Firms other than banks cannot deal in deposits: RBI
This is the first time that an RBI official clarified on the issue of fintech players such as Google and Amazon tying up with banks to facilitate deposit collections
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The Reserve Bank of India (RBI) will have to adopt entity-based regulations instead of activity-based, deputy governor Rabi Sankar said.
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Speaking at the Global Fin Tech Fest 2021 on Tuesday, Sankar also spoke about why fintechs are not allowed in deposit products, but only as payment service providers.
“Any fintech entity that provides such liquidity services is effectively functioning as a bank and therefore should be subjected to the same legal/regulatory/supervisory regime that a bank is subjected to. This is one reason why in almost all countries, entities other than banks are not allowed to directly deal in deposit or deposit-like money," he said.
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This is the first time that an RBI official clarified on the issue of fintech players such as Google and Amazon tying up with banks to facilitate deposit collections.
Fintech firms are transforming the entire financial landscape and regulation has to change accordingly, he said.
“The regulation must be activity based and not entity based; for example, in case of big tech firms, or large non-financial entities (but engaged in finance). The approach to regulation has to evolve with the size of fintech," Sankar said, adding, “cybersecurity, systemic risk, and risk affecting competition need to be considered while dealing with big tech". “In many ways, regulation is the process of slowing down continuously evolving value chains so that legislation gets time to catch up," he said.
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“Slowing down the process of change can attract criticism that the regulator is stifling innovation, but that is often the best way to protect customers," he said in his speech.
Sankar also said that big tech raises competition and concentration issues. While limits imposed on the number of market participants might open up opportunity for new players, it might also stifle innovation.
“There is no clear regulatory approach available, whether in India or abroad. Just that markets are evolving, so must regulations," he said.
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The RBI deputy governor also spoke on the importance of banks in the financial intermediation process.
“Banks provide liquidity services, and bridge the temporal gap. Banks can create money and credit. Similarly in the area of payments, banks are uniquely placed, since all digital payment transactions are transfers of money from one bank to another," he said.
“It is easier to see why financial tech cannot replace the core nature of financial intermediation. It can bridge the spatial gap because of their reach, but not the temporal gap," he said.
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