Fintech laws in India

Fintech laws in India: All you need to know

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This article on ‘Fintech laws in India: All you need to know‘ was written by Monika Yadav, an intern at Legal Upanishad.

Introduction

“Fintech is booming, and so are associated concerns like frauds, breaches, and cybersecurity risks”. In this article, we will discuss the fintech laws in India. Understanding the term fintech and why we need fintech regulation laws. After that, we will be discussing the services provided by the fintech sector and later on the existing biotech laws in India. In the end, we will look into the future of the fintech sector means what can be seen in the fintech sector in the coming years and we will end our article with a short and crisp conclusion.

What is fintech?

The term “fintech” stands for financial technology. Fintech refers to a broad range of goods, innovations, and business strategies that are reshaping the financial services sector.

Every time you donate to a Kickstarter campaign, which is considered fintech, or whenever you transfer funds using any online app, such as UPI, Google Pay, etc., which is also referred to as fintech. It includes all from digital payment to funds raising platforms to Robo-advisors to cryptocurrencies.

Why do we need fintech laws in India?

Fintech is no more a novel concept because of the popularity of Shark Tank India among children, teenagers, and adults. The reality programme did a good job of introducing the general people to the value and idea of fintech in India, which is crucial to the country’s future. More than ever, the fintech sector is expanding, making it challenging for authorities to stay consistent with the most recent technological advancements.

Security and market integrity may be compromised by new payment models and approaches. Customers who are unaware of the hazards or unable to accept them may be sold new products and services. The risks of fraud and hacking are growing for distributed ledger technology, blockchain, and crowdfunding.

Fintech companies are the most strictly regulated industry in the world as a result of these hazards that are inherent in the finance industry.

Fintech sector services

  1. Crowdfunding Platforms: In addition, the platforms enable business owners and startups to raise money across the world, helping them to get around local restrictions and connect with investors and markets throughout the world.
  2. Mobile Payments: One of the most common applications and gateways for mobile payments is fintech. These programmes also enable users to conduct banking operations without going to a physical bank. Customers can send and receive money using mobile at cheap transaction costs, for instance, businesses like Phonepe and Google Pay.
  3. Robo-Advisors: Robo-advisors are digital investment managing firms that create customers’ portfolios and distribute assets in the most efficient way possible using algorithms. Additionally, they enable users of all ages to carry out investing activities at affordable costs with little human labor.
  4. Insuretech: The use of technology in the insurance industry to deliver specialized insurance coverage and data protection is referred to as insure tech. Additionally, insure tech facilitates the insurance procedure through online policy administration and claims submission.
  5. Regtech: Regtech (regulatory technology) is primarily concerned with automating financial firms’ compliance procedures. Additionally, it provides quick and affordable management of massive amounts of data, comprising transaction details and regulations.
  6. Blockchain and cryptocurrency: Using encryption technology, blockchain develops cryptocurrencies, a promising new form of payment that is safer and more efficient than cash. Earlier in 2021, Dogecoin and bitcoin became trends in the investment market. In practice, blockchains open up a wide range of opportunities to challenge and alter traditional business paradigms. They are the future of the investment sector.
  7. Smart contracts are a prominent new blockchain application. They are digital, self-executing contracts that enable, verify and carry out agreements in a digital manner. According to experts, these blockchain items will probably alter how future transactions are carried out.

Fintech laws in India

  • Regulations for NBFCs: All NBFCs are subject to the Reserve Bank of India Act of 1934. Any firm offering fintech services in India must register with the RBI, per its requirements. No NBFC may start or operate a non-banking financial institution before even obtaining a certificate of registration from RBI, as per section 45-IA of the RBI Act.
  • Payment Banks:  Payment banks are governed by the same laws as banks, but they do it on a much smaller scale. Both loans and credit cards cannot be issued by it. The Banking Regulations Act of 1949’s Section 22 grants these banks licenses and registration as private limited companies. The activities of the banks are restricted by specific licensing requirements, particularly for the processing of demand deposits as well as for payments and settlements.
  • Payment and Settlement Systems Act (2007): It outlines the control as well as oversight of monetary transactions in India. The Board for Regulation and Supervision of Payment and Settlement Systems Regulations, 2008 (BPSS Regulations), as well as the Payment and Settlement Systems Regulations, 2008 (collectively referred to as the “PPS Regulations, 2008”), were both made by the RBI as per the PSS Act, 2007, and they are both regulations.

