‘You get paid in direct proportion to the difficulty of problems you solve.' 
Elon Musk  

SpaceX recently became the first private company to send an exclusively civilian crew to space on a privately funded mission. This is a part of Elon Musk's grand vision to build a self-sustaining human colony on Mars. But even if colonisation of Mars seems far-fetched, SpaceX has already disrupted the aerospace industry. It has cut down the cost of delivering payload to space by a staggering 90% through technological improvements like building reusable rockets.  

This has left us wondering if technology will disrupt the financial services industry in the same way. Or if fintech players will limit themselves to making incremental improvements – like creating a slicker UI/UX. For instance, UPI marked a paradigm shift in how digital payments are made. And since then, fintech players have made incremental improvements to apps built on UPI rails. Like WhatsApp Pay offering greater convenience by letting users pay through the WhatsApp messenger app. Even UPI may not be truly disruptive. UPI ate into the market share of other digital payment options like cards and e-wallets but it failed to unseat cash as the predominant mode of payment for Indians. One thing is for sure though: much like SpaceX, fintech players will also have to navigate a complex maze of regulations if they want to truly change how people save, invest, lend and move their money. 

Welcome to another edition of  FinTales – your monthly dose of all things fintech. On the FinTales menu this month is a three-course meal along with a palate cleanser. 

Appetizers: bite-sized snackable updates about recent fintech developments.    

Main-Course: meatier stories about the new regulatory framework for NBFCs, the recent flurry of acquisitions in the fintech space, the new Aadhaar authentication and verification rules, and the promise and pitfalls of digital gold.    

Palate Cleanser: a break from the fintech menu.   

Dessert: sweeten your day reading about blockbuster fintech IPOs.    

Let's start.   

The Appetizers   🍟

🎉  Diners Club gets a reason to rejoice this festive season   

RBI lifted its ban on Diners Club from onboarding new customers. RBI imposed this ban on Diners Club for non-compliance with the RBI's data localisation norms. And lifted the ban as Diners Club demonstrated satisfactory compliance with the norms.  

👨‍💻  RBI wishes to hack its way to smarter digital payments – quite literally 

RBI is organising its first global hackathon – Harbinger 2021. The theme of the hackathon is ‘Smarter Digital Payments'. Some of the sub-themes from the hackathon are alternative authentication mechanisms for digital payments and social media monitoring tools for fraud detection. The winner of the hackathon can take home a prize of Rs. 40 lakhs. 

🚨  Under RBI's tight vigil – if you falter, you pay 

RBI has fined Paytm Payments Bank (PPB) Rs. 1 crore. As PPB mentioned incorrect facts in its application for a final Certificate of Authorization (to operate as a payments bank). Like we wrote in the September Edition of FinTales, RBI seems to be keeping up with its hawkish stance on non-compliance by regulated entities.  

🧑‍⚖️  Delhi HC issues notice on disruption in UPI route for cryptocurrency 

Last month, a law student filed a petition in the Delhi HC asking the State Bank of India (SBI) to take back the decision of blocking UPI payments for WazirX – a cryptocurrency exchange. RBI and NPCI have already clarified this year that they have not imposed any bans on cryptocurrency transactions. The Delhi HC issued notice to SBI, RBI and NPCI seeking a response to the plea. 

The Main-Course  🍱

🏦   Scale based regulation for NBFCs 

Last month RBI notified scale-based regulations for NBFCs (which will kick-in on 1 October 2022). With these regulations, RBI aims to increase transparency (in NBFC operations) through greater disclosures and improved governance standards. 

What changes? NBFCs will be regulated according to their size, activity, and risk exposure. They will be categorised in base, middle, upper, and top layer. With each layer, regulations become stricter. Non-deposit taking NBFCs, peer-to-peer lending platforms and account aggregators are in the base layer. And for this layer, RBI will prescribe light touch regulations. The middle layer consists of deposit taking NBFCs, infrastructure debt funds etc. In the upper layer are NBFCs which need greater regulatory supervision. For now, the top layer is empty. The RBI will move an NBFC to this layer if it poses higher systemic risk. But NBFCs (in all the layers) must comply with the risk management norms, disclosure norms etc. RBI will notify detailed guidelines for each category of NBFCs separately. 

