Month: September 2021

Banks perform the core service of intermediation in the financial system and fintechs should be seen as enablers, Reserve Bank of India (RBI) deputy governor T Rabi Sankar said on Tuesday. Fintechs which offer liquidity services — the exclusive domain of banks — must be subjected to regulations and supervision on a par with those applied to banks, he said, speaking at the Global Fintech Fest organised by Internet and Mobile Association of India.

Banks bridge temporal gaps in requirement of money by providing liquidity services, Sankar said, as they are uniquely placed by dint of their ability to create money and credit. Similarly, in the field of payments, banks are uniquely placed since all digital payment transactions are transfers of money from one bank account to another.

All other payment service providers facilitate this transfer of money and in that sense, play a supporting role, he said.
“While financial technology can improve the efficiency of intermediation, they cannot replace the core nature of financial intermediation,” the deputy governor said.

For that purpose, there will always be a need for a bank to provide liquidity services. “Put another way, this means that if any fintech entity provides liquidity services, it is effectively functioning as a bank and, therefore, should be subjected to the same legal, regulatory and supervisory regime that a bank is subjected to. This is one reason why in almost all countries, entities other than banks are not allowed directly to deal in deposits or deposit-like money,” Sankar said.

Even as he acknowledged the various ways in which the use of financial technology has improved the delivery of financial services, Sankar said that fintechs by their very nature pose a challenge to incumbents. The ideal approach is for fintech companies to be considered as enablers and partners in synergy with banks or similar financial institutions, he said. “So there is this normal talk of competition to banks from fintech companies. I think the proper way to look at that is that competition to banks and other financial institutions is not really from fintech companies,” Sankar said, adding, “The competition remains within banks — between banks which can leverage fintech better and banks which are not as good at leveraging fintech.”

Sankar observed that the nature of regulation has to necessarily adjust as fintech transforms the financial landscape. “The regulatory perimeter needs to widen. The approach to regulation also needs to adapt to the type of entity being regulated,” he said.

Normally, similar activities should attract similar regulation in most cases. But, Sankar said, such activity-based regulation may be less effective than entity-based regulation when one is dealing with Big Tech firms or large infrastructure entities in the financial or fintech sector. Cybersecurity risks are likely to overshadow financial risks in fintech because of the dependence on technology. Systemic risks, operational risks and risks affecting competition are of importance when dealing with large financial market infrastructure and Big Tech.

Countries need to overcome the regulatory and legislative deficits in dealing with concerns surrounding privacy, safety and monetisation of data, Sankar said. “By definition, legislation will lag behind financial progress or technological progress. Regulation will probably be better off in catching up, but in essence it will still be catching up that needs to be done,” he added.

Therefore, Sankar said, regulations pertaining to data issues need to adapt to a world where boundaries between financial and non-financial firms are getting increasingly blurred and geographical boundaries are no longer a constraint.