The BPSS has the authority to authorize, prescribe policies, and establish criteria for regulation. Moreover, overseeing the nation’s whole payment and settlement system. Moreover, acts in accordance with the 2007 PSS Act to carry out the RBI’s authority.

Fintech laws in India
Fintech laws in India: All you need to know

Procedures for starting or operating a payment system are outlined in the PPS Regulations, 2008 document.

  • The 2009 EPT Directions have been released by the RBI under section 18 of the P&SS Act to safeguard the customers ’ interest and also to guarantee that the amounts paid through them are subsequently taken into account to the financial intermediary gaining these transactions and submitted towards the records of the traders with due diligence. Furthermore, the RBI has published the PAPG Rules within section 18 in reference to section 10(2) of the P&SS Act.
  • Peer-to-Peer Lending Platform Directions of 2017 regulate the vulnerability of creditors and financing restrictions for the functioning of P2P lending frameworks in India. These guidelines govern P2P lending platforms.
  • Payments made through UPI in India are governed by NCPI regulations, known as UPI Procedural Guidelines. This framework mandates that banks produce money transfer services over UPI systems. Banks are permitted to work with technology suppliers to manage mobile apps for UPI payments as long as they adhere to the NCPI’s prudential standards and eligibility requirements.
  • Ombudsman Scheme: In January 2019, the RBI implemented an Ombudsman Scheme for Digital Transactions as per section 18 of the P&SS Act, which was modeled after the banking ombudsman program the RBI had established in 1995. The implementation of this plan began on January 31, 2019. A senior officer authorized through the RBI serves as every ombudsman for online payments to address a complaint made by consumers about those using the system as those parties are defined in the Ombudsman Scheme, for deficiencies in specific mechanisms that fall within the criteria listed in clause 8 of this Scheme.

Any person operating the payment process as specified by section 2 of the P&SS Act who is not a bank is referred to as a “System Participant” under the Ombudsman Scheme. The term does not include System Providers. The P&SS Act defines a system provider as a person who manages an authorized payment platform.

At the moment, there are about 21 ombudsmen for digital transactions, most of whose offices are in state capitals.

What’s next?

Fintech organizations have been creating creative ways to enroll new clients without using aadhaar-based verification since the Aadhaar Case. While some businesses have been employing authentic IDs like PAN cards, driving licenses, and passports in conjunction with video-based authentication, with more innovations under development, many have already started using smartphones for photo identification.

The expensive approach of Personal validation has not been used thanks to these innovative techniques for consumer authentication[i]. A system for consumer verification using video, for instance, was created by a peer-to-peer lending platform to enable the collection of a customer’s “liveliness test.”

The client is prompted to read the displayed writing at the conclusion using the applicant’s mobile or desktop camera, and the loan application process is approved. If the user can understand the writing, the programme compares the video to the applicant’s photo and determines the applicant’s identity. Similar to this, several businesses in the digital lending sector have created a video-based method that employs PAN cards to confirm consumers’ legitimacy. The programme on the system captures the process as the applicant is instructed to move their head in distinct directions, keep the PAN card, and by reading the PAN card number.

Framework for Recognition of Self-Regulatory Organizations for PSOs, developed by the RBI authority, is projected for playing a significant role in ensuring the safety and caliber of PSO services in India. The implementation of NUEs in the retail industry is also expected to have an impact on how Fintech is implemented in the retail industry.

The Government established a committee to develop a framework for controlling non-personal data, and it just issued its Study on Governance of Non-Personal Data, which suggests legislation for controlling non-personal data as well as the establishment of a new statutory authority. It is intriguing to learn that one of the report’s main recommendations is to make it mandatory to share non-personal data for economic, public interest, and sovereign purposes.

Additionally, the Personal Data Protection Bill 2019—India’s first extensive data protection framework—is now being drafted by legislators. Since financial information is now covered by the Bill, once it becomes law, Fintech companies and financial organizations will likely face stricter duties for data protection.

Conclusion

Despite knowing that financial services are still not widely used, adoption rates are substantially greater, creating appealing business potential. India’s low data prices and the continually falling price of smartphones both significantly contribute to the growth of Fintech businesses. The complexity of India’s fintech market for international firms is due to the multiplicity of authorities and developing legal frameworks. The market is enormous, though, and there are many gaps in the current rules, which makes this a very realistic business prospect. We will be looking forward to more legislative reforms in this area.

Reference

 

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