Protection and Privacy

There is also an urgent need for a stand-alone data protection and privacy law in the country. Banks and regulated entities may be encouraged to collaborate with fintech start-ups to improve their customer experience and operational excellence. They may also consider undertaking fintech activity in areas such as payments, data analytics and risk management. Further, models of engagement and checklist to be developed by each regulator for each of the activities.

Suffice it to say that a tidal wave of technological change is making a tectonic shift in the country's financial firmament. But the driving force is not the overhyped blockchain technology but the irrevocable change built on Artificial Intelligence, Big Data, and the Internet of Things panning out at a breakneck pace. A fresh look at this innovation-driven revolution underlines the need for a new regulatory eco-system that understand the evolving technology and at the same time red flag any potential risks well ahead of any negative incident. To sum up, for fintech to grow on a robust platform at a rapid pace, a quick response technology driven regulatory eco-system (RegTech) is a necessary condition.

Vinay Kalantri

Founder and Managing Director, tmw

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