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The role of Financial Technology i.e. FinTech in the Indian digital payments, lending, and virtual digital assets space has been highly disruptive and impactful. Coupled with fast-paced growth in internet services and access to mobile phones in India, FinTech products/services from regulated entities as well as non-regulated intermediaries have rapidly grown in innovation and volume in the past few years. Consequently, the Indian fintech industry is expected to generate revenue amounting to around USD 190 billion by 2030.1 At the same time, regulatory developments have been fast-paced in the FinTech space, which oftentimes requires assessment of business strategies to achieve compliance. The FinTech industry also continues to support many new-age business models in this digital era.
KEY INDUSTRY VERTICALS / OFFERINGS
- Unified Payments Interface: Unified Payments Interface (“UPI”) is a payment system operated by the National Payments Corporation of India (“NPCI”) and subject to regulation by the Reserve Bank of India (“RBI”). UPI enables real-time bank-to-bank payments, relying on mobile applications such as BHIM, Google Pay, PhonePe, etc. The NPCI has launched certain new features and is in the process of offering several new features. These include overdraft facility through UPI, conversational payments through UPI (Hello UPI), UPI123 Pay, UPI Tap & Pay, UPI Lite X and even international payments through UPI.
- Prepaid Payment Instruments: Prepaid Payment Instruments (“PPIs”) are instruments issued by authorized banks and non-bank entities with stored value such as e-wallets or virtual cards which can be used for purchase of goods and services. PPIs also include gift cards, vouchers, and metro cards.
- Digital payments and lending: Digital payments include UPI, PPIs, cards as well as other payment mechanisms that do not involve physical exchange of legal tender. Digital lending is providing credit-linked FinTech products/services through websites or mobile applications such as staking, derivative products in the crypto space, white-label lending, pre-sanctioned credit lines through UPI, P2P and Non-banking Financial Companies (“NBFCs”) lending structures. However, new age business models operating both locally and cross-border are facing various challenges around structing payment models, foreign remittances and data related compliances.
- Virtual digital assets: Virtual Digital Assets (“VDAs”) are cryptographic tokens recorded on a digital ledger (the blockchain) and are transferred using a peer-to-peer method, eliminating the requirement for banks and other financial institutions. While a Supreme Court of India judgment in 2020 supported trading activities in VDAs, the crypto industry at large still faces numerous regulatory grey areas. However, VDAs are taxable at a flat 30% income tax rate coupled with tax deduction at source of 1%, and VDA service providers have been brought under the GST regime. As of March 2023, VDAs have been brought under the ambit of the Prevention of Money Laundering Act, 2002, and shall be subject to KYC and due diligence requirements and related compliances. On a related note, the RBI launched the first pilot of the central bank digital currency, a digital alternative to physical cash run on distributed ledger technology.
Payment aggregators and other payment intermediaries collect payments from customers on behalf of e-commerce merchants, and pool them to transfer the funds to the merchants periodically. They enable e-commerce merchants to undertake business without requiring a separate payment integration system. Payment gateways offer the technological infrastructure required to process online payment transactions without handling funds.
- Strategic and Regulatory Advisory: Nishith Desai Associates (“NDA”) advises routinely on regulatory issues surrounding various national and multi-jurisdictional FinTech models flow of funds, cross-border remittances, VDAs and crypto-backed products, tax issues, sectoral storage and data localization issues and AML/CFT concerns.
- Disputes and Litigation: We offer pre-litigation advisory and assist in responses for anti-money laundering and income tax related investigations and compliances under payment systems laws. We also represent clients before various forums, including the Supreme Court and High Courts.
- Structuring and Transactions: We advise on business models of multi-national payment service providers, intermediaries, crypto exchanges, etc. including models that are subscription based or those that involve cross-border fund transfers. We also conduct due diligence and identification of issues for payment service providers and review of regulatory compliance of business models offering financial products.
- Documentation: We assist in drafting, negotiating and advising on payments services, merchant on-boarding, outsourcing and tech infrastructure service agreements, with banks, NBFCs, payment service providers and other FinTech companies. We also assist in drafting, reviewing and negotiations investment agreements for investors in the FinTech space, platform documentation and employment documentation.
