The Pattern #97: Why won’t the FinTech distress go away anytime soon   

Hello everyone,  

Welcome to the 97th edition of The Pattern, a weekly newsletter where we bring you the latest from the worlds of finance, economy and technology.  

From the frying pan into the fire   

The year 2024 so far hasn’t been a ray of sunshine for Indian FinTechs. Even as startups continue to battle a funding winter, discontent investors and a rough macroeconomic environment, those in the financial sector arguably have had it way worse.  

Like our CEO Rajat Deshpande wrote in his newsletter this week, the FinTechs find themselves in a tough spot right now with the regulator breathing down their necks. But, as he wrote, it’s an opportunity to reorient themselves to the hyper-regulated world of finance.  

After all, banks and insurers know that being in the good books of the regulator is the only product strategy that pays off.  

However, philosophising rarely helps alleviate pain. Beyond the platitudes of columnists and watchers, FinTechs on the ground are hustling – fighting terrible odds to stay alive in the face of extreme adversity.  

Just this week, the Reserve Bank of India came down heavily on yet another sector- corporate credit card s. A whole bunch of companies built a business out of providing commercial credit cards to companies who then use these cards to make payments to their vendors. These card providers are basically distributors who launch these cards in partnership with the banks and card networks like Mastercard and Visa.  

But, the RBI has instructed the card networks to immediately pause all payments pending further instructions. This has thrown a spanner in the works for multiple companies offering exactly this facility as a service while also potentially inconveniencing thousands of companies that depend on these corporate cards for their expenses.  

The industry is expecting some clarity to come through after certain representatives meet the regulator next week but for now, it’s uncertainty and disappointment even as the startups try to make quick fixes to enable them to provide some of these services with lesser disruptions.  

But why is the RBI mad?    

The troubles for the FinTech sector aren’t new. Before the credit card action, there was Paytm Payments Bank that has been all but frozen throwing one of the biggest companies in the space in a limbo. Earlier too, the regulator has been heavy handed with digital lending apps, alternative investment companies and other niche whitespaces that enterprising FinTechs were catering too.    

Every circular, every direction, and every suspension enforced by the regulator comes after a deep review of practices and consideration of consumer protection and interest. So, the regulator is unlikely to carry much blame for being unfair. A more likely explanation is that we’re now nearing the end of the road for light-touch regulation and exploratory policymaking.  

The regulator has now decided to step into the weeds and fix things it deems incongruent with its larger goals for the Indian financial and banking system.  

This means that the stereotypical ‘move fast and break things’ adage will no longer apply to Indian FinTechs – at least the ones that want to live to see another day.  

It also means that, irrespective of the size, scale, function, products or the industry – any company that interacts with the banking system must prepare themselves to be regulated at par with banks – that's perhaps the only way to ensure business continuity at a time when non-compliance could be a death sentence for many a promising companies.  

Like Rajat wrote:  

“For B2B FinTechs, the brief has never been clearer. They have always existed to build for REs, and the growing sectoral affinity towards regulation means that they might have been on to something. Business-facing FinTechs are deeply integrated into the systems of REs. This means that even though they might not build the flashiest features, as long as they adhere to their regulated customers’ IT policies, they will automatically toe the regulatory line.” 

Perhaps, FinTechs are due for a realization that no matter how much they want to be tech-first but in India, you’ll have to be finance-first. And that means, knowing the boundaries and never crossing them – even by mistake.  That’s all from me this week. As always, leaving some interesting data and reading recommendations below.  

Between the digits   

• 1,75,000 accounts – Authorities have found more than 1.75 lakh accounts without proper KYC at payment banks. Out of these 50,000 are suspected to be involved in money-laundering or fraudulent transactions.  

• 2.9% - S&P expects Indian banking system to come under pressure in the year 2024 with retail credit demand expected to moderate by 200 bps and the net interest margin to reduce further from 3% to about 2.9%.  

Reading list  

1. RBI's resounding message to fintechs: Quick and easy but with KYC  

2. Here’s why RBI placed B2B card pay on full hold  

3. PayU, NPCI join hands to roll out Credit Lines on UPI’ feature  

4. FinBox CEO: Will FinTechs sacrifice the pawn of innovation to win over the queen of regulation?  

5. RBI cautions banks, NBFCs against complancency  

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.