Why RBI is wary of large tech companies entering the finance sector

In India, fintech has been entering businesses that are beyond the scope of just one regulator. The most popular ones are in the payments space through the domestic unified payments system. Others deal in equity markets, mutual funds and insurance. In the initial days fintechs were seen as a competition to the banking sector, but they later evolved as a partner to several traditional banks and non-bank lenders. We are now in a phase where banks are ramping up investments in technology and a section of large lenders believe they would leave nimbler fintechs behind in the race for customers.

Have RBI and such firms locked horns?

RBI was reportedly scrutinizing a deal between Google Pay and Equitas Small Finance Bank, announced last September. It was meant to allow customers use Google Pay to open fixed deposits with Equitas. RBI’s concerns could have risen from the involvement of a large tech company in garnering customer deposits, but the payment app of Google is understood to be meant only for distribution of the product. RBI deputy governor M. Rajeshwar Rao had said last October that the entry of BigTech into the financial sector is a global phenomenon, engaging the attention of central banks around the world.

What is RBI’s stance on data storage by foreign firms?

In April 2018, RBI had mandated all payment firms to store data exclusively in India. A delay in compliance by WhatsApp led to a restricted rollout of its payments feature. Diners Club, American Express and Mastercard were asked to stop issuing cards in 2021 after they failed to store data exclusively in India. RBI subsequently allowed Diners Club to issue cards.

What has RBI done so far to check BigTech?

The regulator is taking baby steps towards regulating the presence of large tech corporations in financial services. In June 2018, it set up a fintech unit under the department of regulation as a central point of contact for activities related to fintech. In January, this was hived off as a separate department. RBI believes regulations are needed to mitigate risks. It believes the size of large tech firms in finance poses a systemic and concentration risk to the economy; they also have an unfair competitive advantage over regulated entities.

How does regulation affect consumers?

Regulating the fintech sector and large tech companies in finance is expected to protect consumer rights. Equally key is the issue of privacy and data security, given that India is yet to have a solid data protection legislation. Last November RBI’s committee pointed out that large tech firms typically enter financial services by sharing the data gathered by them with existing financial services companies, and gradually providing financial services either in partnership or directly to their customers.