- Policy Development: We regularly assist and prepare position papers on issues of FinTech policy, submit representations to the Government, participate in public consultations and hold industry focused sessions with stakeholders.
The Banking Regulation Act, 1949 establishes a regulatory framework for banking providers in the country and imposes registration as well as compliance requirements on banks. The Reserve Bank of India Act, 1934 (“RBI Act”) is the parent act of the RBI and provides regulatory powers to the RBI making it the primary financial services regulator in India. The Payment and Settlement Systems Act, 2007 (“PSS Act”) governs payments systems in India and mandates authorization from the RBI for all entities that intend to commence and operate a payment system. Under the RBI Act and the PSS Act, the RBI is empowered to regulate financial services providers and payment systems service providers through directions, notifications and circulars. The RBI is also endowed with rule making power under the Foreign Exchange Management Act, 1999 to implement foreign exchange controls for cross-border transactions.
There are also other sectoral regulators that industry participants may be regulated by such as the Securities and Exchange Board of India established under the Securities and Exchange Board of India Act, 1992, which regulates securities related products/services. The Insurance Act, 1938 and the Insurance Regulatory and Development Authority of India Act, 1999 regulate FinTech services that provide insurance products/services. There are also other regulators such as the NPCI which operates certain payments systems (UPI, RuPay, Bharat Bill Payment System, etc.) and the Unique Identification Authority of India which oversees the framework on Aadhaar, a Government identifier that is relied on heavily by many FinTech service providers.
It is important to have a close eye on a space that is as rapidly evolving as FinTech. The trends in the space include:
- As per reports, India has become the third-largest fintech ecosystem in the world following the USA and China. The market size was $50 billion in 2021, while it reduced to $39 billion in 2022, owing to global developments2, it is estimated to reach $150 billion by 2025.3
- India has signed MoUs with multiple countries and talks are underway to enable UPI payments in such countries through accounts linked to international mobile numbers. Countries such as France, UAE, US, Saudi Arabia and Singapore have allowed use of UPI. In February 2023, the RBI also enabled access to UPI to foreign nationals and non-resident Indians visiting India.4
- Driven by financial inclusion, the RBI has allowed small value digital payments in offline mode up to a limit of INR 500 per transaction, subject to an overall limit of INR 2000 per payment instrument.5
- To safeguard customer data, the RBI has restricted storage of card data by merchants and payments systems providers, prompting the industry to implement alternate solutions such as tokenization (also suggested by RBI).
- A regulatory framework for e-mandates on payment instruments to facilitate automatic payments was also introduced with regular tweaks by the RBI in coherence with industry demands.
- The VDA industry has also witnessed the entry of several crypto exchanges offering varied products from typical trading to derivative and staking products.
- Neobanks are also garnering popularity as they provide completely digital banking platforms in partnership with traditional banks, allowing an individual to access a whole array of banking services without stepping out of their homes. The RBI has also issued master directions on outsourcing of IT services, with effect from October 1, 2023, applicable on its regulated entities which work with tech providers, as is the case in most neobanking models.
1Leading Companies: CoinDCX, Coinswitch Kuber, Discovery, GoDaddy Hike, Hungama, Paytm, Rario, Unocoin, Viacom 18, Visa, Coinbase, PlotX & WazirX
2Important Industry Associations: Blockchain Association Singapore (BAS), DSCI (Data Security Council of India), FICCI (Federation of Indian Chambers of Commerce & Industry, IAMAI (Internet and Mobile Association of India), NASSCOM (National Association for Software and Services Companies) and USIBC (US-India Business Council).
2https://www.thehindubusinessline.com/economy/indian-fintech-start-up-funding-fell-40-in-2022-report/article66964533.ece (last accessed on October 16, 2023).
3GLI Fintech Laws and Regulations 2022|India available at https://www.globallegalinsights.com/practice-areas/fintech-laws-and-regulations/india (last accessed on October 16, 2023).
4https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12452&Mode=0 (last accessed on October 16, 2023).
5https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12531&Mode=0 ; https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=56174 (last accessed on October 16, 2023); https://rbi.org.in/scripts/FS_Notification.aspx?Id=12215&fn=9&Mode=0 (last accessed on October 16, 2023).
6NDA’s FinTech Chambers & Partners 2024 Submission.