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Challenges in India’s Fintech Landscape

Context:

In a recent report presented to Parliament, the Standing Committee on Communications and Information Technology raised concerns regarding the dominance of foreign-owned fintech apps in India’s digital payments ecosystem. Fintech is the use of digital platforms to provide financial services.

Relevance:

GS III: Indian Economy

Dimensions of the Article:

  1. Key Report Highlights on Digital Payments Regulation
  2. Understanding Fintech in India
  3. Fintech Landscape in India

Key Report Highlights on Digital Payments Regulation:

Regulation Emphasis:

  • The committee underscores the need for effective regulation of digital payment apps due to the growing usage of digital platforms in India.
  • Suggests that regulatory bodies like RBI and NPCI are better suited to control local apps than foreign ones operating across multiple jurisdictions.

Market Dominance of Foreign Fintech:

  • Foreign-owned fintech companies, including PhonePe and Google Pay, hold substantial market shares in India.
  • Market distribution: PhonePe (46.91%) > Google Pay (36.39%) > BHIM UPI (0.22%) (as of Oct-Nov 2023).

NPCI’s 30% Volume Cap:

  • Aligns with NPCI’s 30% volume cap on UPI transactions for third-party apps like PhonePe and Amazon Pay.
  • Cap implemented in November 2020 with a phased compliance period until December 2024.
  • Aims to manage risks and maintain UPI ecosystem stability during expansion.
  • Emphasizes the importance of consumer outreach by banks and non-banks for UPI growth.

Money Laundering Concerns:

  • Expresses worries about fintech platforms being exploited for money laundering, citing instances like the Pyppl app administered by Chinese investment scammers.
  • Despite increased transaction volumes, the fraud-to-sales (F2S) ratio remains around 0.0015% over the last five years.
  • UPI fraud impact on users stands at 0.0189%.
  • F2S ratio measures the percentage of fraudulent transactions compared to the monthly sales volume for a business.

Understanding Fintech in India:

Definition:

  • Fintech, or financial technology, involves leveraging digital platforms, software, and services to offer or facilitate financial services like payments, lending, insurance, and wealth management.
Importance in India:
  • Financial Inclusion: Fintech plays a crucial role in extending financial services to India’s vast unbanked and underbanked populations, particularly in rural areas.
  • Efficiency Boost: Enhances the efficiency and convenience of financial transactions by reducing costs, time, and complexities associated with traditional methods.
  • Economic Growth: Drives innovation and fosters economic growth by creating opportunities for entrepreneurs, startups, and consumers.
Segments and Trends:
  • Major Segments: Payments, Digital Lending, InsurTech, WealthTech.
  • Digital Payments: Facilitates online or mobile money transfers through platforms like UPI, wallets, cards, and QR codes.
  • Digital Lending: Provides online loans or credit to individuals and businesses using alternative data and algorithms.
  • Insurtech: Applies technology to enhance the distribution, delivery, and management of insurance products and services.
  • Wealthtech: Offers online platforms for investment, wealth management, and financial advisory services.

Fintech Landscape in India:

  • Market Size: India is one of the world’s fastest-growing fintech markets, with over 7,000 fintech startups.
  • Market Growth: The Indian fintech industry was valued at USD 50 billion in 2021 and is projected to reach approximately USD 150 billion by 2025.
Regulatory Oversight:
  • Reserve Bank of India (RBI):
    • Regulates banks, NBFCs, PSPs, and credit bureaus.
    • Responsible for overseeing India’s money market and foreign exchange market.
    • Regulates fintech sectors like Digital Payments, Digital Lending, and Digital or neo-banks.
  • Securities and Exchange Board of India (SEBI):
    • Regulates securities markets and intermediaries such as stockbrokers and investment advisors.
    • Jurisdiction includes services like stockbroking and investment advisory.
  • Insurance Regulatory and Development Authority of India (IRDAI):
    • Regulates insurers, corporate agents, web aggregators for insurance, and third-party agents for insurance.
    • Ensures compliance and integrity in the insurance sector.

-Source: The Hindu


November 2024
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