FINTECH REGULATION

DR.SELVAMOHANA K
Unit 1
 COURSE OBJECTIVES

 To learn about Laws and Regulation

 To acquire the knowledge of Regulations of Fintech firm and
their role in Market.
 UNIT I INTRODUCTION
• The Role of the Regulators,
• Equal Treatment and Competition,
• Need for a regulatory assessment of Fintech
• India Regulations,
• The Risks to Consider
• Regtech and SupTech,
• The rise of TechFins,
• Regulatory sandboxes,
• Compliance and whistleblowing.
 Fintech(Financial Technology)-Meaning

• Financial technology (FinTech) refers to the technology used for

providing financial product or service to financial markets.
• Eg: online Banking apps, Digital Wallets, UPI(gpay/paytm),
cryptocurrencies etc.
• Fintech makes financial services more accessible, faster, and often cheaper.
• Using technology, fintech apps can access more data, process payments
faster, and improve security.
• The rise of AI and machine learning is likely to enhance the benefits of
fintech even further.
 Fintech Regulation-Meaning

• Fintech regulation refers to rules, laws, and guidelines that govern financial
technology (fintech) companies operations.
• These regulations aim to ensure stability, security and fairness of the
financial system.
• And fostering innovation and protecting consumers.
Leading fintech companies
 Phonepe,
 Razorpay,
 Zerodha,
 Groww,
 Policybazaar,
 visa etc
 Who regulates Fintech operations in India?

 Reserve Bank of India (RBI): Oversees the banking sector and monetary
policy.
 Securities and Exchange Board of India (SEBI): Regulates the stock
market and other securities markets.
 Insurance Regulatory and Development Authority of India
(IRDAI): Oversees the insurance industry.
 Competition Commission of India (CCI): Ensures fair competition in the
financial sector.
 Pension Fund Regulatory and Development Authority (PFRDA).
 Role of Fintech Regulators
• Financial regulators act as watchdogs, ensuring that the financial system
operates in a stable, fair, and efficient manner, protecting both consumers
and the economy.
• They achieve this by enforcing rules, monitoring financial institutions, and
investigating violations.
• Following are the major roles of Fintech Regulators.

 Maintaining Financial Stability

 Protecting Consumers
 Ensuring Market Integrity
 Enforcing Compliance
 Promoting Fair and Competitive Markets
Maintaining Financial Stability:
• Regulators assess risks like excessive leverage and systemic
failures.
• And implement measures like capital requirements, liquidity
ratios, and stress tests to ensure financial stability and
adequate preparation for withstanding shocks.
Protecting Consumers:
• Protecting consumers from unfair or deceptive practices.
• Enforcing rules on consumer credit, insurance policies, and
investment products.
• And to investigate complaints, impose penalties, and take
other measures to ensure fair treatment of consumers.
Ensuring Market Integrity:
• Ensuring financial Markets fairness, transparency, and efficiency.
• Implement regulations to prevent insider trading, market manipulation,
and other fraudulent activities.
• Ensuring that information is adequately disclosed to investors, allowing
them to make informed decisions.
Enforcing Compliance:
• Regulators have power to investigate and impose penalties on financial
institutions and individuals who violate rules and regulations.
• This can include fines, suspensions, or even revocation of licenses.
Promoting Fair and Competitive Markets:
• Regulators strive to ensure that financial markets are competitive and
that all participants have a fair opportunity to compete.
• They may review and approve mergers and acquisitions, and they may
also take action to prevent monopolies or anti-competitive practices.
 Equal Treatment and Competition in Fintech Regulation

