Startup ecosystem put at risk from increased scrutiny of bank-Fintech Unions

varsha sarkar

June 9, 2023

4:26 pm

Startup ecosystem put at risk from increased scrutiny of bank-Fintech Unions

The Indian Fintech ecosystem has seen significant growth in recent years, thanks to the partnerships between financial institutions and Fintech companies. These partnerships have enabled the rapid introduction of innovative financial products and solutions that cater to the diverse financial needs of Indian consumers. However, this growth has also brought increased scrutiny from regulators, particularly the Reserve Bank of India (RBI). The RBI has been taking steps to bring Fintech activities under its purview, and has requested banks to provide reports of their contractual arrangements with Fintechs to assess the risks involved. While this increased scrutiny may pose challenges for Fintech startups, it also underscores the importance of balancing innovation with regulatory compliance and consumer protection. By working closely with regulators and industry associations, Fintechs can navigate this changing landscape and continue to drive financial inclusion and digital transformation in India.

The Reserve Bank of India (RBI) has been emphasizing the importance of adhering to know your customer (KYC) regulations in light of the increased anti-money laundering and combating the financing of terrorism (AML/CFT) concerns arising from the use of digital means by Fintechs. The RBI has imposed monetary penalties on regulated entities found to be non-compliant with KYC regulations, including entities such as AmazonPay, Bank of India and Axis Bank. In March, an international bank was directed by the RBI to update KYC information pertaining to its corporate credit cardholders. This bank, which offers products through arrangements with Fintechs, conveyed the decision to pause customer transactions through co-branded corporate credit cards to its partner Fintechs, effective April 01, 2023, in order to ensure compliance with the central bank’s mandate.

However, reports suggest that the partner Fintechs were only informed of the decision 10 days prior to the effective date, while customers were given barely a few hours to update their KYC information before the complete pause. This short notice has made it difficult for start-ups and other clients to maintain business continuity and access corporate credit card services, as large banks are unwilling to provide credit cards to them. This underscores the importance of striking a balance between regulatory compliance and innovation, while also ensuring that consumer protection and business continuity are prioritized. Fintechs and financial institutions will need to work closely with regulators to navigate these challenges and continue to drive growth and financial inclusion in India.

The regulatory action taken by the RBI has been stringent, with penalties imposed for non-compliance and even directions given to stop cross-border remittances in some cases. Given this backdrop, it can be assumed that the decision to pause transactions through corporate credit cards may have been taken to avoid any adverse action by the RBI. Regulated entities face the risk of adverse decisions, including not being allowed to onboard new corporate credit card customers or facing monetary penalties for non-compliance with KYC regulations.

The potential consequences of such actions can have far-reaching implications for all stakeholders involved. Customers may lose confidence in the financial products, leading to financial losses for regulated entities, particularly banks and financial institutions that work closely with Fintech companies. Fintech businesses that provide services related to co-branded corporate credit cards would be most affected, and such actions have the potential to bring their businesses to a complete halt. This can cause a confidence crisis among all stakeholders and have significant ripple effects on an otherwise flourishing start-up ecosystem, particularly under the current tight liquidity scenario.

It is crucial for all parties involved to strike a balance between regulatory compliance and innovation, while ensuring that consumer protection and business continuity are prioritized. Fintechs and financial institutions will need to work closely with regulators to navigate these challenges and continue to drive growth and financial inclusion in India.

varsha sarkar

June 9, 2023

4:26 pm

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