Disrupt, play by rules

Some fintech firms’ argument that RBI action against Paytm bank hurts innovation is plain wrong

RBI yesterday gave more information on its regulatory action against Paytm Payments Bank. It said the root cause of action was the bank’s non-compliance with regulatory norms. The action came only after bilateral talks between the bank and RBI didn’t produce results.

No special dispensation | Digital technology has disrupted the financial sector in a big way. It’s introduced a whole new way of doing business and even traditional banks have been forced to adapt. But one aspect that hasn’t changed, and rightly so, is the need for disruptors to operate within boundaries set by regulators.

Misplaced fears | Regulatory action on Paytm Payments Bank was followed by some fintech firms asking RBI to reconsider its action as it could have a chilling effect on innovation and investmentin a fast growing area. That’s a baseless argument. On the contrary, a Wild West environment could undermine investment. RBI’s action was on account of non-compliance. If there’s no deterrent, why should any firm want to follow rules?

Why invoke innovation | Fintech’s fast expansion owes everything to innovation. Lobbying to change a regulator’s decision would make sense if it chokes innovation. That, however, isn’t the case here. Asking for regulatory forbearance using innovation as defence is at best misplaced. Nothing prevents fintech firms from innovating in future. Let’s not mix issues.

Communication is key | Where RBI could have done better is anticipating the fallout among mobile wallet users about the way its regulatory action would be perceived. Umbrella brand names may cover multiple businesses with independent regulatory requirements. It’s unreasonable to expect mobile wallet users to be aware of the distinction between different businesses under a brand name. Anecdotal evidence indicates that regulatory action against the bank had a negative fallout on wallet users.

Complementary roles | To an extent, all countries experience a tussle between regulators whose job it is to examine risks in detail and innovators who race ahead. But that engagement is not inherently adversarial. It’s about different perspectives.
In India, GOI across political formations has provided fintech a big boost through Aadhaar. It’s allowed fintech to take off by carrying out digital verification of data to meet KYC needs. That’s the prime example of complementarity between govt and tech. Fintech firms should innovate – and play by rules.

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