India stands at a pivotal moment in capitalising on the global shift away from China by inviting investment to revamp its economy. While India’s IT and financial services sectors have expanded through digital infrastructure, FDI inflows, and export growth, regulatory uncertainty in the regulation of the fintech sector remains a challenge for enhancing the reach of India’s financial services space. Regulation in this space has significantly increased recently and, coupled with changes to the broader financial environment, has caused some new-age companies to shutter their business, e.g., Lazy Pay, GoldPe, InsurStaq.ai, among others.
India’s regulatory approach to fintech has oscillated between hesitation and overreach. As a result, the sector has seen multiple startups shutting shop, not because of flawed business models, but because regulatory changes have rendered them illegal. The magnitude of the challenge faced by this sector has been obfuscated by the glint of a few successful startups.
To be clear, there are genuine reasons for regulators to take a conservative approach to this sector. For one, business models enabled by new technologies are quite disruptive for the existing regulatory architecture, as discussed below.
India has been successful in creating a digital public infrastructure enabled by Aadhaar, which brought in near universality of bank accounts / mobile wallets and UPI-enabled payments (colloquially, the ‘India Stack’). This infrastructure is accessible to most businesses, enabling electronic customer identity verification and low overheads on financial transactions. Multiple consent and verification points enhance reliability and trustworthiness, fostering a high trust environment crucial for businesses.
