Hi everyone, 

Welcome to the 95th edition of The Pattern, a weekly newsletter where we bring you the latest from the worlds of finance, banking, and technology.  

There’s little on FinTech minds this week other than the RBI’s latest directions to Paytm Payments Bank to curb its deposit taking, credit issue, and fund transfer operations. So, let’s unpack what’s going on there. 

What explains the RBI’s action? 

The regulator’s clampdown doesn’t necessarily come as a surprise. It had penalised the payments bank in 2022 as well – barring it from onboarding new clients – over violation of rules around the flow of data to servers outside India, in addition to oversight in verification of customers.  

The latest instructions come after an external audit found persistent non-compliance with anti-money laundering and KYC norms. The audit also flagged that the payments bank had failed to isolate itself from risks arising from related-party transactions, especially with its affiliate Paytm Payment Services. Its complex shareholding has also added to the regulator's concerns about its related-party transactions. 

The larger picture

 It’s evident that the RBI intends to tame the FinTech beast, even if it’s through proxy. Several developments over the last few years testify to this: 

1. In 2022, it  stopped  non-bank entities with PPI licenses from loading cards and wallets with credit lines.

2. In the same year, it also published its  guidelines  for digital lending that aimed to set up standards for consent management, loan recovery, data privacy, and much more. 

3. More recently in 2023, RBI governor Shaktikanta Das also proposed setting up a  Self-Regulatory Organisation  for FinTechs. 

4. The RBI is all for FinTechs  merging  with regulated banks – creating unions that would bring them under the regulatory ambit.

The Paytm Payments Bank development is just another example of the RBI’s long roll out of regulations for financial entities. Just this week, the regulator came out with recommendations to  improve the effectiveness of compliance monitoring  and automation tech by limiting manual intervention for all manner of banks, except only for regional rural banks.

How are FinTechs taking this?

It looks like FinTechs, and their partners, are falling into line. Soon after the RBI’s diktat, Paytm officials said that they will look to third-party banking partners to continue distributing their financial services.  

This is nothing new. In the past, PPI-based FinTechs found workarounds to stay in business despite the ban. Of late, there has been a surge in the demand for legal and compliance specialists in the BFSI sector and FinTechs – with a  6X increase  in managing director level movements for these positions. 

Conclusion

This latest development sheds light on a phenomenon we’re all trying to wrap our heads around – the same RBI licencing (and therefore, legitimacy) that is FinTech’s coveted El Dorado might also come to limit its potential. 

But FinTechs have proved time and again that they can regroup and rebuild each time the regulator throws them a curveball.  

This is very symptomatic of the FinTech temperament – players in this space have always found ways to survive, dare I say even thrive, in the face of what would pose existential crises for weaker actors. FinTechs have rolled with the punches like shifting regulations and changing investor sentiments with resilience and dynamism. 

Between the digits

Rs 1.2 trillion : Centre’s revenue expectation from the Telecom sector in FY25  Rs 11.1 trillion : Centre’s budget allocation to Infrastructure sector  $620.441 billion : India’s Forex reserve  Rs 13,000 crore : Transactions on TReDs platform 

Reading list

 1.  Can tomorrow’s Budget promise a decade of economic growth?

2.  Budget 2024: Vote on confidence

3.  Germany is in a bizarre fiscal mess of its own making

4.  Five key Budget 2024 proposals that pack a punch

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter  here  and follow  FinBox on LinkedIn  to always get all updates.  

Cheers,

Mayank 

All opinions expressed are my own and do not necessarily reflect the views of FinBox or its promoters