Shaktikanta Das: Opportunities and challenges of FinTech
Keynote address by Mr Shaktikanta Das, Governor of the Reserve Bank of India, at FinTech
Conclave 2019, organized by NITI Aayog, New Delhi, 25 March 2019.
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I am extremely happy to participate in NITI Aayog's FinTech Conclave 2019 and share my
thoughts on the technological revolution that is shaping the future of finance. I am particularly
thankful to Shri Amitabh Kant, CEO of NITI Aayog for having invited me to such an august
gathering. As I understand, this Conclave is woven around the theme of Indian FinTech
ecosystem as well as steps required to help achieve the potential that the sector offers towards
growth, employment and inclusion. Given the wide canvas that FinTech encompasses, I have
organised my thoughts on some of the core issues in this area.
2. In general, FinTech stands for financial technology and describes technologically enabled
financial innovations. From 'start-ups' to 'big-techs' to established financial institutions, all the key
players are harnessing this technological edge along the financial services' value chain to provide
agile, efficient and differentiated experiences to the end-user. This movement has the potential to
fundamentally transform the financial-landscape where consumers will get to choose from a
larger set of options at competitive prices and financial institutions could improve efficiency
through lower operational costs. As a country that is determined to achieve universal financial
inclusion at affordable costs, this is a defining moment for us, and we should seize the
opportunity.
FinTech Experience in India
3. India has been at the forefront of this revolution. A recent global survey ranks India second in
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terms of FinTech adoption, with an adoption rate of 52 per cent . It is reported that there are as
many as 1218 FinTech firms operating in India which have created a large number of jobs. They
are also generating a healthy appetite for investment.
4. The Reserve Bank has over the years encouraged greater use of electronic payments so as
to achieve a "less-cash" society. The objective has been to provide a payment system that
combines the attributes of safety, security, enhanced convenience and accessibility, leveraging
technological solutions that enable faster processing. Affordability, interoperability, and customer
awareness and protection have also been other focus areas. Banks have been the traditional
gateway to payment services. However, with the fast pace of technological changes, this domain
is no longer the monopoly of banks. Non-bank entities are cooperating as well as competing with
banks, either as technology service providers to banks or by directly providing retail electronic
payment services. The regulatory framework has also encouraged this enhanced participation of
non-bank entities in the payments domain.
5. In recent years, a focussed effort has been made to develop a state of the art national
payments infrastructure and technology platforms, be it Immediate Payments Service (IMPS),
Unified Payments Interface (UPI), Bharat Interface for Money (BHIM), Bharat Bill Pay System
(BBPS), or Aadhaar-enabled Payment System (AePS). This has changed the retail payments
scenario of the country. The total volume of retail electronic payments witnessed about nine-fold
increase over the last five years.
6. Let me now mention some numbers with regard to digital modes of payment. The NEFT
system handled 195 crore transactions valued at around Rs.172 lakh crore in 2017-18 growing
by 4.9 times in terms of volume and 5.9 times in terms in terms of value over the previous five
years. Similarly, the number of transactions carried out through credit and debit cards in 2017-18
was 141 crore and 334 crore, respectively. Prepaid payment instruments (PPIs) recorded a
volume of about 346 crore transactions, valued at Rs.1.4 lakh crore. Thus, the total card
payments, in volume terms, stood at 52 percent of the total retail payments during the year
2017-18.
7. Developments in the spheres of banking technology and trade finance have been
commendable as well. Alternative models of lending and capital raising are coming up and have
the potential to change the market dynamics of traditional lenders and the role of traditional
intermediaries. Crowd-funding, which entails raising external finance from a large group of
investors, is at a very nascent stage in India. The peer-to-peer (P2P) lending for which RBI has
issued Master Direction in October 2017 has the potential to improve access to finance for small
and medium enterprises. Eleven entities have been licensed to operate P2P platform. The
Reserve Bank has also granted licenses and permitted seven purely digital loan companies
(NBFCs) to commence operations. Although they are purely digital players operating through
mobile applications, we have ensured that they have at least one physical presence for
customers to reach out to in case of need.
8. Furthermore, seven payment banks have commenced operations. These technology-led
banks use FinTech, both while onboarding customers as well as while carrying out operations.
9. Invoice trading is another nascent area of FinTech application in India. It assists MSMEs which
often have working capital and cash flow problems due to delayed payments. The Reserve Bank
has set up the Trade Receivables Discounting System (TReDs), which is an innovative financing
arrangement where technology is leveraged for discounting bills and invoices. Three entities
have been authorised for this purpose and the volumes are slowly gaining traction.
10. Another initiative has been laying down a regulatory framework for Account Aggregators (AA).
A total of five entities have been given in-principle approval as NBFC-AA and are expected to
commence their operations during 2019-20.
