The calendar year of 2022 was a year of challenges for fintechs in India, with funding falling to levels worse than pre Covid-19 levels. However, despite such challenges, there is a sense of cautious optimism in relation to the fintech industry in 2023 and in the years ahead.1 The Reserve Bank of India ("RBI") has continued undertaking measures to protect market players with the aim of providing further stimulus to this expected growth in the first calendar month of 2023.

With the digitisation of payments still being in primary focus, the growth of the popularity of the Unified Payments Interface ("UPI") (wherein transactions hit a record high of INR 782 crore (USD 95 million)) has been a welcome development in this regard.2 Further, in light of increased adoption of UPI extending beyond the shores of India (more specifically, to 10 countries), and an increase in the grants provided by the Central Government to this space, the fintech sector looks set to have some interesting times ahead, with the financial year of 2023 coming to a close in the next couple of months.

This newsletter highlights the key developments and measures as well as other developments in the Indian fintech space from January 01, 2023, to January 31, 2023.


RBI puts NUE licensing on hold

The RBI has reportedly put the issuance of new licenses under the New Umbrella Entity ("NUE") framework on retail payment systems in India on hold.3 The NUE framework was launched by the RBI in August 2020 with the aim of incorporating an entity to essentially set up, manage and operate new payment systems in the retail space in India,4 as an alternate mechanism to the National Payments Corporation of India ("NPCI") which could also reduce the risks of overload on UPI infrastructure operated by the NPCI. The NUE framework would help participating entities gain greater autonomy in processing digital payments and establish their presence in the financial services ecosystem in India.

In pursuance to this framework, several tech giants applied for a license but the RBI felt that none of the applicants proposed a novel idea or breakthrough, as most of the suggestions were similar to that of the NPCI. However, this isn't the first time the NUE framework has been put on hold, as in August 2021, owing to user data safety concerns, the RBI put a hold on allowing private players from creating and operating digital payment platforms in India.

RBI's Regulatory Sandbox allows six entities to test fintech products from February 2023

The RBI by way of a press release dated January 05, 2023, has announced the applications selected for the testing phase of the Fourth Cohort under their Regulatory Sandbox ("Regulatory Sandbox").5 The theme of this edition's Regulatory Sandbox is 'prevention and mitigation of financial frauds', which was launched by the RBI in October 2021.

A Regulatory Sandbox refers to the testing of new products or services in a controlled environment for which the concerned regulator, in this case, the RBI, may permit certain relaxations for the limited purpose of the testing.

The RBI believes that the benefit of a Regulatory Sandbox is that it allows all stakeholders, including the regulator, the innovator, the deployer and the final user of the technology to conduct field tests and collect evidence on the benefits and risks of the innovation, while monitoring and containing its risks, if any.6

Under this Regulatory Sandbox, the RBI received nine applications out of which six entities have been selected for the testing phase with the following products – (i) a comprehensive surveillance mechanism for monitoring transactions and events from loan accounts on a continuous and real time basis (Bahwan Cybertek Pvt. Ltd.), (ii) an early warning system for credit monitoring and fraud identification (Crediwatch Information Analytics Pvt. Ltd.), (iii) risk based authentication solution aimed at providing a frictionless (without a one-time password ("OTP")) transaction experience for low value transactions based on risk assessment of users (enStage Software Pvt. Ltd. (Wibmo)), (iv) closed user group artificial intelligence/machine learning based solution which helps in card-not-present fraud detection (HSBC in collaboration with Wibmo), (v) lock the login form, payment form, ATM, point-of-sale ("PoS") machines and enable it only for the authorised user to initiate the transaction using their credentials via napID Zero-Factor Authenticator app (napID Cybersec Pvt. Ltd.), and (vi) a product that helps in address verification by running its proprietary artificial intelligence algorithms on non[1]personally identifiable data on subscriber usage, location signals and other such parameters to predict residential and office address of users (Trusting Social Pvt. Ltd).

These entities will be permitted to test their fintech products from February 2023.

UPI to be supported on international mobile numbers of ten countries

The NPCI has issued a circular dated January 10, 2023 ("Circular") allowing non-resident Indians ("NRIs") to access UPI on their international mobile numbers. As per the circular, NRIs operating non-resident external ("NRE") and non-resident ordinary ("NRO") bank accounts from ten countries i.e., Singapore, Australia, Canada, Hong Kong, Oman, Qatar, USA, Saudi Arabia, UAE and the United Kingdom, can access UPI services with their international mobile numbers. These NRE and NRO accounts shall be permitted to be used for receiving UPI services, subject to the member banks ensuring that these accounts are in adherence to the extant foreign exchange regulations and guidelines issued from time to time. The remitter/beneficiary bank must also ensure that all anti-money laundering checks and compliances are in place. The Circular further states that the NPCI will add to the list of countries in the future through an addendum to this Circular or separate NPCI guidelines.

Partner banks have been given time till April 30, 2023, to comply with the Circular.

Cabinet approved INR 2,600 crore (approximately USD 360 million) scheme for promoting RuPay debit cards and low-value UPI transactions

The Union Cabinet has approved an incentive scheme of INR 2,600 crore (approximately USD 360 million) for the promotion of RuPay debit cards and low-value BHIM-UPI transactions (person-to-merchant) for a period of one year from April 01, 2022. These incentives are in line with the Central Government's efforts to boost the digital payments ecosystem in India with a focus on promoting the use of payment platforms that are economical and user-friendly.

Under this scheme, the acquiring bank would receive a 0.4% incentive for RuPay debit card transactions at PoS and through e-commerce, with a cap of INR 100 (approximately USD 1.2) for 'other than industry programmes'. In the case of 'industry programmes', i.e., insurance, mutual funds, government, education, railways, agriculture, fuel, jewellery and hospitals, the acquiring bank would receive an incentive of 0.15 % with a cap of INR 6 (approximately USD 0.072). Similarly, the acquiring bank will receive an incentive of 0.25% for 'other than industry programmes' and 0.15% for 'industry programmes', in respect of payments made to merchants using BHIM-UPI for transactions up to INR 2,000 (approximately USD 25).

These incentives are in furtherance of the pervious financial year's INR 1,500 crore incentive to promote digital modes of payment which according to the Central Government has led to a 59% year-on-year growth in the total digital payment transactions and a 106% year-on year growth for BHIM-UPI transactions.

The Central Government believes that the incentive scheme will facilitate building a robust digital payment ecosystem as well as promote UPI Lite (an application to process low-value transactions of INR 200 and below) and UPI 123PAY (UPI payments on feature phones without internet connectivity) as economical and user-friendly digital payments solutions.

UIDAI enables 'Head of Family' based online address update in Aadhaar

The Unique Identification Authority of India ("UIDAI") has introduced a facility for updating addresses in Aadhaar online with the consent of the 'Head of Family' ("HoF"). The relatives of a resident, such as children, spouses, parents, etc., who may not have supporting documents in their own names to update address in their Aadhaar, can utilize the HoF-based online address to update their address in Aadhaar.

This service can be availed for INR 50 (approximately USD 0.60) and can be completed by presenting a proof of relationship document, such as a ration card, mark sheet, marriage certificate, passport, etc., stating the applicant's and the HOF's names along with the nature of their relationship, before the HOF authenticates the document using an OTP. If the resident cannot present a proof of relationship document, the UIDAI allows the resident to submit a self-declaration by the HOF in the UIDAI-required format. Any resident above the age of 18 can be an HOF for this purpose and can share their address with their relatives through this process.

Download : Recent Legal Developments And Market Updates In India - January 01, 2023 - January 31, 2023


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