• To ensure equal treatment and competition in fintech regulation,

policymakers should focus on creating a level playing field where all firms,
regardless of their size or origin, are subject to comparable regulations for
similar activities.
• This includes adopting a principle of "same activity, same risk, same
approach"
1.Level Playing Field
 Activity-based regulation
 Entity-based regulation
 Harmonization
 Risk-based approach
2. Promoting Competition
 Openness to new entrants
 Preventing anti-competitive practices
 Data portability and interoperability
 1. Level Playing Field
Activity-based regulation
Refers to rules applied for specific financial activities, regardless of
who performs them,
For example, a payment processing activity regulated in the same way
for a bank and a non-bank fintech company under activity-based
regulation. (Muthoot finance may have same rules from SBI for Gold
loan cash payments)
Entity-based regulation:
Entity-based regulation targets specific types of financial institutions.
Entity-based regulation might have unique rules for banks versus non-
bank payment processors. (Muthoot finance may have different rules
from SBI for providing credit cards)
Harmonization:
Policy actions should strive for consistency and avoid unwarranted regulatory
discrepancies, Ensuring that similar activities are subject to comparable rules,
while also considering the potential for regulatory arbitrage. (Eg: Tax
optimization, Geographic Relocation)
Risk-based approach:
Regulations should be proportionate to the risks associated with different
fintech activities, ensuring that the regulatory burden is appropriate for the
level of risk involved.
 2. Promoting Competition
Openness to new entrants:
Regulatory frameworks should be designed to encourage competition and
innovation, rather than creating barriers to entry for new fintech
companies.
Preventing anti-competitive practices:
Authorities should actively monitor for and address anti-competitive
practices, such as predatory pricing (the pricing of goods or services at
such a low level that other firms cannot compete and are forced to leave
the market.) or exclusive agreements(buyer commits to purchasing
exclusively from the designated seller), that could stifle(to stop something
happening, developing or continuing) competition in the fintech space.
Data portability and interoperability:
Regulations that promote data portability (Data on “Account balance”
transferred between Gpay and Bank account) and interoperability
(Both the UPI and Bank manages its operations between the
applications) can enhance competition by allowing consumers to easily
switch between different fintech providers and services.
 Need for a regulatory assessment of Fintech

A regulatory assessment is crucial for fintech companies for building a

sustainable and trustworthy fintech ecosystem. It includes ensuring

 Consumer Protection
 Financial Stability
 Combating Financial Crime
 Establishing Trust and Credibility
 Level Playing Field
 Facilitating Growth
 Risk Mitigation
Consumer Protection:
Regulations help protect consumers from fraud, data breaches,
and unfair practices, ensuring they can trust and utilize financial
services safely.
Financial Stability:
By overseeing fintech activities, regulators can help prevent
systemic risks and maintain the overall stability of the financial
system.
Combating Financial Crime:
Regulations like AML (Anti-Money Laundering) and KYC
(Know Your Customer) are vital for preventing money
laundering, terrorist financing, and other financial crimes.
Establishing Trust and Credibility:
Compliance with regulations builds trust between fintech
companies and their customers, as well as with other stakeholders
like investors and partners.
Level Playing Field:
Regulations ensure that all companies, including fintechs, adhere to
the same standards, promoting fair competition.
Facilitating Growth:
Compliance can actually help fintechs scale their operations by
enabling them to offer new products, expand into new markets, and
attract investment.
Risk Mitigation:
A robust regulatory assessment helps fintechs identify and address
potential risks, including those related to cybersecurity, data
privacy, and operational resilience.
 Fintech-India Regulations
• FinTechs are being continuously monitored and evaluated by the financial
services regulators to keep up with technological and entrepreneurial flux.
• They are now expanding their focus from entity-based regulation to activities-
based regulation.

FINTECH OFFERINGS IN INDIA

 Unified Payments Interface(UPI)-gpay/phonepe
 Bharat Bill Payment System-Electricity, water, gas, telephone, and DTH
services
 Digital lending-Bank Bazaar, Paisa Bazaar
 Payment Gateways-Paypal/amazon pay
 Prepaid Instruments-Debit cards/mobile wallets/Paytm
 Neo-banking or digital banking services
 Virtual Digital Assets-Cryptos/non-fungible tokens(art work/collections etc)
(legally defined under Finance act 2022)
Indian financial services regulators have introduced technology driven
initiatives in the FinTech regulatory space to support the industry, which
include
 “PRAVAAH” portal
 RBI Retail Direct portal
 FinTech Repository
 “Finquery” initiative

ACTIVITY : HAVE A CHECK OF THESE PORTALS AND EXPLORE

DIFFERENT SERVICES RENDERED.
• The portal was launched by the Reserve Bank of India in May 2024.
PRAVAAH aims to streamline the regulatory processes for banks and
financial institutions. It facilitates the submission, validation, and
authorization of various regulatory applications.
• The RBI Retail Direct portal is used by individual investors to directly buy
and sell government securities (G-secs) online, It eliminates the need for
intermediaries like banks or brokers, allowing investors to open a "Retail
Direct Gilt Account" (RDG Account) directly with the Reserve Bank of
India.
• The FinTech Repository is a centralized hub designed to capture crucial
information about FinTech entities, their activities, and technology usage.
• The Finquery portal is designed to provide a dedicated platform for
fintech companies to interact directly with the RBI. This direct
communication channel aims to streamline the process of addressing
regulatory issues, enhancing transparency in the regulatory
framework, and fostering innovation in the fintech space.
 Key laws & regulations that govern FinTech
businesses in India.

