The regulatory framework ensures compliance with applicable laws, protects consumers, fosters market competition, and promotes the growth and sustainability of the fintech industry

Fintech is a combination of ‘Financial Technology’ where business entities in the financial sector integrates technology such as apps, software, etc. into their financial services in order to improve end-user experience and allow the consumers to access, manage, gain insights into their finances or make financial transactions in a digital method.

  • Fintech companies provide a wide range of services such as wealth and financial management or funding new accounts from an existing bank account which is later used for trading stocks and cryptocurrencies.
  • These companies work through financial APIs for safe and secure connection of consumer bank accounts to the fintech app.
  • They offer mobile applications and web-based solutions for their financial services such as internet banking, etc.

The Fintech sector in India has witnessed rapid growth in recent years. Certain initiatives like Digital India and improved internet by the Indian Government became the enabling factors for the Fintech industry. Reports show that Fintech start-ups in India had raised around USD 8 billion through 280 funding deals in the year 2021, making India the third-largest fintech ecosystem in the world following USA and China.

The financial market regulator in India, the Reserve Bank of India (RBI) setup its first and unique fintech division under its regulation department in 2018, which was later recognized as the department of payments and settlement systems in 2020. Maintaining a consumer-centric approach while keeping up with recent developments, the RBI regulates all the traditional entities like Banks and Non-Banking Financial Companies (NBFCs), etc. Other than the RBI, the Insurance Regulatory and Development Authority of India (IRDAI), the Securities Exchange Board of India (SEBI), the Ministry of Corporate Affairs, and the Ministry of Electronics and Information Technology (MEITY) are the primary regulatory agencies in charge of this sector. A Fintech company would be governed by the appropriate regulatory body in charge of its goods and services. For instance, the Fintech businesses that engage with account aggregation, peer-to-peer credit, cryptocurrencies, payments, etc. are governed by RBI.

Due to a disjointed Regulatory Framework in the fintech sector, it is often difficult to determine the laws and compliances governing all the fintech services. Some of the applicable regulatory frameworks are –

  • The Companies Act, 2013 under which fintech must register and abide by all regulations under this enactment.
  • ThePayments and Settlements Systems Act, 2007 (PSS Act) regulates payments in India. A “payment system” is defined as “a system that permits payment to be made from one person to another,” but it specifically excludes a stock exchange. Payment methods include PPIs, money transfer services, smart card operating systems, and debit and credit card operating systems. Authorization from RBI is necessary to begin operation by a Payment System. All the compliances under this enactment are essential for the operation of a Fintech company in India.
  • The Prevention of Money Laundering Act, 2002 – The regulations and standards under this Act set the anti-money laundering standards and operational directions for business entities that offer financial services. Some applicable regulations are the Prevention of Money Laundering Rules 2005 and KYC Master Directions. These laws require all types of financial institutions and intermediaries to confirm the identification of clients, preserve records and provide information to Financial Intelligence Unit – India (FIU - IND).
  • Reserve Bank of India Act, 1934 – The regulations and governing guidelines and series of circulars under the RBI Act are applicable to fintech companies. These regulations are applicable either directly through the issuance of NBFC Licenses to them or indirectly through the regulation of banks and NBFCs connected to them. Some important regulations are – RBI regulation dated 10 November 2014 on Revised Regulatory Framework for NBFC and RBI Circular dated 6 October 2016.
  • The Insurance Act 1938 – Insurance technology companies also known as InsurTech provide services like processing of claims, etc. There are other companies that Act as aggregators that helps determine the premium and other services. The clearance is required for such online aggregators from the Insurance Regulatory Development Authority.
  • The Foreign Exchange Management Act, 1999 – The regulations under FEMA are enacted to regulate the cross-border transaction services provided by the fintech companies.
  • The Consumer Protection Act 2019 – The provisions of the act states that disclosure of consumer’s personal information supplied in confidence, unless required by law or in the public interest, is an unfair trade practice.
  • The Information Technology Act 2000 – The IT Act and its regulations are important laws that regulate personal data privacy. The Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011, which prohibit the disclosure of a consumer’s personal information without the person’s prior authorization unless required by law, are comparable to this.

The Indian Fintech industry is facing rapid growth and advancements, but the industry faces obstacles with confusing laws. Therefore, legal compliance is of utmost necessity to avoid sanctions from market regulators.


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