Banks execute the core service of intermediation in the monetary method and fintechs should really be seen as enablers, Reserve Bank of India (RBI) deputy governor T Rabi Sankar stated on Tuesday. Fintechs which give liquidity services — the exclusive domain of banks — will have to be subjected to regulations and supervision on a par with these applied to banks, he stated, speaking at the Global Fintech Fest organised by Internet and Mobile Association of India.
Banks bridge temporal gaps in requirement of revenue by offering liquidity services, Sankar stated, as they are uniquely placed by dint of their capacity to develop revenue and credit. Similarly, in the field of payments, banks are uniquely placed considering that all digital payment transactions are transfers of revenue from one bank account to a further.
All other payment service providers facilitate this transfer of revenue and in that sense, play a supporting function, he stated.
“While financial technology can improve the efficiency of intermediation, they cannot replace the core nature of financial intermediation,” the deputy governor stated.
For that objective, there will often be a want for a bank to provide liquidity services. “Put another way, this means that if any fintech entity provides liquidity services, it is effectively functioning as a bank and, therefore, should be subjected to the same legal, regulatory and supervisory regime that a bank is subjected to. This is one reason why in almost all countries, entities other than banks are not allowed directly to deal in deposits or deposit-like money,” Sankar stated.
Even as he acknowledged the several methods in which the use of monetary technologies has enhanced the delivery of monetary services, Sankar stated that fintechs by their pretty nature pose a challenge to incumbents. The perfect method is for fintech businesses to be viewed as as enablers and partners in synergy with banks or comparable monetary institutions, he stated. “So there is this normal talk of competition to banks from fintech companies. I think the proper way to look at that is that competition to banks and other financial institutions is not really from fintech companies,” Sankar stated, adding, “The competition remains within banks — between banks which can leverage fintech better and banks which are not as good at leveraging fintech.”
Sankar observed that the nature of regulation has to necessarily adjust as fintech transforms the monetary landscape. “The regulatory perimeter needs to widen. The approach to regulation also needs to adapt to the type of entity being regulated,” he stated.
Normally, comparable activities should really attract comparable regulation in most circumstances. But, Sankar stated, such activity-based regulation could be significantly less efficient than entity-based regulation when one is dealing with Big Tech firms or substantial infrastructure entities in the monetary or fintech sector. Cybersecurity dangers are most likely to overshadow monetary dangers in fintech simply because of the dependence on technologies. Systemic dangers, operational dangers and dangers affecting competitors are of significance when dealing with substantial monetary market place infrastructure and Big Tech.
Countries want to overcome the regulatory and legislative deficits in dealing with issues surrounding privacy, security and monetisation of information, Sankar stated. “By definition, legislation will lag behind financial progress or technological progress. Regulation will probably be better off in catching up, but in essence it will still be catching up that needs to be done,” he added.
Therefore, Sankar stated, regulations pertaining to information challenges want to adapt to a world exactly where boundaries involving monetary and non-monetary firms are obtaining increasingly blurred and geographical boundaries are no longer a constraint.