India, fintech businesses operate under a combination of

financial sector laws, RBI regulations, SEBI rules, IT/data
protection laws, and sector-specific guidelines.
• Reserve Bank of India (RBI) Regulations
• Securities and Exchange Board of India (SEBI)
Regulations
• Insurance Regulatory and Development Authority
of India (IRDAI)
• Information Technology & Data Protection Laws
• Other Relevant Laws
1.Reserve Bank of India (RBI) Regulations

The RBI is the primary regulator for most fintechs (especially payments,
lending, and NBFC-related activities). Key frameworks include:
• Payment and Settlement Systems Act, 2007 – Governs payment
systems, payment gateways, wallets, UPI, etc.
• Master Directions on Prepaid Payment Instruments (PPIs) –
Rules for wallets, gift cards, and prepaid instruments.
• Master Directions on NBFC–P2P Lending Platform (2017) –
Regulates peer-to-peer lending platforms.
• RBI Digital Lending Guidelines (2022, updated 2023) – Covers
loan disbursal, transparency, data storage, and recovery practices.
• RBI Guidelines on Payment Aggregators and Payment Gateways
(2020) – Licensing, capital, KYC, and compliance requirements.
• Foreign Exchange Management Act (FEMA), 1999 – Governs
cross-border payments and remittances.
Securities and Exchange Board of India (SEBI)
Regulations

Relevant for fintechs dealing with wealth-tech, robo-

advisory, investment platforms, and stock broking:
• SEBI (Investment Advisers) Regulations, 2013 –
Regulates robo-advisory and financial advisory platforms.
• SEBI (Research Analysts) Regulations, 2014 – Governs
research/advisory fintech firms.
• SEBI (Crowdfunding framework – proposed) – For
investment-based crowdfunding (still under consideration).
• SEBI guidelines for online bond/equity trading
platforms – Applicable to wealth-tech startups.
Insurance Regulatory and Development
Authority of India (IRDAI)
For InsurTech companies:
• Insurance Act, 1938 – Primary law for
insurance business.
• IRDAI (Insurance Web Aggregators)
Regulations, 2017 – Governs insurance
marketplaces/aggregators.
• IRDAI Sandbox Guidelines – For testing
innovative insurance products and tech.
Information Technology & Data Protection Laws
Fintechs handle sensitive personal and financial data, so IT
regulations are critical:
• Information Technology Act, 2000 (and amendments) –
Cybersecurity, digital signatures, and data protection.
• Information Technology (Reasonable Security Practices
and Sensitive Personal Data) Rules, 2011 – Governs how
fintechs handle sensitive customer data.
• Digital Personal Data Protection Act, 2023 (DPDP Act) –
India’s new data protection law, mandates consent-based
processing of personal data.
• CERT-In Directions, 2022 – Requires reporting of cyber
incidents within 6 hours.(Computer Emergency Response
Team)
Other Relevant Laws
• Companies Act, 2013 – Governs company incorporation,
governance, and compliance.
• Prevention of Money Laundering Act (PMLA), 2002 –
KYC/AML compliance for fintechs.
• Consumer Protection Act, 2019 – Protects users of digital
financial services.
• Indian Contract Act, 1872 – Governs digital contracts,
clickwrap agreements, and lending terms. (clicking serves as a
digital signature, indicating acceptance of the agreement)
• Competition Act, 2002 – Prevents anti-competitive practices
in fintech.
• GST Act, 2017 – Indirect tax implications for fintech
services.
 Risk to be considered
Fintech regulation faces several key risks including
compliance complexity, cyber security vulnerabilities,
financial instability, and reputational damage.

