Financial Services News

Key compliance measures to onboard Fintech firms

Several industries have had to innovate to ensure business continuity in the last two years. It was also essential from the point of view of developing consumer connect for a competitive edge. A relatively emerging sector like fintech has had to work hard to create a good space for itself in India. Last year, Indian fintechs raised an impressive $9 billion. The funding came with the promise of innovation, with the promise of building models which haven’t been built before to serve customers’ needs that have not been addressed. But regulations must be adhered to while dealing so closely with money and finance.

Considering the massive pace at which Fintech is growing, potential threats like fraud, breaches, and danger to cybersecurity are also rising. Currently the third largest FinTech ecosystem in the world, behind the US and China, the Indian fintech sector is expected to grow with a compound annual growth rate of 22%, in the next five years. New payment systems and models can compromise security and market integrity. Blockchain, crowdfunding, and distributed ledger technology (DLT) are also vulnerable to fraud and hacks. Because of these risks integrated with the finance sector, the financial services sector must be heavily regulated across geographies.

Let’s look at some of the key best practices fintechs can follow to safeguard the financial security of their customers, especially while evaluating partners and vendors who offer employee financial wellness.

Consumer-centric digital enterprises

Regulations exist to protect the interest of end customers. They exist to ensure that short-term benefits do not hurt long-term financial independence. For example, a recent innovation like credit lines, which prospered for a while, was shut down soon after. In June this year, the Reserve Bank of India (RBI) issued a circular saying that credit lines cannot be loaded into prepaid instruments.

Businesses which processed transactions worth more than 3500 crores were now in jeopardy.

With regulators giving extra scrutiny to new innovative technologies, fintechs and banks that partner with them need to be extra careful they are compliant with regulations, new and old.

Credit lines are a pre-approved loan amount, usually from a bank or NBFC, which may be used when the customer requires it.

Customers also have options to avail overdraft facilities provided by the bank or access to their earned salary (Salary-on-Demand) provided in partnership with employers. In a world full of emergencies, where employees may need urgent access to finance, the Salary-on-Demand is a great system for employers to ensure the well-being of employees. However, the onus to ensure compliance also falls on employers to avoid any regulatory hassle in the future.

Make Know Your Customer mandatory

Fintechs were replicating credit cards without going through the necessary Know Your Customer (KYC) requirements and underwriting norms required for a credit card. The latest digital lending guidelines also re-emphasise that a credit line must be transferred from the lender’s bank account to
the borrower’s registered bank account.

The major differentiating factor between prepaid instruments and bank accounts is that the KYC requirements for opening Prepaid Instruments (PPIs) are relatively relaxed and not subject to the
same level of scrutiny. This should change. Making KYC mandatory helps add safety cover.

Identify fraudulent models

A few basic questions that one should ask before availing credit from fintechs and Non-Banking Financial Companies (NBFCs) are: Where is the money coming from? What is the underlying instrument? A bank account? A credit card? A prepaid instrument? How is the money flowing between the multiple entities involved? Are direct payments being made to end merchants without passing through the borrower’s bank account?

Regulators cannot monitor all financial institutions and only audit non-compliant models after they become big enough to be actively audited. Until such time, it is essential, as a customer, one remains informed and aware of such models that could spell trouble. Using services from non-compliant organisations can put your credit scores and financial security at risk. Moreover, if organisations are willing to flout regulations in one aspect, they may do the same in other aspects, such as data security and collection/recovery processes.

Prioritising Consumer Safety

Leveraging technological advancements to deliver financial services has greatly facilitated financial inclusion. Several banks and financial institutions have partnered with Fintechs to incorporate modern technologies such as blockchain and artificial intelligence into their products, services, and operations.

Digital financial services, payment aggregators and processors, standalone platforms that interface with regulated institutions, and digital banks are all growing in popularity. Though we all appreciate innovation, one can’t ignore that the responsibility towards the safety of their customers does not become casualties of failed experiments by overzealous organisations. Helping employees manage their finances is important, but even more essential is that it is done with utmost caution. Ultimately, the commitment of the organisation to manage employees’ finances and promote financial wellness will add to the well-being of the employees and positively impact the organisation.



Views expressed above are the author’s own.


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