Month: November 2022

The concept of credit cards emerged in the 1950s and thus began the phenomenon of competitive financial services and innovative banking. Thereafter, with the initiation of internet banking in the 1990s and digitized payment technology recently, the financial ecosystem has undergone a massive change. Until recently, traditional banks ruled the financial ecosystem but with the introduction and fast adaptation of Fintechs, the financial arena is undergoing a disruption; a disruption for superior services and better CX. How is the disruption taking place? Regulatory and policy shifts in the financial ecosystem have paved the way for transparency and scope for collaboration between age-old banks and upstarts. It has offered an opportunity for players with innovative technology to join forces and introduce customer-centric services and solidify their legitimacy. The said collaboration and therefore change in policies have forced traditional banks to share customer data who authorize it with third parties. This has given rise to open banking systems and the use of open APIs thereby allowing third-party developers to build applications and services that are institution-centric. These changes have given rise to the concept of Banking as a Service; a concept widely being adopted by organizations. Banking as a Service A plug-and-play, on-demand financial service; Banking as a Service allows traditional businesses to offer payment gateways on their platform without building entire applications in-house. Just like the concept of Dropbox that enables individuals to purchase space and store data on the cloud instead of investing in hardware, Banking as a service, a seemingly simple model has revolutionized how banking is performed today. Banking as a service has proven to be a cost-saving and an increased source of revenue for banks who prefer to work through a model that allows them to charge a fee per API transaction, i.e., 43% of the banks. However, banking as a service comes with its own set of challenges which include modernizing traditional banks and reconstructing a well-defined API strategy where operational processes and business capabilities need to be exposed optimally. Banking as a service case study RBL recognized that cash flow is an important consideration for customers interested in purchasing a vehicle and hence, in collaboration with Bajaj Finance, RBL is leveraging Bajaj Finance’s pan-India reach and offering vehicle loans to its customers. RBL’s secure and compliant digital infrastructure provides existing customers with a sense of reliability while increasing its reach in the market for newer customers. As the above example demonstrates, the financial capabilities of banking-as-a-service go far beyond those associated with traditional financial services products. They can create new revenue streams, lower cart abandonment rates and improve customer retention levels. Conclusion Banking as a service has given rise to an entire ecosystem of regulated applications that provide tailored customer services and experiences. Traditional banks should take note and keep up with the rising demand for intuitive and personalized financial services as they risk being left behind by their innovative brethren if they fail to comply with increasing customer demands.

The agricultural sector; the primary sector has been the backbone before the industrial revolution. As witnessed by economies, the upholding of the agricultural sector has led to the development of the secondary and tertiary sectors. As for India, agriculture sector growth has been steady with constant support and uplifting by the government. India ranks 2nd in agricultural output and for approx 54.6% of India’s population, agriculture is the primary source of bread and butter. Over the years, the agriculture sector has effectively transitioned from a subsistence unit to a commercial marketplace. This has paved the way for a basic structured market that has transitioned from barter to currency acceptance. Over time and citing the potential, Fintech has penetrated this sector too with a tailored and customized service stack. The term Agri Fintech was coined to refer to agricultural technology financing. It enfolds the use of technology to improve the said sector, farming process, value chain financing, farmer reachability, market accessibility and much more with the help of technology. Earlier banks, and now Fintech have intervened to offer farmers contractual agreements wherein they can avail of value chain farmer financing that consists of operators such as producers, processors, aggregators and traders. The Importance of Agri Fintech in India As per data, almost 70% of rural households rely on agriculture for their livelihood. Furthermore, it contributes to 17% of the total GDP and employs over 60% of the population. Despite this, the majority of the farmers have no or limited access to the global market and are forced to sell their produce in the local market at minimal rates. These gaps have given rise to Agri Fintech which is offering a platform to build the agriculture market with the help of data intervention, market linkages, partnerships, digital blueprints and designs, etc to enable the farmers to scale their business with the help of technology. With several startups eyeing the segment, many Agri Fintech firms are on the path to building regulated market interconnection, post-harvest schemes, data-centric models and credit-enabling schemes. Furthermore, realizing the potential yet underserved nature of the segment, several startups have already built a platform that offers warehousing services that include credit facilities in partnership with banks. Several case studies suggest that Fintech is launching NBFC which is trying to digitize the entire agriculture process starting from stock arrival to market supply. By digitizing processes like quality and weight checks, receipt and pledge generation, etc, Fintech is allowing the agriculture sector into financial inclusion by offering them credit against warehouse receipts; a classic example of a blockchain application. Access to institutional credit is a challenge despite increasing YoY budget allocation under Priority Sector Lending (PSL) for the agriculture sector. As per data, approximately only 30% of farmers have access to institutional credit while 70% are dependent on informal credit means. The digital layer will allow a transparent end-to-end process thereby eliminating fraudulent activities, unnecessary middlemen and the challenge of securing credit for business growth. Currently, banks are often skeptical to lend to farmers owing to a lack of data, risk analysis, collateral and high transactional cost coupled with loan waivers by state governments to curtail the burden on farmers. This puts lenders in a spot at the time of retrieving the loan amount hence, jeopardizing their balance sheets. Therefore, digitizing means giving farmers access to larger markets and farm economics functioning within the regulatory framework.