1. Regulatory Compliance Risks

2. Cyber security Risks
3. Financial Risks
4. Reputational Risks
5. Strategic Risks
 1. Regulatory Compliance Risks:
Complex and Evolving Regulations:
Fintech companies operate in a dynamic regulatory landscape, with
different rules and requirements across various jurisdictions. This
complexity can be challenging for fintechs to navigate, especially those
operating internationally.
KYC/AML Compliance:
Fintechs must adhere to Know Your Customer (KYC) and Anti-Money
Laundering (AML) regulations to prevent financial crimes. These
regulations can be particularly challenging for fintechs due to their
reliance on digital onboarding and cross-border transactions.
Licensing and Authorization:
Scaling fintechs may need to acquire banking licenses, which involves
increased regulatory scrutiny and potentially higher compliance costs.
 2. Cyber security Risks:
Data Breaches:
Fintech companies handle vast amounts of sensitive financial data,
making them attractive targets for cyber attacks. Data breaches can
result in significant financial losses, reputational damage, and legal
penalties.
Cyber attacks:
Fintechs are vulnerable to various cyber attacks, including phishing,
ransom ware, and malware.
Third-Party Risk:
Fintechs often rely on third-party service providers, introducing
additional cyber security risks if these providers are not adequately
secured.
 3.Financial Risks:
Credit Risk: Fintechs providing lending services face the risk of borrower
defaults.
Liquidity Risk: Maintaining sufficient cash reserves to meet short-term
obligations is crucial in a volatile market.
Fraud Risk: Fintechs are susceptible to various types of fraud, including
money laundering, which can lead to financial losses and reputational
damage.
4. Reputational Risks:
Negative Publicity:
Data breaches, financial instability, or regulatory violations can lead to
negative publicity and loss of customer trust.
Damage to Brand Image:
A fintech company's reputation can be severely damaged by negative events,
impacting its ability to attract customers and investors.
 5.Strategic Risks
Competition:
• The fintech landscape is highly competitive, with new players
constantly entering the market.
Market Volatility:
• Fintechs are exposed to market fluctuations and economic
downturns, which can impact their financial performance.
Lack of Tech Expertise:
• Fintechs may face challenges in recruiting and retaining skilled tech
professionals.
 REGTECH AND SUPTECH
• Regulatory technology- RegTech describes technology, particularly
information technology, used by fintech companies for maintaining
regulatory compliance, with more efficiency and lower cost.
Eg: KYC/AML
• Supervisory technology, often known as SupTech used by regulators, that
assist financial supervisory authorities in managing regulatory
compliance and helps monitoring financial markets.
Eg: RBI’s CIM-centralized information management./IRDA’s-SUPTECH
Dashboard.

REGTECH=Tech for Fintech companies

SUPTECH= Tech for Regulators to supervise financial market.
 The Rise of TechFins
Introduction
• FinTechs = Financial + Technology companies (startups/banks
using tech to deliver financial services).
• TechFins = Technology giants (like Google, Amazon, Apple,
Facebook, Alibaba, Tencent) entering finance.
• The term “TechFin” was popularized by Jack Ma (Alibaba’s
Ant Financial).
 FinTech (Finance TechFin (Tech →
Aspect
→ Tech) Finance)
Financial services
Technology firms
Origin firms using
entering finance
technology
Google Pay,
Paytm, PhonePe,
Examples Amazon Pay, Apple
LendingKart
Pay, Ant Financial
Technology
Strength Financial expertise expertise + massive
user base
Embedding finance
Innovating financial
Focus into tech
products
ecosystems
Reasons for the Rise of TechFins
• Large customer base – Tech companies already
have millions/billions of users.
• Data advantage – They collect user data (search,
shopping, social, browsing).
• Trust & convenience – Users already rely on them
for daily life (shopping, communication, etc.).
• Regulatory openings – Many countries allow non-
bank players to offer payment & lending solutions.
• Shift to digital economy – COVID-19 accelerated
e-payments, digital lending, and e-commerce.
Examples of TechFins Worldwide
• Google Pay (Alphabet inc) – UPI, Wallets,
Loans.
• Apple Pay – Tap-to-pay, Apple Card.
• Amazon Pay – Payments, credit, insurance.
• Alibaba / Ant Group – Alipay, wealth
management, lending.
Importance of TechFin
• Expanded Access to Financial Services: By integrating financial products
seamlessly into their existing platforms, they can reach previously
underserved populations, promoting financial inclusion and empowering
individuals with access to banking, payments, and investment services.
• Seamless Integration: Tech companies already use, like social media or
e-commerce platforms, can offer financial services like payments or
budgeting tools within their existing apps.
• Enhanced Security: Techfin companies often have robust security
measures in place, potentially offering a safe and familiar environment for
financial transactions.
• Faster Adoption: By leveraging existing user bases of tech giants,
techfin can accelerate the adoption of new financial services.
• Focus on User Experience: Techfin companies prioritize user-
friendly interfaces and intuitive designs, making financial tools
more accessible and engaging.
• Increased Financial Inclusion: Fintech and TechFin tools can
reach a wider audience compared to traditional financial institutions.
Mobile banking apps and peer-to-peer lending platforms can bring
financial services to underserved communities, boosting financial
inclusion and participation in the economy.
• Democratization of Finance: With user-friendly interfaces and
potentially lower fees, Fintech and TechFin can empower individuals to
take more control of their finances. Robo-advisors(Motilal oswal/grow)
can make investing more accessible, while mobile budgeting tools
can promote better financial literacy.
• Rise of the Cashless Society: As digital payment solutions become
more convenient and secure, cash usage may decline. This could lead to
a faster and more efficient flow of money within the economy.
• Evolving Financial Products and Services: Innovation in Fintech and
TechFin will likely lead to the creation of new financial products and
services tailored to specific needs. This could include personalized
insurance plans, AI-powered financial planning tools, and alternative
investment options.
• Enhanced Security and Fraud Prevention: TechFin companies often
prioritize robust security measures, potentially leading to a decline in
financial fraud. Additionally, advancements in data analytics can help
identify and prevent suspicious activity.
Risks and Challenges
• Data privacy concerns.
• Monopoly power of Big Tech firms.
• Regulatory challenges – are they banks or
tech firms?
• Cybersecurity risks with massive user data.
 Regulatory sandboxes
Introduction
• A Regulatory Sandbox (RS) is a controlled environment set
up by regulators.
• It allows FinTech/TechFin companies to test new products,
services, or business models with real customers, under the
supervision of regulators, and with relaxed rules for a
limited period.
• Regulatory Sandboxes act as a “safe playground” where
innovation meets regulation, ensuring new financial
technologies are tested in a controlled, risk-free environment
before full-scale adoption.
Objectives of a Regulatory Sandbox
• Encourage innovation in financial services.
• Ensure consumer protection while testing
new ideas.
• Reduce time-to-market for startups.
• Help regulators understand emerging
technologies.
• Support financial inclusion and economic
growth.
Key Features
• Testing with safeguards → Limited users, limited duration.
• Regulatory relaxation → Some rules eased temporarily.
• Close monitoring → Regulator observes risks & benefits.
• Exit strategy → Product can exit sandbox to full market
OR be stopped if risky.
Examples
• Singapore (MAS) → Strong sandbox for blockchain &
payments.
• Australia (ASIC) → FinTech-friendly environment.
• India (RBI) → Regulatory sandbox launched in 2019
(focus on payments, lending, KYC, blockchain).
Benefits
• For Startups: Safe space to test without full compliance
cost.
• For Regulators: Learn about risks of new tech early.
• For Consumers: Access to innovative products safely.
Challenges
• Limited scale – testing on small user base only.
• Regulatory uncertainty – unclear rules after sandbox
exit.
• Possible misuse – firms may exploit relaxed rules.
• Global mismatch – different countries have different
standards.
 Compliance and whistleblowing

