FinTech: New Technology for Future Banking and Finance

A Report based on RIS-IIC Webinar on FinTech 2020-2021

Introduction

Banking and financial institutions worldwide are facing rapid technological transition enabled by new digital technologies like Big Data, AI etc. One such sector is FinTech, which leverages the benefits of technology in improving efficiency and reach of the financial system, as well as the concomitant benefits for economic growth and to financial inclusion. While this calls for a systematic non-disruptive adoption and encouragement of such technology in the financial system, important questions of cyber security, regulation and data localisation still need to be addressed.

Objective

To feed the growing interest and to provide a fresh, comprehensive and consolidated picture of FinTech.

Banks, Finance and Changing Forms of Technology: New Options with FinTech
T. Rabi Sankar, Executive Director RBI

FinTech can improve the efficiency of intermediation by driving down costs, saccharisation of products and services, improving customer service and expanding the reach of financial services. Hence, FinTech poses a challenge to the incumbents and forces them to adopt / change the way of financial intermediation.

While FinTech can do all that and even change the form of banking (e.g. we may have entirely virtual banks) FinTech cannot make banking redundant. The essential function of banks – deposit-taking, making advances and effecting payments – would continue in an economy.

The growth of the FinTech industry in India has been substantial with an adoption rate of 87 per cent compared to global average adoption rate of 64 per cent.

  • RBI’s Role

RBI has taken up initiatives to set up key institutions to help in the evolution of financial technology. For instance, Reserve Bank Innovation Hub (RBIH) was set up to promote innovation across the financial sector by leveraging on technology and creating an environment which would facilitate and foster innovation.

It also makes efforts to promote the use of technology through its regulations and an array of innovative financial products and services have evolved in the last decade as a result of these efforts. Broadly, Reserve Bank of India’s regulation has played an enabling role. (for details, check out the full report)

  • RBI’s focus going forward
  1. Targeting areas that are still characterised by pricing infirmities such as cross border transactions etc
  2. Managing the entry of big-tech into financial space in a non-disruptive manner
  3. Basic challenge remains speeding up FinTech absorption in the finance space without undermining the integrity or stability of the financial system

An important observation is that trust is central in the financial services industry. Although new technologies are getting cost effective, a reasonable mistrust exists in society towards them. With their long years of existence, traditional banking institutions have that trust. Considering this difference in trust, the ideal way out would be the complementary existence of FinTech and the traditional banking institutions, or FinTech could become a support system to the existing banks.

FinTech and Society
Thankom Arun, Director CAGD, University of Essex, UK
  • The challenge

A look at the emergence of microfinance over time shows a high level of indebtedness among borrowers in many countries. The lack of registries and unhealthy competition among loan managers develops a space for multiple borrowings.

  • How fintech can help

FinTech has helped alter the lending platform towards P2P platforms. They have different credit models using the cloud platform, which assess the creditors entirely differently. FinTech firms employ multiple parameters to examine the creditworthiness of the borrowers.

Besides lending, the other benefits of FinTech to the borrower and investor are reduced application processing time and faster processing.

FinTech has the potential to reshape banks and other institutions. However, harnessing that potential for the betterment of the population requires providing the suitable regulatory fabric through closer engagement with stakeholders and creating a ‘sandbox’ environment for FinTech.

The confidence and trust that regulation can deliver would encourage the public to use more and more FinTech products.

Regulatory Challenges in Fintech Sector
Dr Srinivas Yanamandra, Chief of Compliance, New Development Bank, Shanghai
  • Main questions answered

What are the regulatory challenges to enable development in FinTech?

  1. The greatest challenge in this dimension is basically defining the scope of different aspects of regulation and developing the lexicon
  2. FinTech industry comprises of two types of players- the FinTech start-ups and the big tech firms competing for a vital share in the financial sector. The tough challenge for the regulator is to differentiate between the regulations applicable to these two entities and find the right balance to have this differentiated regulation operational in context of FinTech.
  3. To come up with a co-regulation model, which is the right balance between the state and the self-regulation. This is when both parties’ efforts and objectives are factored in; How does the regulator maintain that balance is going to be a challenge that needs to be addressed going forward.

How are the regulators trying to overcome these challenges?

  1. By undertaking capacity building programs by themselves in the way of pilot projects and not leaving it to outside players; this will help them understand the ramifications and also to see whether the promises being made by the FinTech players are really achievable on the ground.
  2. International cooperation across the regulators; these networks are important platforms for understanding and exchange of information relevant for FinTech regulation and policy among the regulators.
  3. In addition to this, regulatory sandbox collaborations with FinTech industry are also critical for achieving nimble regulatory frameworks.

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