Standing Committee Report on Fintech Sector in India- Explained Pointwise

Recently, the report of Parliamentary Standing Committee on Communications and Information Technology, has raised certain concerns over the Fintech Sector in India. The committee has raised concerns about the dominance of fintech apps owned by foreign entities in the Indian ecosystem. It has also recommended the promotion of fintech apps owned by local players.

What is the summary of the Parliamentary Standing Committee Report on Fintech Sector in India?

Major observations of the report

1. Dominance of foreign entities owned fintech companies, apps and platforms- Walmart-backed PhonePe and Google backed Google Pay, dominate the Indian fintech sector. PhonePe commands 46.91% of the market share in volume terms, while Google Pay commands 36.39% of the market share in volume terms.

2. Low adoption of Indian fintech apps- Indian fintech apps are not preferred by the customers for payments. NCPI’s BHIM UPI’s market share in terms of volume stands at a mere 0.22%.

3. Use of Fintech apps for Money Laundering- Scamsters have been using these financial companies to dupe people and launder illegitimate money. For ex- Abu Dhabi-based app called Pyppl, operated by the Chinese investment scamsters was used for money laundering in India.

4. Fraud to Sales Ratio- Fraud to Sales ratio represents the total number of fraudulent transactions in comparison to the total number of transactions in a financial year. This ratio has remained around 0.0015%, despite the increase in volume of transactions over the past five years.

5. Feasibility of Regulatory Bodies to control local apps over foreign apps- The committee has also pointed to the feasibility of regulatory bodies such as RBI and NPCI to control local apps as compared with foreign apps. Foreign apps operate in multiple jurisdictions, which makes their regulation challenging.

Major Recommendations of the Report

1. 30% volume cap on transactions- The total number of transactions initiated by any third-party app (like PhonePe and Amazon Pay) individually, should not exceed 30% of the overall transactions made using the interfaces cumulatively over three preceding months. This recommendation is in line with the NPCI’s guideline issued earlier.

2. Effective regulation of Digital Payment apps- The committee has recommended effective regulation of Digital payment apps due to the rise of digital platforms to make payments in India.

3. Multifold penetration of the Digital Payment Market- The committee has recommended that existing and new players (banks and non-banks) must scale-up their consumer outreach for the growth of UPI payments through their platforms. This will help us to achieve overall market equilibrium.

What is Fintech? What is the Status of Fintech Sector in India?

Fintech- The term “FinTech” is a contraction of the words “Finance” and “Technology”. It refers to businesses that use technology to enhance or automate financial services and processes.

Different Types of Fintechs in India, classified according to their functions

Status of Fintechs in India

1. World’s 3rd largest FinTech ecosystem- India is the 3rd largest FinTech ecosystem. 17 Indian Fintech companies have gained ‘Unicorn Status’ as on Dec 2021.

2. Highest Fintech Adoption rate- India’s Fintech adoption rate of 87% is highest in the world. The world’s average Fintech adoption rate is around 64%. 

3. Growth of Unified Payments Interface (UPI)- Total UPI transactions crossed 100 billion mark in 2023 and commanded a share of 73.5% share of the total digital payments in terms of volume in FY 2022-23.

4. Government’s initiatives propelling the Fintech Growth- The Indian Govt initiatives such as the JAM trinity, India Stack, Open Network for Digital Commerce (ONDC), Unified Payments Interface (UPI), and Central Bank Digital Currency (CBDC), have the growth of Fintechs in India.

What are the benefits of the Fintech Sector?

1. Promotion of Financial Inclusion- Innovation driven by Fintech has widened citizen’s access to financial services. For ex- Use of UPI has improved the financial inclusion of small vendors in India.

2. Improved Credit availability- Lending Fintechs have improved credit availability options for the financially marginalised sections in India. For ex- Fintechs providing hassle-free loan options to the MSMEs.

3. Improved Customer Experience- Fintechs have improved the customer service experience in financial sector by employing leveraging big data, machine learning tools. For ex- Ease of investment in share markets by investment fintechs like Zerodha.

4. Increased FDI inflows and employment opportunities- The growth of Fintech sector in India has attracted huge FDI inflows in India, with 17 fintech companies crossing the valuation of $1 bn mark. These fintech startups have enhanced formal sector employment opportunities in the Country.

5. Social Change and Justice- Fintech startups have been used as a tool to bring social change and justice. For ex- Crowdfunding apps like Keto have helped in raising funds for various social causes like health care treatment of poors.

What are the Challenges with the Fintech Sector In India?

1. Increase in Cyber-Attacks on Fintech- The Fintech startups are vulnerable to cyber-attacks and hacking. According to the CERT-In data, a total of 13.91 lakh cases of cyber-attacks were reported in India.

2. Data Privacy Issues- Fintechs face the challenge of maintaining data privacy to prevent the misuse of personal information and financial data. Fintech startups have not fully complied with the provisions of Digital Data Protection Act.

3. Money Laundering- There have been reports of Fintechs indulging in Money Laundering activities. For ex- Abu Dhabi-based payments app called Pyppl, operated by the Chinese investment scamsters was used for money laundering in India.

4. Indulgence in Unethical Financial practices- The fintech sector in India has been found to be indulged in unethical financial practices like Illegal Digital Lending, mis-selling of financial products, opaque lending practices, brutal collection methods and customer harassment.

5. Infrastructural Issues- The sector is marred by infrastructural inadequacies like slow internet connectivity in rural areas.

6. Lack of Comprehensive regulatory guideline- Due to the diverse and dynamic nature of FinTech Sector, the formulation of a comprehensive regulatory guideline for its regulation and development, has become a major challenge. For ex- Lack of comprehensive regulatory guidelines for cryptocurrencies based fintechs.

What are the government steps for regulation of Fintech In India?

What Should be the way Forward?

1. Comprehensive legal framework for Fintech Regulation- RBI must adopt a comprehensive approach to Fintech regulation. Fragmented and reactionary approach to regulation stifles development of fintech sector.

2. Strengthening of Cybersecurity Infrastructure- Fintech companies must collaborate with local law enforcement agencies to address cyber threats specific to the region. Also, reporting mechanisms for cybercrimes must be established to encourage users to report any suspicious activities.

3. Addressing the Infrastructural issue of slow internet connectivity- Fintech companies should enable offline access to financial services so that users can perform essential transactions with limited or no internet connectivity.

4. Compliance Program for Fintechs- Fintechs should develop a compliance program to ensure their regular compliance with all applicable laws and regulations like the Personal Data Protection Act. This will help them avert any crisis in the future like the PayTM crisis.

5. Increase in customer awareness- Customer awareness and digital literacy must be increased to help the customers in making informed choices.