• FinTech compliance means adhering to regulatory laws that

guide business models and financial technologies. These
guidelines help protect consumer’s interest and investor’s
capital and help businesses to stay out of trouble.
Compliance in Fintech:
Regulatory Frameworks:
Fintech companies operate within a complex web of regulations,
including those related to anti-money laundering (AML), know
your customer (KYC), data protection (like GDPR), and
cybersecurity.
AML/KYC:
Robust AML and KYC procedures are essential to prevent
financial crimes, including money laundering and fraud.
Data Protection:
Fintechs handle vast amounts of sensitive customer data,
requiring strict adherence to data privacy regulations and robust
data governance frameworks.
Cybersecurity:
Protecting against cyber threats is paramount for maintaining
customer trust and preventing financial losses.
Why Compliance is Important in FinTech
• Protects consumers – Ensures safety of money and data.
• Prevents fraud & scams – Reduces financial crime.
• Maintains financial stability – Prevents risky practices.
• Builds trust – Customers feel safe using the service.
• Supports innovation legally – Firms grow without breaking
rules.
Whistleblowing in Fintech:
• Whistleblowing is the act of revealing information about
wrongdoing within an organization.
• In fintech, this specifically relates to activities that violate
laws, regulations, ethical standards, or company policies.
• Whistleblowers can be employees, contractors, or anyone with
knowledge of wrongdoing within a fintech company.
Importance of Whistleblowing in FinTech
• Detects fraud & scams early → e.g., insider trading, fake
KYC.
• Promotes accountability → Employees know they can’t hide
misconduct.
• Protects consumers → Stops unfair practices.
• Supports compliance → Regulators get accurate information.
Whistleblower Protection act
• Many countries have laws that protect whistleblowers from
retaliation (firing, harassment).
• Example:
– India → Whistle Blowers Protection Act, 2014.
– US → Dodd-Frank Act encourages whistleblowing in
finance.
• Companies often set up confidential reporting channels
(emails, hotlines, portals).
THANK YOU