We're witnessing the creative destruction of financial
services, rearranging itself around the consumer. Whoever does this
in the most relevant, exciting way using data and digital,
– Arvind Sankaran
Do you recall the last time you spoke to your bank? I can't.
I think it's because there is little to differentiate one bank's services from another. They offer the same services (at similar prices) through the same cookie cutter (and often glitchy) apps. Which is why they are being relegated to a behind-the-scene role for delivery of digital financial products (like lending and payments). Banking services are increasingly becoming commoditized. Fintechs, on the other hand, offer bespoke user experiences. They speak to you, in your language. They customise banking services and products. Like Fampay, which offers payment solutions specifically for teenagers. Which is why regulators are keen to give fintechs room to grow. Like this month, RBI allowed fintechs to access credit information from credit bureaus and created a dedicated fintech department.
Welcome to 2022, and a fresh new edition of FinTales. We repeat the familiar four-course fintech meal.
Appetizers: bite-sized updates about recent fintech developments.
Main-Course: meatier stories about access to credit reports and offline digital payments.
Palate Cleanser: a break from the fintech menu.
Dessert: RBI's new Fintech Department.
💳 Delayed and denied: Last year, the RBI asked merchants to purge card data by 1 January 2022. It suggested tokenization as the alternative to card storage. The industry was unprepared for this change. Many players asked the RBI for an extension. Finally, on 23 December 2021, the RBI relented. It extended the timeline to 30 June 2022. This article written by our fintech team speaks to the challenges of tokenization in greater depth.
🌎 UPI's western union: Cross-border payments, for the most part, have been clunky, slow and expensive. By partnering with Western Union (a cross-border payments giant), the NPCI wants to change this. Through their new offering, NPCI and Western Union will facilitate instant inbound remittances to bank accounts in India using UPI IDs.
🔎 Taxman's lens on cryptocurrency exchanges: It hasn't been a particularly 'happy' new year for cryptocurrency exchanges. The Directorate General of GST Intelligence found that several exchanges had been evading taxes, including WazirX. While WazirX was quick to pay the shortfall, other cryptocurrency exchanges argue that the GST law is unclear on treatment of cryptocurrency-cryptocurrency transfers. Most cryptocurrency exchanges already pay taxes on INR-cryptocurrency transactions.
🌟 All eyes on gold: SEBI is on track to set-up a regulatory framework for gold trading. In September 2021, it permitted recognised stock exchanges to set up gold exchanges. Gold will be traded on these exchanges as electronic gold receipts (EGRs) – a type of security. Now, it has notified the Vault Managers Regulations, according to which only authorised persons can act as vault managers for gold. Vault managers will play a crucial role in gold trading. They will collect physical gold from traders and issue EGRs in exchange.
🧮RBL's search ends with Google: RBL Bank has partnered with Google for its new digital banking product, Abacus 2.0. The bank plans to offer Abacus 2.0 as a one-stop solution to customers, and cross-sell new products without additional customer acquisition cost. The collaboration will rely on Google's existing suite of products like Google Cloud, Google Ads and Google Pay to augment the bank's new offering.
Main Course 🍱
🔐 A toe in the walled garden of credit information
Digital lending is a data play. The better a lender knows its borrowers, the more likely it is to get its money back. Which is why digital lending platforms use multiple data sets, like social media activity, e-commerce purchases, internet usage patterns etc. to underwrite borrowers. They have developed sophisticated underwriting tools (based on alternative data sets) to determine a borrower's creditworthiness. But, till now, they couldn't access more traditional data points like a borrower's credit score. This is set to change.
RBI relaxed the eligibility criteria to access credit information from credit bureaus (like Equifax and CIBIL) this month. Before this change, only regulated entities could access information from credit bureaus. Despite this restriction, a few banks and NBFCs shared credit bureau information with their (unregulated) fintech partners. This market practice caught RBI's eyes, and in 2019, it asked banks and NBFCs to stop. RBI has, however, changed its tack. Digital lending platforms can now directly access credit bureau information.