11. To further deepen digital payments and enhance financial inclusion through FinTech, the
Reserve Bank of India (RBI) has also appointed a five member committee under the
chairmanship of Shri Nandan Nilekani.
12. While opening a new world of opportunities, the FinTech revolution has its own share of risks
and challenges for the regulators and supervisors. Early recognition of these risks and initiating
action to mitigate the related regulatory and supervisory challenges is key to harnessing the full
potential of these developments. I would, therefore, like to give a bird's eye view of these
opportunities, risks and challenges, especially in the Indian context as also the policy roadmap
that we have in mind.
Opportunities, Risks and the Way Forward
Let me first highlight the opportunities in the area of digital onboarding and financial inclusion.
Digital onboarding and financial inclusion
13. There are two broad areas that merit attention in the Indian context: the first is regarding
improving the accessibility of financial platforms using FinTech; and the second is about
analysing potential risks that may arise out of FinTech adoption. Designing suitable financial
products that cater to specific needs of the financially excluded population, digital onboarding and
boosting the quantum of investments are vital in achieving the first objective. Effective utilisation
of Aadhaar eco-system may provide incentives for the people to adopt digital platforms as it is
happening in the case of direct benefits transfer (DBT). The central KYC registry is a significant
step in this regard - about 100 million KYC records have already been uploaded onto this
platform. We also need to ensure multi-lingual financial literacy and a robust grievance redressal
machinery to effectively handle inter-regional disparities and to offer online dispute resolutions.
RegTech and SupTech
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14. As regards potential risks and their mitigation, RegTech and SupTech have an important
role. Regulators and supervisors have to undertake accelerated off-site surveillance. This also
brings in the need for a transparent, technology and data-driven approach. To serve this need,
new fields called RegTech and SupTech are coming up. Both the technologies aim at improving
efficiency through the use of automation, introducing new capabilities and streamlining
workflows. In the Reserve Bank, we have been using SupTech for data collection and analysis.
The examples are Import Data Processing and Monitoring System (IDPMS), Export Data
Processing and Monitoring System (EDPMS) and Central Repository of Information on Large
Credits (CRILC), to name a few. Also, the risk-based supervision of banks is extensively
datadriven and is an example of SupTech. The future of RegTech and SupTech technologies,
however, lie in big data analytics, artificial intelligence, machine learning, cloud computing,
geographic information system (GIS) mapping, data transfer protocols, biometrics, etc.
15. A strong risk culture - in which risk detection, assessment and mitigation are part of the daily
job of bank staff - will be central to the success of managing the emerging risks. Similarly,
systemic risks may arise from unsustainable credit growth, increased inter-connectedness,
procyclicality, development of new activities beyond the supervisory framework and financial
risks manifested by lower profitability. Risks for FinTech products may also arise from cross
border legal and regulatory issues. Data confidentiality and customer protection are major areas
that also need to be addressed.
16. The Reserve Bank has encouraged banks to explore the possibility of establishing new
alliances with FinTech firms as it could be pivotal in accelerating the agenda of financial inclusion
through innovation. It is essential that flow of investments to this sector is unimpeded to realise
its full potential. It is imperative to create an ecosystem which promotes collaboration while
carefully paying attention to the implications that it has for the macroeconomy.
17. In order to ensure an orderly development of FinTech, to streamline their influence into the
financial system, to protect the customers and to safeguard the interest of all the stakeholders,
we need to have appropriate regulatory and supervisory frameworks. Such frameworks should
address associated risks while keeping in mind the growth requirements of this sector. The
Reserve Bank's working group on FinTech and digital banking (Report of the working group on
FinTech and digital banking, November 2017) suggested the introduction of a 'regulatory
sandbox/innovation hub' within a well-defined space and duration to experiment with FinTech
solutions, where the consequences of failure can be contained and reasons for failure analysed.
A 'Regulatory Sandbox' would benefit FinTech companies by way of reduced time to launch
innovative products at a lower cost. Going forward, the Reserve Bank will set up a regulatory
sandbox, for which guidelines will be issued in the next two months.
Conclusion
18. In conclusion, I would like to say that FinTech has the potential to reshape the financial
services and financial inclusion landscape in India in fundamental ways. It can reduce costs and
improve access and quality of financial services. We have to strike a subtle balance between
effectively utilising FinTech while minimising its systemic impacts. By enabling technologies and
managing risks, we can help create a new financial system which is more inclusive,
costeffective and resilient.
Thank you.
RegTech is an application or platform which makes regulatory compliance more efficient through automated
processes and lowers the costs of compliance. RegTech focuses on technologies that facilitate the delivery of
regulatory requirements more efficiently and effectively.
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SupTech is technology to be used by the regulators and supervisors to support supervision. The objectives of
SupTech are seamless and straight-through data collection / reporting, data analysis and decision making,
streamlined licencing, market monitoring and surveillance, KYC / AML / CFT, cybersecurity data or evidence
based policy making.