The fintech ecosystem needs a balance between regulations and innovations

Since being subject to severe restrictions by the RBI that stem from regulatory concerns, the Paytm saga has undoubtedly, rocked the fintech ecosystem. On January 31, the central bank barred the bank from undertaking any banking activities, including deposits, credit transactions and wallet top ups, among others after February 29. While the regulator has taken action against various financial entities in the past, this one is considered to be the harshest on any new-age fintech player.

The RBI did not leave any window open for the bank to come back from these stringent restrictions, which have led to questioning of the gravity of regulatory concerns. Meanwhile, a group of Indian startup founders wrote to Prime Minister Narendra Modi, Finance minister Nirmala Sitharaman and the RBI on the recent sanctions against Paytm, urging them to engage in a constructive dialogue with the fintech ecosystem.

“RBI's current, seemingly punitive, regulations levied against Paytm Payments Bank could have far-reaching and detrimental consequences for the entire FinTech ecosystem. The recent directives also impact millions of users of Paytm Payments Bank and such harshness needs to be revaluated to safeguard the best interests of customers and merchants,” it said.

The letter also pointed out that the sanctions against Paytm Payments Bank can impact the country's image as a business-friendly nation as ‘excessively stringent regulations targeting prominent fintech innovators like Paytm could create an impression of inconsistency and unpredictability, potentially deterring potential investors and innovators from entering the Indian market.’ Now, there are two sides to the argument. Firstly, the transgressions of Paytm with regard to regulatory compliance that led to such punitive action.

As the details are awaited with regard to specifics of the case, the central bank has indicated that it wouldn’t tolerate any lapses on compliances that can potentially harm the Indian economic system. Through such a punitive measure, the RBI has sent a clear signal that innovation cannot be at the cost of financial stability of the system. The other side of the argument is related to the Indian fintech ecosystem. No doubt, India as a country has surpassed many developed nations in terms of financial innovations. Paytm is, no doubt, one such player that has enriched the Indian fintech ecosystem in many ways.

There are thousands of fintechs, which have made life of the common man easier through innovative product offerings. Therefore, such ecosystem needs stabile regulatory norms with predictability. In the last two years, the central bank had come up with several directives to regulate the ecosystem. Earlier, it banned non-banking financial institutions from loading pre-paid instruments.

Similarly, it showed its discomfort on ‘Buy now, pay later’ products. Such regulations definitely created disruptions in the fintech ecosystem as companies had to change their business models. Against this backdrop, the regulator must find a balance between maintaining financial stability and also promoting innovation. Though the impact of any new innovation is initially unknown to the whole system, the central bank has the task of anticipating those impacts before allowing such products. It also has to engage with fintech ecosystems more on compliance related matters than the traditional financial institutions. Armed with such moves, the Paytm kind of decisions could be avoided.