We discussed the impact of this change with Vardhan Koshal, founder of Tortoise, a platform for intuitive savings products. "This is a positive step," he said, "the data belongs to customers and the customers should have the choice to grant access to private players." "Cheaper and quicker access to credit bureau information can encourage innovative use-cases", he added. He also believes that RBI must allow access to credit bureau data to fintech companies who offer financial planning or financial health assessment products (and not just credit products).
Empirical studies indicate that combining alternative data with traditional credit bureau data is more accurate at predicting loan defaults (compared to a model which relies on one of these sources). So, access to credit bureau data will allow digital lending platforms to lower delinquencies and help lenders (banks/NBFCs) build healthier loan books. But it isn't a win-win. Democratizing access to credit information could introduce new data privacy concerns. Especially before the Personal Data Protection Bill is enacted. Till it is, RBI may need to step-in and control the end-use of this data.
💸 Payment bridges for Bharat
We've said it before, 'offline digital payment' sounds like an oxymoron. But with RBI's framework for facilitating small value offline digital payments, it may become a mainstream payment option. Offline digital payments can be used without telecom or internet connectivity. So, if implemented effectively, the framework can aid digital and financial inclusion.
We spoke to Asheeta Regidi, Associate Director, Policy at Cashfree about the impact of this framework. "The new offline payments framework can incentivise last-mile penetration of digital payments," she said, "particularly in rural and lower-tier areas where improper network/internet access has restricted adoption so far". "Digital payments are often the first step towards financial inclusion which can drive merchants and customers away from cash-based transactions and towards the formal financial economy, thereby also opening the gates to other financial services like savings, credit, etc.," she added.
Offline digital payments are not entirely new. In fact, UPI has been available offline since 2012. You can use it by simply dialling *99# on your phone, in any language (13 languages, to be precise). Offline digital payments were also part of the first cohort of RBI's regulatory sandbox. The RBI then conducted a 7-8 month pilot program to test offline payments of up to Rs. 200. With a successful pilot and successful exits of the regulatory sandbox's first cohort, the RBI felt encouraged to implement the framework.
The framework is an opportunity – to service first time digital payment users. Users can use form-factors like mobile devices, cards, or wallets to make offline digital payments. The regulatory sandbox's first cohort participants have already demonstrated how technologies like bluetooth, sound waves, NFC, or IVRS can be leveraged to develop creative solutions for such payments.
The framework tries to strike a balance between security and convenience. For instance, it imposes a transaction cap of Rs. 200 and a total cap of Rs. 2,000 (per instrument) to ensure security. And for convenience, it foregoes the additional factor of authentication (AFA) requirement.
But a larger question about adoption remains. While offline UPI was revolutionary, it does not have the numbers to show even after 8 years of its launch. There are multiple reasons behind *99# service not picking up. Like it's not free (it costs Rs. 0.50 per session), works only on GSM network, and the user experience isn't as clean as say usual UPI payments.
Palate Cleanser 🍧
Have you been typing away at your keyboard, dreaming about your next tea break? How about taking a drum lesson at Patatap. Enjoy.
💪 RBI gears up for fintech revolution
In the last FinTales edition, we hoped that regulators respond to PM's call-to-action for a fintech revolution. This month, RBI took a key step in this direction by creating a new Fintech Department. Through the department, RBI can identify prospects and snags for fintech. It can also harness fintech's potential for socio-economic goals (like financial inclusion).
We discussed the creation of the RBI's Fintech Department with Ram Rastogi, a digital payments expert. "There are over 2100 fintech companies in India, out of which more than 67% have been set up in the last five years. India's fintech segment has also seen exponential growth in funding; investments worth more than US$8 billion were received across various stages of investment in 2021," he said. "Looking at this exponential growth, RBI has taken a prudent step by establishing a dedicated department of fintech", he added.
Some priorities for the Fintech Department may be fast-tracking CBDC launch and crypto-assets. The Fintech Department must also build its RegTech capacity. For this, it could take a cue from foreign regulators like the UK Financial Conduct Authority, which is already leveraging blockchain and APIs to automate regulatory reporting processes. The Fintech Department should inculcate an all-inclusive vision for the fintech ecosystem (beyond banks and NBFCs). Specially while implementing mandates like card-on-file tokenisation. And include stakeholders like merchants and payment aggregators in the consultations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.