News: Recently, the Reserve Bank of India (RBI) created a new department to supervise and regulate fintech.
Through the department, RBI plans to promote innovation in the sector and also identify the challenges and opportunities associated with it.
Fintech ecosystem has seen the entry of ‘Big Tech’ like Alibaba, as well as decentralized products and services based on blockchain technology.
In this context, the creation of a dedicated department within RBI for workflow allocation is much needed.
What should be the main role/functions of the newly created department?
RBI has been so conservative on banking-sector liberalization, despite our need to improve the provision of credit to spur investment.
Further it has failed to nudge banks to think of digitization. For instance, banks refusing to upgrade digital payment infrastructure to meet RBI norms on things like e-mandates for subscription payments.
The Fintech Department will need to shift this model in three distinct ways.
First, the department must take a hint from climate-change discussions and adopt a ‘common but differentiated responsibilities’ ethos to regulate fintech.
-Rather than disallowing banking licences for new forms of financial intermediation, RBI should apply differential rules in cases where core policy objectives such as financial stability are secure.
-Further, RBI should not discriminate fintech businesses for providing Protectionism to the banking sector.
-Moreover, the Fintech Department should leverage ‘supervisory technologies’ to meet policy goals like consumer protection in fintech markets, while maintaining a light-touch regulatory approach.
-For instance, the Financial Conduct Authority (FCA) of the UK is experimenting with the use of ‘supervised learning’ techniques to predict the probability of mis-selling of financial products.
-Though RBI has embraced supervisory technologies, it needs to build real capacity through this new department.
Second, the department should recognize the interconnected nature of digital markets, and widen RBI’s consultation perimeter beyond regulated entities like banks.
For instance, RBI mandated banks to adopt card-on-file tokenization. Tokenization technology allows e-commerce providers or ‘merchants’ to process payments via payment services and banks, without storing debit or credit card data.
Since merchants have service agreements with fintech firms, they are well-placed to share market information with RBI to enable evidence-based decisions.
Also, merchants have an incentive to build last-mile readiness, since they have a direct interface with consumers, unlike banks.
Consumer awareness and digital financial literacy can be greatly increased by leveraging this interconnected stakeholder.
Third, the Fintech Department must work upon the new concepts of digital money. it should aim to define the contours of our future digital financial ecosystem. For instance, central bank digital currency (CBDC), crypto Assets.
Irrespective of RBI’s position on Cryptocurrency, the international society values Crypto assets. So, the Fintech Department should increase international coordination with regulators and agencies, such as the Financial Action Task Force, to understand the implications of cryptos.
Source: This post is based on the article “The new fintech department of RBI has its work cut out” published in Livemint on 11th Jan 2022.