Fin Legitech - Demystifying FinTech Law & Policy in India

Archit Tiwari,

SVKM's Narsee Monjee Institute of Management Studies, School of Law, Navi Mumbai

Introduction 

In the dynamic world of Indian finance, a new buzzword is making waves: These companies are Fin Legitech. Combining “FinTech” with “legal” and “tech” is ideal for a newly distinguished area of software that touches upon legal and financial processes. The purpose of this blog is to make the structure and complexity of the FinTech laws and policies easier to understand in the Indian context and still stay true to the legal aspect.

Suppose you are not familiar with the term FinTech. In that case, it stands for a technology that comprises the financial sector and technology sector which aims at offering financial services and products to the consumers.[i] These firms apply innovative technological methods of improving monetary affairs and services by exploiting digital currency such as Bitcoins.

That is why the financial technology sector is filled with a rich number of new and rapidly developing fintech companies. The largest fintech company by market value is Paytech Visa from the USA, this credit goes to Google Finance and conforms to a report compiled in 2024.[ii]

In India, the UPI has changed how the fintech startups get the customers. Players like PhonePe and Google Pay are out there, and emerging data indicate that UPI alone has enabled more than 1,200 billion transactions and revolutionized the process of making financial transactions. Ever since there has been a Lockdown situation in the country due to COVID-19. Digital payments have increased so much that we are moving towards a cashless society. UPI makes it easy for people to transfer money from one place to another in just a few seconds. In India, everyone ranging from small business owners to even a roadside cart owner has a barcode printed that is being used to carry out transactions from their consumers. 

Regulatory Landscape: Navigating the Complex Web of Regulations Governing FinTech Activities

India’s Fintech market is rapidly growing and relies heavily on innovation; however, the legal and regulatory infrastructure is still quite siloed. This situation, wherein there is no uniform set of rules, brings about issues among the regulator as well as among the companies. Some specific agencies also have their own rules.

The Reserve Bank of India (RBI) controls the payment systems by the use of the Payment and Settlement Systems Act of 2007 (PSS Act)[iii] which accredits mechanisms such as UPI and RuPay. Concerning payment gateways and aggregators, regulation was spelled out in the Directions for Opening and Operation of Accounts and Settlement of Payments for Electronic Payment Transactions Involving Intermediaries, 2009 (EPT Directions) and the Guidelines on Regulation of Payment Aggregators and Payment Gateways (PAPG Guidelines)[iv]. Prepaid instruments such as e-wallets are overseen by the Master Direction on Issuance and Operation of Prepaid Payment Instruments also known as the PPI Guidelines[v]. The sandbox mechanism of the RBI concerning the Fintech business helps in the controlled experimentation with new-age financial products/.[vi]

The IRDAI regulates insurance intermediaries by the Insurance Regulatory and Development Authority of India (Registration of Corporate Agents) Regulations, 2015[vii], Insurance Web Aggregator Regulations, 2017[viii], and the Insurance Regulatory and Development Authority of India (Insurance Brokers) Regulations, 2018[ix]. Such regulations protect policyholders and govern corporate agents, Websites with insurance products’ aggregators, and insurance brokers.

The SEBI is authorized to manage securities markets and their participants according to the Securities and Exchange Board of India Act 1992[x] and the Securities Contracts Regulation Act 1956[xi]. The regulations that are implemented in Fintech concerning hedge funds in India are the SEBI (Alternative Investment Funds) Regulations, 2012[xii]; they regulate the AIFs that are used in Fintech such that they outline the manners of registration and investor protection.

Other major regulations are NPCI Regulations that regulate payment systems typified by UPI and RuPay and the Companies Act, 2013[xiii], which mandates Fintech companies to get registered and, therefore, comply with laws governing their industry.

Emerging Technologies: Examining the Legal Implications of AI, Blockchain, and Other Cutting-Edge Technologies in FinTech

FinTech industry in India is expanding rapidly, with the help of Artificial Intelligence and Blockchain. Emerging Technologies in fintech will be Artificial intelligence, blockchain, embedded finance, Biometrics, cybersecurity, cloud computing, Buy Now Pay Later, robotics, mobile banking, gamification, cryptocurrencies, Neobanking, internet of things, open banking, P2P Lending etc. In open banking, authorized Third party service providers can access users' financial data and there is secure data sharing along with collaboration between consumers and tech Companies. For example, Instagram and Facebook are used for collaborations by influencers and there are registered businesses on Instagram and Facebook who sell their product through their website. Businessmen send products to these influencers in return for marketing and promotion of their products.

A major area of legal examination is the application of AI in automated decision-making, especially in lending and credit rating. The AI turned administrative decision case of Shanmugam v. State (Inspector of Police) decided on 22nd March 2021 underlined the principle of procedural fairness in the use of AI models. Here, the Court also recommended eliminating hidden steps in algorithms and making classification processes as fair as possible. . Financial institutions applying AI for communication with customers or credit scoring, when those techniques are deemed material for making financial decisions, must make sure these applications are not only unbiased but also their working is easy to explain to the regulators and consumers. This could include having human input in decisions made by machines, or ways in which a human could appeal the decision made by a machine. 

Blockchain technology has a decentralised base for record keeping, with high security being a major feature.  Cryptocurrencies are mostly decentralised and often built on blockchain technology. The RBI has warned about these and more, and although there are no special rules for them yet. Besides it, certain concerns such as the statuses of smart contract as enforceable and the position of Digital Assets under the Indian Contract Act, 1872[xiv], still need some legal analysis. 

