FinTech Laws & Regulations in India

Author - Anupam Prasad

FinTech is a combination of finance and innovation. Its substantial reliance on innovation—specifically, the Internet—prompts a more noteworthy requirement for guidelines as online money-related transactions are inclined to various security dangers. Further, the FinTech space is presented to the danger of illegal tax avoidance, terrorist financing and so on.

FinTech has caused a critical interruption in lending and payments in India. Quick advancements in portable and broadcast technology innovation combined with the Indian Government's boosted help for digital payments have prompted huge innovation and development of FinTech products. But Due to it’s sensitive working base and Rise in demand usage, it requires more High security regulations and laws. In this article we are going to discuss about Fintech companies regulations in India and Fintech law in India

FinTech Offerings in India

The key FinTech products offered by financial services organizations and different other entities working in the FinTech space in India are:

• Prepaid Payment Instruments (PPIs): PPIs are instruments that encourage the acquisition of goods and services (including remittance facilities, financial services and so forth) against a "stored-value" on such instruments. In India, PPIs might be given by banks and qualified non-bank elements as prepaid cards or virtual wallets. PPIs might be given under one of three classes:

• Shut framework or closed system framework PPIs

• Semi-shut framework or semi-closed framework PPIs 

• Open-framework PPIs

• Unified Payments Interface (UPI) Payments: The UPI is a payments platform overseen and operated by the National Payments Corporation of India (NPCI). It empowers constant, real-time, prompt, mobile-based bank-to-bank payments

• Digital Lenders: With expanding propels in innovation, technology, and telecommunications foundations, several NBFCs in India have moved to advanced stages of digital platforms for credit items, especially to retail and SME clients. They have developed intuitive applications and websites to empower end-to-end digital customer journeys. 

• Payment Intermediaries/Aggregators: Payment intermediaries or aggregators are entities which simplify online sale and purchase transactions primarily on e-business platforms. They facilitate collecting electronic payments from customers transfer them to facilitate merchants.

• Payment Banks: Payment banks are bodies authorized by the RBI to offer fundamental online banking services to their clients. These are allowed to accept small deposits (up to INR 100,000). However, they are not permitted to issue credit cards, give loans or offer any credit products.

• Peer-to-Peer Lending Platforms: Peer-to-peer (P2P) lending platforms are online platforms that offer loan facilitation services between lenders registered on the platform and prospective borrowers. Under RBI regulations, P2P lending platforms may be operated by eligible Indian companies registered with the RBI as NBFC.

Governing fintech Regulations in India

FinTech's regulatory environment in India is highly fragmented, and there are no single set of regulations or guidelines that universally regulate FinTech products in India. The lack of a standardized collection of FinTech regulations India makes it difficult to navigate the regulatory environment regulating FinTech in India. Above all, the regulatory system primarily consists of:

Payment and Settlement Systems Act, 2007

The Payment and Settlement Systems Act, 2007 (PSS Act) is India's principal oversight of payments. The PSS Act forbids the start-up and operation of a "payment system" without RBI’s prior authorization. The PSS Act describes a "payment system" as "a system that allows payment to be made between a payer and a recipient, all of which include clearing, payment or settlement, but does not include a stock exchange." Payment schemes include credit card operating systems, debit card operations, smart card operations, money transfer operations, PPIs, etc.

Master Direction on Issuance and Operation of Prepaid Payment Instruments

The RBI's Master Directive on the Issue and Operation of Prepaid Payment Instruments released on 11 October 2017 and updated from time to time (PPI Master Directions) prescribes the eligibility criteria for PPI issuers, PPI appropriate debits, and PPI credits and other operating guidelines to be followed by PPI issuers when issuing PPIs to their Indian clients. 

NPCI Guidelines Governing UPI Payments

UPI Transactions in India are regulated mainly by NPCI's UPI Procedural Guidelines and UPI Operational and Settlement Guidelines. Under the current framework, only banks can integrate with the UPI network to offer their customers money transfer services. Nevertheless, banks are allowed to engage technology providers for developing and running mobile applications for UPI payment purposes, subject to compliance with certain eligibility and prudential requirements prescribed by the NPCI.

Non-Banking Finance Companies (NBFCs)

NBFCs are regulated primarily by the Reserve Bank of India Act of 1934 and a set of master directions and circulars governing NBFC licensing and service in India. The RBI has set certain criteria to decide if an organization will be listed as a licensed financial services company. Most of the digital lenders operating in India are NBFC authorized.

Guidelines Regulating P2P Lending Platforms

P2P lending platforms are controlled mainly by the Master Directions – NBFC – Peer to Peer Lending Platform Directions 2017, which prescribe lender liability requirements and aggregate borrowing limits to the country's operation of P2P lending platforms.

Guidelines Governing Payment Aggregators/Intermediaries

The circular dated 24 November 2009 on "Directions for opening and operating accounts and settling payments for electronic payment transactions involving intermediaries" (Payment Intermediary Circular) sets out the legal framework applicable to payment intermediaries operating in India. Payment intermediaries such as payment gateways, payment aggregators, etc. are required to comply with the operating guidelines laid down in the Payment Intermediary Circular for the operation of intermediary systems in India.

RBI Guidelines on Payment Banks

The RBI's Operating Guidelines for Payment Banks dated 6 October 2016 and the RBI's Guidelines for Payment Bank Licensing dated 27 November 2014 are the primary regulations governing the licensing and operation of payment banks within the country. Such guidelines include, inter alia, registration eligibility criteria, appropriate operations and other operational guidelines for payment banks operating in the country.

Anti-Money Laundering Regulations

The PMLA, the PML Rules, and the KYC Master Directions comprise the main regulations which prescribe anti-money laundering standards and operational guidelines for entities engaged in providing financial services in the country to prevent money laundering.

Data Privacy and Protection

With FinTech platforms collecting and storing various types of user personal, financial, and behavioral data, access to customer data, data privacy and protection has now become an increasingly important issue. India today lacks a robust system with data privacy. The Information Technology Act 2000 and the Rules 2011 on IT (Reasonable Security Practices and Procedures, and Sensitive Personal Data or Information) are the two main regulations governing personal data security. The Justice Srikrishna Committee appointed by the Government of India to establish a regulatory framework for data protection released a set of recommendations and introduced the Personal Data Protection Bill in July 2018. The new Personal Data Protection Bill is currently undergoing Policy scrutiny and debate.

Conclusion

The report by the RBI highlights the need for collaborations and active engagement between regulators, players in the financial sector, clients and FinTech companies. Such a holistic approach will create a structured, unambiguous environment and promote the creation of more market-ready innovative solutions across different segments for customers. The guidelines, regulations and Fintech law India will improve the working system of Fintech companies and it’s users.