Fintech regulation must be calibrated

Fintechs have leveraged the gaps in traditional financial institutions and processes to provide increased efficiency and productivity. They have been a vehicle of financial inclusion

The much-lionised Nathan Rothschild, also alluded to in the book, The Ascent of Money: A Financial History of the World, by Niall Ferguson, helped by his sharpened communications, became the only person in possession of information on the outcome of the Battle of Waterloo a good two days ahead of the official messengers.

By the middle of 1816, the net worth of the Rothschild family had touched 1 million pounds, and they brought about one of the most efficient money exchange mechanisms in the world, in addition to their standing and impact in the bond market. The point is that there have been, time and again, folks and companies who have been ahead of their game and created spaces for finance to surge forward and conquer.

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In India, we have had the advent of myriad microfinance companies and, more recently, the financial technology (fintech) storm. Fintech firms were able to leverage the gaps in traditional financial institutions and processes to provide increased efficiency and productivity. They have been a fantastic vehicle of financial inclusion in non-urban Bharat.

Banks and insurance players have synergised with such organisations to bring a larger customer base into their service web than would have been possible through traditional means. This has meant that traditional institutions have incubated fintechs as part of their strategic plan. Moreover, there have been very many avenues in the recent past, wherein they have wrung open customer value where none existed earlier — especially when one talks of companies like Paytm, Razorpay, and Instamojo.
 

Fintechs have attracted billions of dollars from Berkshire Hathaway and SoftBank, apart other venture capital (VC) and private equity (PE) firms. And that brings me to my second point: as in all other forms of innovation, investors play a critical role in the growth story of any industry, and fintech is no aberration. Investors’ interests and motivations need to be kept in mind for the industry to expand and prosper.

Fintechs, in their efforts to unlock financial value, have impinged on improving liquidity services, enhancing credit often through a new look at creditworthiness and forced toleration of new levels of risk appetite for its sheer scale of inclusion. So, even as payment-service providers, fintechs have unfurled and exposed new segments to credit risk as well as risks of financial fraud.

I understand that such risk would definitely need its own set of regulations. However, this should not be at the cost of the very PE firms which have taken a view on a firm’s potency, sans regulations.

The stance of regulations being injected to rein in fintechs would prove to be counter-productive. The array of fund houses which had borne the risk with no perception of such measures of control being cast, would then not expose themselves in the financial domain on the road ahead. I believe this would be a great blow to the substantial progress that India is poised to make in financial inclusion. India’s fintech market size, at $31 billion in 2021, is the third-largest in the world, behind the United States and China. And I would be very careful in showcasing how we give effect to controls in this space.

It would be pragmatic for the Reserve Bank of India and the powers that be to impose regulations on fintechs, but ensure that VCs and PEs are able to rope in their investments by providing a regulation-less window for a proper exit. I would imagine that an exit window of about three years would allow everyone ample time to iron out issues and build a strategy around how to effect future investments in the space.

The writer is Chief Investment Officer and Executive Director of Jupiter Capital