Answer ... The digital payment sub-sector is the fintech industry sub-sector which has achieved the greatest penetration in India. Prepaid payment instruments (PPIs) – most commonly mobile wallets –are instruments that facilitate the purchase of goods and services against value stored on such instruments. India has one of the fastest-growing markets in terms of mobile wallet adoption. Mobile wallet transactions increased from INR 24 billion in 2013 to INR 955 billion in 2017, and surpassed the INR 1 trillion mark in early 2018.
Payments through the indigenously developed Unified Payments Interface (UPI) have also rapidly increased. The UPI adoption rate has been phenomenal: by August 2019, 10 billion UPI transactions had been executed. Nearly 80% of those transactions were executed between September 2018 and August 2019.
Answer ... The products and services in the digital payments space include the following:
- PPIs that allow customers to use stored value to purchase goods and services from an array of registered merchants;
- card tokenisation services;
- electronic point of sale services;
- QR code processing;
- technology services provided through UPI-enabled payment platforms;
- digital identity verification services within the payments process; and
- data encryption services which are embedded in the payments flow.
Answer ... Most fintech players are structured as companies incorporated in India. This is generally due to legal requirements. For example, entities that undertake payment and settlement activities in India require prior authorisation from the Reserve Bank of India (RBI) under the Payment and Settlement Systems Act, 2007. One requirement to obtain such authorisation is that the entity be a company incorporated in India.
Where fintech entities offer both regulated and unregulated services or products, those products and services may be offered through different legal entities. Entities that undertake regulated business may be capitalised only to the extent required under law. Affiliated entities which provide unregulated products or services may potentially also receive investments. These affiliates may also incur expenses relating to marketing, research and development and corporate partnerships.
Complex structuring is largely no longer required for fintech businesses in India. Most will fall under a category whereby foreign investment is permitted up to 100% of the shareholding, with no prior approval requirements.
Answer ... Fintech companies may raise funds through equity or debt financing rounds. Equity financing rounds involve the issuance of stock to equity investors, which will then own a share in the business. Debt financing is usually through term loan or working capital facilities arranged through banks and non-banking financial companies.
Foreign direct investment (FDI) of up to 100% is automatically permitted in most fintech businesses and is a common financing option. Since 2016, fintech companies have consistently attracted the maximum FDI financing. Fintech start-ups can also avail of external commercial borrowing facilities from foreign lenders.
Financing through the public issuance of shares and other innovative models such as crowdfunding has not taken off significantly thus far, but may in future once the sector matures.
Answer ... Fintech players frequently position themselves as technology enablers and service providers. While some venture into the regulated core financial services space, most fintech players operate at the periphery, offering value-added services to traditional financial players. As the ecosystem matures, it is expected that more fintech players will offer core financial services. Neo-banking, micro-lending and risk assessment are increasingly finding traction among fintech players.
Given the general positioning of fintech business, the regulatory regime which applies to them is generally much lighter than that applicable to traditional financial service players. Even where a fintech business is regulated (eg, clearing and settlement of payments), the applicable rules and requirements may not be as stringent as those applicable to traditional financial services players such as banks and non-banking financial companies (NBFCs).
Answer ... Yes, it is typical for both start-ups and established fintech providers to outsource their back-office functions.
Where the outsourcing fintech entity is not a bank or NBFC, Indian law imposes no mandatory obligations on the outsourcing partner. However, the RBI prohibits banks and NBFCs from outsourcing regulated functions as part of their licence conditions, meaning that only non-core functions may be outsourced. These requirements flow from guidelines and directions issued by the RBI on managing risks and codes of conduct in the outsourcing of financial services. Therefore, any fintech company which is a bank or NBFC will be similarly restricted.
The outsourcing of IT service functions by banks is regulated by the RBI’s Guidelines on Information Security, Electronic Banking, Technology Risk Management and Cyber Fraud. The guidelines impose conditions on safeguards against the commingling of information, records and assets. They also contain guidance on the content of IT outsourcing contracts and prescribe certain minimum requirements.
The RBI’s Master Direction on Issuance and Operation of PPIs imposes certain conditions on PPI providers that outsource operations. These include requirements on the RBI’s audit and access rights, compliance with data localisation requirements and the obligation to disclose security breaches.