Undoubtedly, technology has evolved manifolds over the years, and since coupled with Finance, it is cultivating experiences and opportunities fairly new to audiences. Regulators and policymakers are attempting to keep pace with the innovations and developments to implement firm yet inclusive policies. To ensure increased cybersecurity against threats, frauds and breaches, it is essential regulators design policies that align with security and market integrity. Traditional banks have active policies that must be complied with solemnly. Contrastingly, Fintech, which functions in the same domain has had comparatively forbearing laws until recently. Following are the regulatory bodies that govern different products and services within Fintech- ● The Reserve Bank of India (RBI) ● The Securities Exchange Board of India (SEBI) ● The Ministry of Electronics and Information Technology (MEITY) ● The Ministry of Corporate Affairs ● The Insurance Regulatory and Development Authority of India (IRDAI). Microfinance institutions, money lenders, NBFCs, etc who offer consumer loans, peer-to-peer (P2P) loans and other types of credit are governed by the RBI. They ensure that standards relating to capital adequacy, prudential norms, cash reserve ratio, statutory liquidity ratio, credit ceiling, KYC guidelines, etc are rigidly maintained. However, these compliance norms may vary depending upon the agency and service it is relayed to. Investments are alternative financial instruments that are regulated by the SEBI. It involves mutual funds, collective investment schemes, alternative investment funds, etc. SEBI has implemented various ratings and schemes to apprise customers of potential risks and regulations. Furthermore, it has directed schemes to be close-ended with no guarantee of returns, restricted advertisements, etc as a prerequisite to dealing in mutual funds. To allow customers to take advantage of the convenience of online payments, the Payment and Settlement Systems Act has compliance guidelines in place that lists the various type of payment instruments, aggregators and the guidelines they need to adhere to. Most commonly used; Open payment instruments can be issued only by banks. Prepaid payment instruments, clearing houses, retail payment organizations, card payment networks, ATM networks and many other stakeholders participating in a transaction are regularized and have different guidelines to follow to participate in the market irrespective of the type of payment instrument they are undertaking; open, semi-closed or closed payment instrument. Fintech Regulators and Regulations in India- ❖ Payment and Settlement Systems Act (2007) To reduce risk to customers, these regulations ensure that any payment system initiated and operated within Indian premises must be regulated and authorized by the RBI. This includes credit cards, debit cards, online payment instruments, etc. ❖ P2P Lending Platform Regulations This illustrates the borrowing limits and norms associated with P2P lending. In the borrower’s interest, this guideline is focused on limiting a borrower’s debt factor. ❖ UPI Payment Regulations UPI Procedural Guidelines issued by the NCPI have designed a framework that demands banks to remain involved in money transfer services offered by Fintech. Banks can leverage the technology offered by Fintech and engage them in the operations undertaken in UPI payments but as per guidelines, the banks must always remain at the forefront depriving Fintech of sole ownership. Fintech has disrupted the financial ecosystem by displaying new products and service scope; therefore, the regulators see great potential. However, the risks associated with Fintech are also high at its stake and to limit the risk, it is imperative regulations and governance bodies are set in place.