RBI releases Report of the Working Group on FinTech and Digital Banking

Posted on February 10, 2018 by Sumita Kale

The RBI has released the Report of the Working Group on FinTech and Digital Banking, the full report is available at this link

Key Recommendations

  • There is a need to have 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 & Supervision” to a “Tight Regulation and Full-Fledged Supervision”, depending on the risk implications.

  • There is a need to develop a more detailed understanding of risks inherent in platform based FinTech.

  • Various financial sector regulators to identify sector specific FinTech products and regulatory approaches.

  • The adoption of digital channels to replace manual time-consuming processes to empower customers and / or workforce in insurance sector.

  • Innovation labs may be established, including within insurance companies, to combine brand and product managers with technological and analytical resources.

  • As and when any securities market Fin-Tech products are introduced or emerge in the market, 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.

  • Insurance companies may collaborate with “Insurtech” entities or start-ups to provide better customer experience in a cost effective manner.

  • Financial sector regulators need to engage with FinTech entities in order to chalk out appropriate regulatory response and with a view to re-align regulation and supervision in response to the changing environment.

  • In order to identify and monitor the challenges associated with the development of major FinTech innovations and to assess respond to opportunities and risks arising for the financial system from these innovations, a ‘dedicated organizational structure’ within each regulator needs to be created.

  • To provide an environment for developing FinTech innovations and testing of applications/APIs developed by banks and FinTech companies.

  • An appropriate framework may be introduced 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 Indian context similar to other regulatory jurisdictions.

  • In view of IDRBT’s unique positioning as a research and development institute, and as indicated by some of its activities, it is felt that IDRBT is well placed to create and maintain a regulatory sandbox in collaboration with RBI for enabling innovators to experiment with their banking/payments solutions for eventual adoption. The Institute may continue to interact with RBI, banks, solution providers regarding testing of new products and services and over a period of time upgrade its infrastructure and skill sets to provide full-fledged regulatory sandbox environment. The Reserve Bank of India may actively engage with the Institute in this regard.

  • Regulatory and legal reforms are essential to enable the sustained development of a digital financial industry for the future.

  • Partnerships / 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 Reg Tech that may facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities.

  • The organizational structure and human resources (HR) practices of regulators have to be reoriented to meet the challenges of innovation, in terms of adapted HR hiring profiles, learning and educational programmes.

  • There is a need for a stand-alone data protection and privacy law in the country.

  • Banks / 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.

  • Models of engagement and checklist to be developed by each regulator for each of the activities.

  • Given that FinTech companies are in their infancy but are growing at a rapid pace, the Government may consider introducing tax subsidies for merchants that accept a certain proportion of their business revenues from the use of digital payments.

  • The requirement of increasing the levels of education/ awareness of customers should be highlighted by all market regulators.

  • A self-regulatory body for FinTech companies may be encouraged.

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Innovation for Financial Inclusion

Posted on February 05, 2018 by Sumita Kale

Since the Pradhan Mantri Jan Dhan Yojana launch in 2014, the objective of universal access and coverage of banking services is close to being achieved. The focus is now shifting to enabling usage. While so far top down policy actions have helped catalyse universal access and coverage,  the character of policies associated with financial inclusion is now changing towards empowering ground-up innovation. This in turn, requires a different class of policy action as the policy objective now is to enable traditional and new financial sector stakeholders to innovate without being hindered by unnecessary rules and procedures.

The latest Indicus Policy Brief looks at precisely this aspect of creating an ecosystem where innovation and experimentation can occur at low cost and by diverse service providers in the banking and payments sectors. In the process, it identifies the key tasks ahead under three main categories:

  1. Enabling Open Access and Interoperability:
    1. To enable easy access and interoperability, a comprehensive time bound road map can be evolved and shared with the industry. Innovation and new product launch is a lengthy process and policy uncertainty or ambiguity tends to hinder it. The road map would lay out the government position on major recommendations of the Report of the Watal Committee on Digital Payments (Ministry of Finance, 2016), including currently grey or indeterminate areas if any. The ideal, of course, is for all major payment systems including RTGS, NEFT, IMPS and UPI to operate on a non-exclusive and non-discriminatory basis for both banks and non-banks.
    2. The recommendation from the Watal Committee to declare the National Payments Corporation of India (NPCI) as a critical payments infrastructure should be examined by the RBI. For improving access and participation from non-banks, diffusing the shareholding structure of NPCI and allowing for non-bank participation, as well as independent members will reduce the current large bank orientation and incentivize greater openness to other stakeholder views.
    3. The Business Correspondent outlet is often the sole access point to formal banking in a cluster of villages. Without interoperability at the BC level, the choice of rural poor is limited, footfall at the banking outlet is reduced and opportunities for innovative solutions are blocked. Standardised guidelines for a White Label BC framework should be issued by the RBI; this will allow access to innovative solutions for the rural poor, who are currently under-served by single or few banking outlets.
  2. Data sharing, protection and privacy: The Committee of Experts on a Data Protection Framework for India has released a comprehensive White Paper on these issues and public feedback has been invited. The critical tasks for India this year are to build a framework that will:
    1. Set up data sharing protocols amongst banks and non-banks
    2. Set up rules for data standardization that will allow for cross-platform usage
    3. Define appropriate data privacy rules, and ensure their enforceability
    4. Ensure that the consent architecture is effective, particularly for low income customers.
  3. Comprehensive reporting and monitoring:
    1. An analytics and monitoring unit, potentially within the RBI and coordinating with the Ministry of Finance, is critical now to monitor transaction and pricing activity, identify transactional hurdles and gaps as they emerge and resolve them through regulatory/policy action.
    2. Aggregated, generic results of the analysis must be shared publicly to create a more informed environment for new entrants and for course correction by existing players.
    3. An institutional mechanism set up for inter-regulatory coordination, including Telecom Regulatory Authority of India and the Competition Commission of India would help circumvent many hurdles in a timely manner.

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