Fintech boost

At the recently concluded Monetary Policy Committee meeting, the Reserve Bank decided to allow prepaid payment instruments to enter into a range of quasi-banking functions. This will give a further impetus to achieving financial inclusion goals. Notwithstanding the recent steps to expand access to banking services, there have been hurdles in the usage of services offered by fintech players and prepaid payment instruments like wallets. For instance, after the RBI released its Master Directions in October 2017, digital wallets were to become interoperable within six months. Three years later, they are still functioning in a walled garden approach, thus locking up users to specific platforms. Now, the RBI has made it mandatory for wallets to become interoperable, allowing users to transact irrespective of the platform they are on. This will bring digital wallets at par with credit cards, UPI, and online banking accounts.

Similarly, the RBI’s decision to allow payments banks to enhance the limit of maximum balance at the end of the day from ₹1 lakh to ₹2 lakh per individual customer was a long-standing demand. Payments bank licences were given out by the RBI to bridge the mismatch between small depositors and traditional banking players. The premise was that since payment banks do not have to open physical branches and bear other costs related to running a full-fledged bank, they would be able to cater to low-income groups. However, many entities which took payment banking licences were forced to surrender it after they discovered that the business model was weak due to RBI restrictions. Payments banks offer interest rates on deposits like banks but they are barred from giving loans and advances. While these restrictions remain, the move to increase the cap on the maximum balance will help payment banks expand their client base.

The RBI has also allowed payment system operators to take direct membership in real-time gross settlement (RTGS) and national electronic funds transfer (NEFT), hitherto available only to customers of traditional banks. Through these measures, RBI has opened up a huge market for fintech players; at the same time wallet, payments banks, and other payment systems can offer a range of services. However, the real impact would be seen only if these players utilise the new tools for providing financial services to the unbanked.

It is clear that the financial inclusion objectives cannot be met by banks alone. Fintech players, with their innovative thinking and faster adoption of technology, must be encouraged. On their part, payment companies must invest in robust systems to make online transactions secure. Consumers must be protected from data breaches and network outages if the regulatory boost to fintech is to have to wide-ranging impact.

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