 The aspect complicates even further when cross border transaction involving the use of blockchain is being made. Thus, questions arise such as, What will the Indian courts make of cross-border blockchain transaction disputes? It is crucial to build up a suitable legal foundation that will guarantee possibilities of innovations in blockchain, which are rather promising for the Indian Fintech market.

The Road Ahead (Suggestions and Conclusion): Identifying Future Trends and Potential Legal Reforms to Foster Responsible Fintech Growth in India

India’s Fintech market is rapidly booming, transforming the financial market as its population increasingly goes digital. But this speedy development calls for a strong legal and sound financial framework to support the development and avoid the misdeed. Here, one will discuss possible areas of legal change, and opportunities for developments in the future, which can search for harmony in this rather multifaceted sphere. 

In this case, several areas require a focused effort in order to bring about change. The definition of ‘Data Ownership’ faces dynamic change and therefore calls for conditions that cannot be confined to the IT Act alone. Thus, the so-called “Puttaswamy Privacy Judgment” (Justice K. S. Puttaswamy v Union of India (2015))[xv] created the right to privacy as a fundamental right. Such precedent calls for a broad Data Protection Bill, which would safeguard the Fintech sector against reckless collection, storage, and use of clients’ data.

India has become one of the world's leading digital markets with an impressive fintech adoption rate of 87%, surpassing the global average of 64%. The Fintech Market Opportunity is projected to soar to a remarkable $2.1 trillion by the year 2030[xvi].

The Government of India is actively promoting fintech, aiming to grow in this sector. Gandhinagar Is set up as the premier destination for fintech In India.  A fintech park is Set up in the GIFT city, providing tailored infrastructure and assistance for Fintech startups and enterprises. Initiatives such as Jan Dhan Yojana, Aadhaar, and mobile connectivity, referred to as the JAM Trinity, have notably enhanced financial inclusion in India[xvii]. The proportion of adults with bank accounts rose from 53% in 2014 to 78% in 2021[xviii], granting greater access to formal banking services for a larger population.  Taking into account the easy access of internet and smartphones, the rural areas also have good connectivity, which makes it easier for Village men to carry out day-to-day transactions.

Finally, an approach that is formed out of several strategies is needed to effectively analyse the issues of Fintech. Based on the aim of this paper, it is now clear that India has a unique chance to create a Fintech paradigm for the whole world if it continues to pursue the policy of liberalization and advanced innovation at the same time, maintaining the consumer’s financial protection and financial stability as the main priorities. This process will take a shift in culture with the help of legal reforms enabling the data-led and technology-driven financial solution ecosystem and keeping India on the map of global Fintech.

REFERENCES

[i] AMLEGALS Legal Strategists, FinTech Primer - The Landscape in India, 4 (July 2021), https://amlegals.com/wp-content/uploads/2021/07/FinTech-Primer-The-Landscape-in-India.pdf (last visited June 30, 2024).

[ii] Largest Fintech Companies 2024 by CFTE, CFTE, https://courses.cfte.education/ranking-of-largest-fintech-companies/ (last visited July 1, 2024).

[iii] Payment and Settlement Systems Act, 2007, § 4, No. 51, Acts of Parliament, 2007 (India)

[iv] Corrida Legal, Fintech Laws In India: Understanding The Regulatory Regime, CORRIDA LEGAL BLOG (June 30, 2024, 10:15 AM), https://www.corridalegal.com/publications/fintech-laws-in-india-understanding-the-regulatory-regime/?ut=

[v] Athul Roshal Kumar, All you need to know about FinTech Law in India, IPLEADERS BLOG (June 30, 2024, 10:00 AM), https://blog.ipleaders.in/need-know-about-fintech-law-india/?amp=1#_ftnref3.

[vi] Corrida Legal, Fintech Laws in India: Understanding the Regulatory Regime, MONDAQ (Oct. 9, 2023, 12:34 PM), https://www.mondaq.com/india/fin-tech/1369804/fintech-laws-in-india-understanding-the-regulatory-regime.

[vii] Insurance Regulatory and Development Authority of India (Registration of Corporate Agents) Regulations, 2015, Gazette of India, pt. III sec. 4 (May 20, 2015)

[viii] Insurance Regulatory and Development Authority of India (Insurance Web Aggregator) Regulations, 2017, Gazette of India, pt. III sec. 4 (May 12, 2017)

[ix] Insurance Regulatory and Development Authority of India (Insurance Brokers) Regulations, 2018, Gazette of India, pt. III sec. 4 (July 16, 2018).

[x] Securities and Exchange Board of India Act, No. 15 of 1992, India Code (1992)

[xi] Securities Contracts (Regulation) Act, No. 42 of 1956, India Code (1956)

[xii] SEBI (Alternative Investment Funds) Regulations, 2012, Reg. 2(1)(a), (Securities and Exchange Board of India) 2012

[xiii] Companies Act, 2013, No. 18, Acts of Parliament, India (2013)

[xiv] Indian Contract Act, No. 9 of 1872, India Code (1872)

[xv] Justice K. S. Puttaswamy (Retd.) v. Union of India, 1 SCC 1 (2017).

[xvi] Ministry of Commerce & Industry, "At 87%, India has the highest FinTech adoption rate in the world against the global average of 64%”: Shri Piyush Goyal," AZADI KA AMRIT MAHOTSAV [(30 SEP 2021, 2:15 PM)], [https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1759602].

[xvii] Invest India. "BFSI – Fintech & Financial Services." Invest India, https://www.investindia.gov.in/sector/bfsi-fintech-financial-services (accessed June 30, 2024).

[xviii] Invest India. "BFSI – Fintech & Financial Services." Invest India, https://www.investindia.gov.in/sector/bfsi-fintech-financial-services (accessed June 30, 2024).