Nobel Laureate Robert Shiller in his book Finance and the Good of Society said that form and process may change, but function remains the same. Regulation, in this digital era, must be seen in this context. Thanks to BigTech players and their innovations, financial services have been disrupted for good, and hundreds of millions of un-served and underserved citizens are the beneficiaries of this fintech revolution. Nearly 400 million people in India use these new digital services that are much faster, far cheaper, and more convenient. This begs the question: Why regulate fintech?
First, it is incumbent on financial regulators as guardians of the financial system to ensure that these new solutions do not harm consumers. Some fintechs indulge in unfair business practices: interest rate gouging, coercive collections and mis-selling, to name a few. Many consumers end up in debt traps. Around two lakh frauds involving the digital payments system are reported every month. In an environment of financial and digital illiteracy, regulators have to ensure that the principles of ‘best interest’ and ‘greater good’ are followed in letter and spirit.
Second, care should be taken that no individual fintech can threaten financial stability. This is particularly important because fintechs have a tendency to engage in blitz-scaling by leveraging DNA (data, network effects, activity data) loopholes and create huge monopolies that stifle innovation and squash competition.
Third, there are thousands of fintechs and 90 per cent of them generally fail over a 10-year period. This is largely attributable to unproven business models, poor product market fit, and weak governance. If such failures happen on a large scale involving millions of people, the markets may get destabilised.
Regulators world-over are striving for a framework that can harmoniously balance the difficult triad of innovation, financial stability, and consumer interest. International bodies like the Financial Stability Board, Bank for International Settlements and the IMF have been deliberating, but there is no consensus.
The US is adopting a laissez-faire approach, whereas China is exercising a greater degree of government control. Europe has published robust guidelines to protect consumer interests, including privacy.
India needs a regulatory framework which can promote financial inclusion, protect consumers, foster stability in the financial system, and avoid concentration of business in the hands of a few. The top three digital payments players enjoy 85 per cent market share of UPI. Can network effects be tweaked to avoid this concentration risk?
There are three broad regulatory models: self-regulation, co-regulation and statutory regulation. In many environments, they evolve and co-exist and are not mutually exclusive. Just as excessive statutory regulation can kill innovation, excessive faith in self-regulation can lead to financial system risk or consumer harm. In the fast moving world of fintech, co-regulation may be the most suited where there is give-and-take between the regulators and business entities on a sustained basis.
Timing of regulation also matters. Should regulations be ex post (after the event) or ex ante (before the event)? Where consumer protection is the highest priority, obviously ex ante makes sense. Where allowing time for innovation is important, ex post may be more appropriate. As far as financial stability is concerned, unless something is seriously remiss, some time and space may be given to fintechs to meet the regulator’s expectations without the threat of being shutdown.
Sambamurthy is former Chairman of NPCI and Paul is MD and CEO of TalentSprint. Views are personal