Fintech and Regulatory Unbundling

Fintech is a highly regulated sector, and thereby many (or most) of the innovation and new business models / propositions, depending on policies and norms from regulators.

Historically financial regulators have been better focused in terms of the policies on Financial Risks.

Then with retail banking and branches, some focus started to come on Operation, Customer Services & Marketing.

Then began the advent of technology, norms around security practices, cloud, data privacy, social media etc evolution.

In recent past, we have seen increasing scrutiny by regulators with new age fintech’s. In most cases regulator has some genuine rationale in coming out with curbs or tweak in policies. However, the challenge lies wrt conduct of business, as in many cases it kills the math, makes business unviable, increases friction in conduct of operations, partnership & customer experience. The recent norms by RBI in India on Lending by PPI’s, or curbs on BNPL or even Open Banking policies are some references in this regards.

Given the realities of digital & Fintech ecosystem and emergence of players, there is therefore a need for Regulatory Bundling of new age Fintech’s into 4 categories, viz: –

  1. Front End Players – These are players who will basically be front ending the solution to customer be it sales & servicing. So, mostly Business risk, client acquisition (KYC / AML), customer servicing, partnerships etc will fall here.
  2. Financial / Balance Sheet Players – These players will basically be funding the front-end players and have partnerships with them. Financial Risks, credit, underwriting, deposits, limits, ratios & Norms will fall under their purview.
  3. Operational Players – These are players who offer operational processing and services for frontend players.
  4. Technology Players – These players will offer solutions to the above 3 and will qualify and create their systems in line with some technical rules and guidelines proposed by regulators. So, Technology Risk & Norms will fall in this category.

Note:- Players can fall under multiple buckets. For eg a Card Processing company may provide both tech & Ops. Similarly, a full stack bank will fall under all the categories. Hence, they will need to follow norms for the respective categories they fall under.

Once this is done, the norms can evolve, and so will the business robustness of each category (given each category comes with specialized ability and skills). The beauty is that this has happened in some areas, but not been very explicitly defined and categorized across the board. Since, there is no such clear classification of players there are many gray areas where Fintech’s operate. This then comes under regulatory scrutiny (after the segment has grown to a size) and then curbs and many losses for fintech’s. This 4 category Unbundling will thereby provide better clarity for players in the ecosystem and evolving policies can be more effective.


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