Fintech means a great many things to a great many people. In such a broad, fast-moving space, risk and uncertainty are par for the course. Late last week, the International Monetary Fund and World Bank attempted to create a framework within which the tradeoffs between risk and potential should be made. The Bali Fintech Agenda lays the bromides on thick. Embrace the promise of fintech and use fintech to enhance financial inclusion? Well, yes. But among its 12 points are a few that speak directly to some of the challenges India is facing in fintech adoption.

Promoting fintech in India is preaching to the choir. In 2005, then Reserve Bank of India (RBI) governor Y.V. Reddy used the term ‘financial inclusion’ for the first time in the central bank’s annual policy statement. In the decade and change since, it has become one of the leitmotifs of governance. Government efforts at the Centre and in the states have leveraged fintech to push for this inclusion, aided by the concurrent growth in internet and smartphone penetration. The Narendra Modi government’s demonetisation misstep and ‘cashless economy’ rhetoric provided a boost as well, even if a temporary one. Little wonder the sector is hopping. According to EY’s Fintech Adoption Index 2017, India has the second highest fintech adoption rate in the world.

The skewed nature of that adoption, however, is the first challenge. Inclusion doesn’t mean only the unbanked poor. The Agenda underlines fintech’s potential for spurring businesses as well. But that is complicated in an economy like India’s which is dominated by micro, small and medium enterprises (MSMEs). Going digital for payments can be complicated. This is especially so when modes of digital payment have proliferated in the past few years. Payment gateways are one solution, providing a one-stop shop for businesses. However, integrating with them doesn’t come cheap. The cost can be prohibitive for MSMEs.

Smaller, more nimble fintech companies targeting MSMEs have taken a shot at solving this problem. But as Arundhati Ramanathan has pointed out at The Ken, this isn’t easy. Margins per transaction are low; what matters is scale. This is why larger payment gateways target a handful of large retailers: of the $12-14 billion spent on online purchases annually in India, MSMEs account for only about 5%. This makes it that much harder for fintech companies catering to the latter to come up with sustainable business models. Fintech is supposed to enable small companies and has done so in mature economies. But the danger in India is that the same de facto business caste system that has separated large companies from their MSME counterparts in the offline economy might now carry over into the digital economy.

Regulatory uncertainty in the fintech sector isn’t making things any easier. This is the other major challenge. The agenda stresses the need “to support the formulation of policies that foster the benefits of fintech and mitigate potential risks". This would require “the modification and adaptation of regulatory frameworks to contain risks of arbitrage, while recognizing that regulation should remain proportionate to the risks."

The problem starts at the top: Whose framework is it anyway? RBI can stake a fair claim. But where exactly does the National Payments Corp. of India, a strange beast of many parts, fit in? The draft Payments and Settlements Systems Bill, setting up an independent payments regulator, muddies the waters further as R.D. Barman has pointed out today in these pages. The Unique Identification Authority of India (UIDAI) is in the mix too via Aadhaar’s use for e-KYC by fintechs, among others—or was until the Supreme Court’s judgement left no scope for private companies using Aadhaar. But Union finance minister Arun Jaitley has been making noises since about passing new legislation that would allow private companies back in. Then there’s the Srikrishna Committee—and the Telecom Regulatory Authority of India (Trai) gatecrashing.

Unsurprisingly, there is plenty of policy uncertainty. Consider the current angst by companies in the payments space over RBI’s data localization norms. Those norms were put out well before the Srikrishna Committee’s report on data privacy. Should the issue have been in the latter’s bailiwick? Trai’s releasing its own guidelines days before the Committee didn’t help.

Such policy confusion is understandable in an emerging sector--to a point. Getting the policymaking architecture right is important. As the Agenda says, “Reaping these benefits requires… strengthening of institutional capacity, expanding outreach to stakeholders, and adopting a cross-agency approach involving relevant ministries and agencies."

How can India increase the adoption of fintech? Tell us at views@livemint.com

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