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.
RECENT LEGAL & REGULATORY DEVELOPMENTS
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-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.
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