Why now? NBFCs are increasingly offering new financial products and services and adapting to technology led processes. Over the last five years, NBFCs have grown at 17.91 %. With deeper permeation of NBFCs in the financial services fabric, RBI is bound to step-in. Recent failure of some NBFCs like IL&FS is another cause for concern. Historically, light touch regulatory design permitted NBFCs to perform a wider spectrum of activities than banks. Like peer-to-peer lending, account aggregation and micro-lending on scale. NBFCs also play a big role in delivery of last mile financial services including digital credit. By leveraging AI, machine learning and lower compliance costs, NBFCs can also dole out cheaper loans.  

Is this good for fintech?  Yes, we think so. Curating regulations (based on size and impact of a product or service) is a good way to regulate the tech ecosystem. It keeps large NBFCs and their fintech ambitions in check. Another example of a proportional regulation is Intermediary Guidelines, 2021. Where ‘significant social media intermediaries' (which have more than 50 lakh registered users) must follow more stringent norms compared to other intermediaries. This regulatory framework lowers the compliance burden on smaller players, while keeping large tech companies in check. 

📝 Another twist in the Aadhaar KYC tale   

The Unique Identification Authority of India (UIDAI) notified the Aadhaar (Authentication and Offline Verification) Regulations, 2021 (New Aadhaar Rules) on 8 November 2021. The New Aadhar Rules replace the Aadhaar (Authentication) Regulations, 2016. One of the key additions in the New Aadhar Rules is the process for offline verification of Aadhaar numbers (oKYC). Unlike eKYC (Aadhaar OTP and biometric based authentication), oKYC enables Aadhar number verification without interacting with the UIDAI infrastructure. But how does the oKYC story evolve with the New Aadhaar Rules? Let's explore. 

Recap: UIDAI amended the Aadhaar laws in July 2019 to allow oKYC. And mentioned that the oKYC processes will be notified separately. UIDAI also clarified that an Aadhaar number holder can use any of these documents to prove the possession of Aadhaar number: 

  • Aadhaar letter: A UIDAI issued letter (in physical form) which has details of the Aadhaar number holder. 
  • e-Aadhaar: An electronic copy of the Aadhaar letter, which is digitally signed by the UIDAI. 
  • Aadhaar Secure QR Code: A quick response code which is digitally signed by the UIDAI and contains details of the Aadhaar number holder. 
  • Aadhaar Paperless Offline e-KYC: An XML document containing details of the Aadhaar number holder, which is digitally signed by the UIDAI. 

In addition, UIDAI also prescribed processes to conduct oKYC using QR Code and XML files (on its website). But one piece of the puzzle was missing. UIDAI had not prescribed these oKYC processes in any of its regulations. And the New Aadhaar Rules address this gap.  

What changes:  The New Aadhar Rules enable offline verification seeking entities (OVSEs) to conduct oKYC through the four documents mentioned above. The rules also impose some additional obligations on OVSEs. Like OVSEs must use a person's Aadhaar data only for the purposes that the person has consented to. And delete the data if the person revokes her consent. OVSEs must also communicate the success or failure of the oKYC to the Aadhaar number holder. The rules also empower UIDAI to audit OVSEs and take penal action against OVSEs for violations. 

Unresolved issues: The New Aadhar Rules are a positive step to clear the muddled waters of the oKYC. But there are some issues which still remain unaddressed. Like it is not clear how an Aadhaar number holder will share his e-Aadhaar or Aadhaar secure QR code with OVSEs. The QR code has low resolution photographs. And OVSEs may have to introduce some additional checks to be sure of their customer's identity and avoid frauds. The process for offline paper-based verification (using the Aadhar letter) is not clear. Until these issues are addressed, the conundrum around oKYC is far from being resolved. 

📈   Get on the acquisition train, for some quick gains   

Investments in the financial services space are picking up pace. Cred, a company known for enabling credit card payments (and quirky ads) is entering the prepaid payment instruments (PPI) business through an acquisition. Even the Tatas are keen to enter the payments space via an acquisition. Interestingly, even existing license holders are favouring acquisitions to bolster their offerings. PayU acquired BillDesk in 2021 and Pine Labs acquired Qwikcilver in 2019. PayU has also acquired Paysense – a digital lending platform, and Wibmo – a back-end tech provider to banks. 

Why jump on the bandwagon? If you are an unregulated entity and want to enter regulated walled gardens – the financial services space – you can do one of two things. One – build, fulfil the eligibility criteria, submit all declarations and forms, and wait for the RBI to approve your application. Or two – buy out an existing licensed player, get the license instantly and go on with your business. Afterall, buying is easier than navigating bureaucratic red tape. Applying for a license with the RBI is a long and cumbersome process. And given how fast the fintech market in India is moving, a delayed license may not be worth the wait.  

