The Reserve Bank of India (RBI) Deputy Governor, T. Rabi Sankar, has some advice for the first fintech Self-Regulatory Organisation (SRO): it must begin preparing the fintech industry to embrace the reality that maturity should be reflected in its behaviour. “As the industry gains experience and gradually establishes itself alongside traditional financial firms, it must increasingly demonstrate the same level of maturity that these traditional firms show,” he said.
“This is a process that will evolve as the sector grows. We have made a start with an SRO,” said Sankar during his keynote address at the Global Fintech Festival on “Fintech Innovation and Approach to Regulation.”
This week, the RBI took a significant step in regulating the fast-growing fintech industry by selecting the Fintech Association for Consumer Empowerment (FACE) as the first SRO for the sector. This move clearly indicates the RBI’s focus on safeguarding consumer interests while encouraging innovation.
Sankar outlined five key tasks for India’s first SRO, as well as for other SROs that may be established in the future.
Nurturing a Competitive Environment
Sankar emphasized that an SRO should work consciously and consistently to create conditions that are favorable to competition. He identified several key areas for the SRO to focus on, including the need to foster a competitive environment consistently. “Competition is essential to making markets effective and efficient,” he said. He added that a key indicator of market integrity is price efficiency. The fintech industry’s two major assets are lower costs and faster delivery. “This cost efficiency should be driven by technology, not by the ability to absorb losses. New technology, understandably, comes with business strategies that are radically different from traditional businesses. However, the industry must ensure—and the SRO must drive the industry to ensure—that these strategies do not stifle competition, as that would ultimately hinder innovation,” he added.
Avoiding Questionable Practices
The RBI Deputy Governor also cautioned SROs against engaging in questionable practices. “SROs can play a crucial role in eliminating inefficiencies in existing financial markets through the use of technology,” he said. Sankar noted that one of the key global discussions today revolves around achieving the same level of efficiency in cross-border payment systems that we currently see in domestic systems.
“It is clear from global discussions that the solution will eventually require systems that extend beyond the existing infrastructure, indicating the need for participants other than banks. We will need technologies beyond those available today, and processes different from the typical correspondent banking system if we are to achieve these efficiencies. Many inefficiencies persist because the right technology isn’t in place, and it is up to fintechs to address this. An SRO for fintechs should guide the sector in identifying and eliminating these inefficiencies,” he added.
Delivering Value to Consumers
Sankar also stressed that SROs need to focus on delivering value to consumers. The primary reason fintechs have been a positive disruptive force is their ability to deliver value to customers. “At the same time, many practices have emerged, such as dark patterns, that the fintech industry must consciously move away from. An SRO is best positioned to identify these practices early and sensitize the industry,” he said.
“Many of these practices may not be immediately obvious. Some might even be justified as delivering value to customers. It is up to the SROs to be vigilant in distinguishing beneficial practices from those that are avoidable and to guide the industry away from such practices,” Sankar advised.
Ensuring Fair Pricing
Sankar also addressed the issue of fair pricing. Economists have long studied the concept that the value of any good or service is tied to the conditions under which it is produced, with this value shaping the prices of goods and services. “However, this thinking has gradually changed over the years. It’s now common to encounter the belief that the price paid in the market determines the value. This shift from value determining price to price determining value has led to many consequences in economies around the world—not all of them beneficial from an economic welfare standpoint,” he explained.
“I believe it is up to an SRO to remind the fintech sector not to lose sight of the fact that earning trust requires treating customers fairly. Treating customers fairly encompasses not just fair pricing but also pre-sales and post-sales interactions,” Sankar said.
Facilitating Two-Way Communication
Sankar emphasized that a key function of an SRO is to facilitate honest two-way communication between regulators and the industry. Regulators rely on the assessments provided by an SRO to receive effective feedback. “We regularly engage in this process within the financial sector. SROs in the fintech sector will need to take on this role for the industry. Sometimes, regulatory actions require fintechs to adjust existing processes, especially when the regulations are driven by considerations of customer protection or risk containment. This can understandably lead to some friction within the industry,” he explained.
