RBI: ETtech Opinion | Open Letter: The RBI and the fintech fallacy

I have always held the position that RBI is one of the strongest regulators globally and is pro-consumer and anti-risk and not anti-startup. India boasts a very stable banking ecosystem and has seen far fewer bank failures when compared to some of the most developed nations globally. This is all thanks to the RBI prioritizing customer interest over anything else.

Banking is a balance sheet business built on trust. It is not a tech business. While there is much that tech can do for a bank, it cannot change the fundamental characteristics of money management, lending, and borrowing. I have personally been very vocal about this and have strongly believed that the term fintech is a fallacy and a misnomer. My belief: you are either ‘fin’ or ‘tech’.

Banking is fundamentally about risk management. What is incorrectly being perceived as the RBI’s heavy handedness against fintechs is in reality an opportunity for startups and tech founders to leverage tech to reduce risks, improve governance, and enhance compliance. Instead, we have often found startups looking for creative interpretations of regulations to launch financial products that likely violate the spirit if not the actual letter of the law. This is a quagmire, and any non-compliance with a regulatory mandate puts the fintech, as well as the surrounding ecosystem of investors and customers at considerable risk. In my personal opinion, some of the instances that that have the potential to come under the scanner in the future are:

• The practice of splitting a single company into multiple companies to segregate roles between Business Correspondent, Technology Services Providers, Program Managers, NBFCs, and Account Aggregators – because regulatory norms may not allow all of these activities to be carried out under one umbrella. This is a short term strategy – splitting one company into multiple companies where each may be independently compliant but the group is in violation will not stand the test of time.

• A few fintechs and their sponsor banks may potentially be in violation of the RBI Account Aggregator guidelines. Several fintechs likely have significantly more access to information of the customers they bring to a bank than what RBI’s guidelines have contemplated or allowed.

I believe fintechs globally are acknowledging or will need to acknowledge this dichotomy between being a ‘fin’ or a ‘tech’.

Discover the stories of your interest

• First – decide whether they are “fin” or “tech”

• If you are “fin” – you are a licensed entity that must espouse safety and soundness. Move fast and break things as a philosophy can work in the “tech” world but not in the “fin” world. As a “fin” your RoE will be 20-30% and not 300%. A well run bank delivers stable economics with low risk. As a community we would do well to accept that and not aim for triple digit returns. There is no mathematical way of achieving them.

• If you are “tech” – find your niche and solve a specific problem. Recognize that lending money is a “fin” function and that you do not own the end customer. You are responsible for enabling “fin” players to deliver delightful consumer experiences, financial inclusion, and financial health.

I submit that the RBI has been amongst the most forward looking regulators when compared to most other countries. We don’t have to look far for proof – the Indian financial ecosystem has seen Aadhar, UPI, Account Aggregator, BBPS, OCEN, and many other innovations all supported by the regulator in a short window of time. And, vast opportunities have therefore emerged in the sector due to the RBI’s efforts to foster competition, enhance consumer protection, and propel innovation. I would like to respectfully submit that if all of us wish to rally together around a cause, then let that cause be to support the regulator and in building a stable, vibrant, and financially inclusive society.

Both ‘fin’ and ‘tech’ have unlimited opportunity and tremendous potential. Innovation and regulation are not mutually exclusive.

Bhavin Turakhia is the cofounder and CEO of Zeta.

I have always held the position that RBI is one of the strongest regulators globally and is pro-consumer and anti-risk and not anti-startup. India boasts a very stable banking ecosystem and has seen far fewer bank failures when compared to some of the most developed nations globally. This is all thanks to the RBI prioritizing customer interest over anything else.

Banking is a balance sheet business built on trust. It is not a tech business. While there is much that tech can do for a bank, it cannot change the fundamental characteristics of money management, lending, and borrowing. I have personally been very vocal about this and have strongly believed that the term fintech is a fallacy and a misnomer. My belief: you are either ‘fin’ or ‘tech’.

Banking is fundamentally about risk management. What is incorrectly being perceived as the RBI’s heavy handedness against fintechs is in reality an opportunity for startups and tech founders to leverage tech to reduce risks, improve governance, and enhance compliance. Instead, we have often found startups looking for creative interpretations of regulations to launch financial products that likely violate the spirit if not the actual letter of the law. This is a quagmire, and any non-compliance with a regulatory mandate puts the fintech, as well as the surrounding ecosystem of investors and customers at considerable risk. In my personal opinion, some of the instances that that have the potential to come under the scanner in the future are:

• The practice of splitting a single company into multiple companies to segregate roles between Business Correspondent, Technology Services Providers, Program Managers, NBFCs, and Account Aggregators – because regulatory norms may not allow all of these activities to be carried out under one umbrella. This is a short term strategy – splitting one company into multiple companies where each may be independently compliant but the group is in violation will not stand the test of time.

• A few fintechs and their sponsor banks may potentially be in violation of the RBI Account Aggregator guidelines. Several fintechs likely have significantly more access to information of the customers they bring to a bank than what RBI’s guidelines have contemplated or allowed.

I believe fintechs globally are acknowledging or will need to acknowledge this dichotomy between being a ‘fin’ or a ‘tech’.

Discover the stories of your interest

• First – decide whether they are “fin” or “tech”

• If you are “fin” – you are a licensed entity that must espouse safety and soundness. Move fast and break things as a philosophy can work in the “tech” world but not in the “fin” world. As a “fin” your RoE will be 20-30% and not 300%. A well run bank delivers stable economics with low risk. As a community we would do well to accept that and not aim for triple digit returns. There is no mathematical way of achieving them.

• If you are “tech” – find your niche and solve a specific problem. Recognize that lending money is a “fin” function and that you do not own the end customer. You are responsible for enabling “fin” players to deliver delightful consumer experiences, financial inclusion, and financial health.

I submit that the RBI has been amongst the most forward looking regulators when compared to most other countries. We don’t have to look far for proof – the Indian financial ecosystem has seen Aadhar, UPI, Account Aggregator, BBPS, OCEN, and many other innovations all supported by the regulator in a short window of time. And, vast opportunities have therefore emerged in the sector due to the RBI’s efforts to foster competition, enhance consumer protection, and propel innovation. I would like to respectfully submit that if all of us wish to rally together around a cause, then let that cause be to support the regulator and in building a stable, vibrant, and financially inclusive society.

Both ‘fin’ and ‘tech’ have unlimited opportunity and tremendous potential. Innovation and regulation are not mutually exclusive.

Bhavin Turakhia is the cofounder and CEO of Zeta.