What else does the acquisition route offer? Beyond licensing hurdles, there are also compelling business use-cases of the acquisition route. For instance, in the payments space, an acquisition can help a company expand its reach. Like companies can move from offline payments to online payments or vice-versa; and from merchant side to customer side or vice-versa. And it can do all this without re-inventing the wheel. As regulations become stricter, compliance costs increase. Which can make survival of smaller players difficult and lead to consolidation. Getting hands on an existing tested product and a loyal user base make investments an even sweeter deal. Acquisition of a payments company also means acquisition of payments data. Which can act as flywheel for launch of other products.  

🌟  An unregulated digital gold mine of opportunity 

SEBI is on a prohibition spree. It recently forbade registered investment advisers and registered debenture trustees from dealing in unregulated products like digital gold. Before this, in September 2021, it had prohibited stock brokers from offering any digital gold products. SEBI believes that offering unregulated digital gold products violates its regulations. And it can put investors at risk. But till now, the ban is limited to SEBI registered entities. So unregulated entities are free to deal in digital gold. 

What is digital gold?  Digital gold is online purchase of the yellow metal for as little as Rs. 1. The sellers like MMTC-PAMP India and Augmont store the purchased gold in insured vaults (on behalf of the customers). Once customers accumulate enough digital gold, they can opt for physical delivery of the gold. Fintech players like PayTM, GooglePay, PhonePe and Mobikwik offer digital gold on their platforms. 

What makes digital gold glitter?  Digital gold has become a popular investment option. It eliminates the downsides of investing in physical gold. Like safe-keeping, quality control and making charges. A gold ETF, gold mutual fund or sovereign gold bond (SGB) also offers similar benefits to digital gold. But these alternatives have these drawbacks: 

  • Gold ETFs and SGBs: To buy and sell gold ETFs or SGB, a demat account is necessary – which most Indians do not have. SGBs also have a lock-in period of 5 years. 
  • Gold Mutual Funds: Investment in gold mutual funds is possible without a demat account, but the commission (charged by mutual fund houses) is high.  

In contrast, digital gold products can be easily bought and sold at any time without opening a demat account, paying high fees or lock-in periods. They also provide more flexibility in terms of pledging the gold to seek a loan, which is missing in case of Gold ETFs and Gold Mutual Funds. 

Is SEBI's approach correct?  There are legitimate concerns about investors being duped by fly by night operators. But banning registered entities from dealing with digital gold products may cause more harm than good. For instance, investment advisers will not be able to guide their clients towards trust-worthy digital gold providers because of SEBI's ban. And these clients may end up buying digital gold from unreliable sources. So, SEBI must consider recognising  digital gold products and lay down necessary safeguards. SEBI's prohibition shrouds the product with regulatory uncertainty. And makes investors hesitant. SEBI and RBI are reportedly already thinking on these lines. 

The Palate Cleanser 🍧  

🍧  WindowSwap   WindowSwap lets you open a window anywhere in the world.  Yes. I mean it. Literally. So, look outside a window in Wellington, New Zealand or Times Square, New York. Go on. 

The Dessert  🍰

🚀   Paytm IPO: a defining moment for Indian fintech space 

The recent fintech IPOs of PayTM, Policy Bazaar, Fino Payments Bank and Mobikwik  are a turning point for the fintech space. Out of this bunch, Paytm's IPO stands out. First, it is the biggest Indian IPO ever. Second, it offers an opportunity to Paytm investors (like Alibaba and SVF) to offload their investments. Which reinstates investor trust in fintech start-up space. Third, Paytm plans to reach more customers and merchants through the IPO proceeds. Which is great news for digitisation of financial services. 

Time-travel through Paytm's  journey: Paytm started in 2010 as a phone balance top-up platform. In 2012, it launched a payment gateway, And started offering digital wallets in 2014. And gave the nation a tagline of paytm karo. In 2015, RBI licensed Paytm to run a payment bank. In 2016, Paytm soared higher with the demonetisation wave. Fast forward to the present, Paytm is a super-app. It lends, insures, offers digital games, enables payments, and operates as an e-commerce entity. Depending on regulatory mood, it may also offer cryptocurrency investments. 

A sweet triumph: If trust is the basis of a successful business, an IPO is the culmination of that trust. The fact that fintech startups (like Paytm) command enough confidence to be publicly listed is promising. It's a win for the fintech sector.  

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