3.

Concepts, Types and Trends in the Development of Fintechs worldwide and in

India
 Type of fintech companies

1. Mobile payments
Most of us use Apple Pay, Google Pay, or other forms of mobile payments on
a daily basis. Cash is definitely losing popularity, especially in our post-covid
reality, and startups can enter this growing segment with various ideas. A
good example to look up to is Venmo. If a user wants to split bills with friends
or family members, e.g. for groceries, he/she can transfer or receive funds via
this mobile app.
2. Insurance
Not surprisingly, fintech has influenced this sector too, successfully
introducing the Insurtech term to the world. Tech-driven insurance companies
take advantage of innovations to provide various services: getting insurance
details can be as easy as clicking a button on the phone screen while
managing coverage can be easily accomplished via a convenient user-
friendly application. Insurtech trends include artificial intelligence, predictive
analytics, implementation of chatbots, and even drones to collect and analyze
data to make a compensation decision. In many markets, insurers have also
begun using telematics to evolve the core auto product. These scenarios
aren’t science fiction as such innovative instruments could become
mainstream in the next few years.

(Source- https://ein-des-ein.com/blog/types-of-fintech-companies/)

Apart from these 2 everything was similar to below contents; like

lending, crowdfunding, P2P lending

The major fintech areas concerning SME financing include:

• Digital KYC (e-KYC)
Digital KYC is paperless online KYC process for non-KYC compliant customers.
It can be completed by filling an online KYC form, via a Video-Based Customer
Identification process. Digital KYC allows a customer to become KYC compliant
from the comfort of home. All that’s required are documents and signatures in
electronic format, which makes the lives of KYC verifying intermediaries easy.
Banks, insurance firms, and other financial institutions can use digital KYC
verification technologies to streamline the on boarding process, prevent fraud
and money laundering. Digitization of KYC leads to consent based KYC to avoid
identity thefts, real-time verification eliminates document forgery, adequately
parameterized, highly secure KYC.
 • P2P Lending;
In recent years, peer-to-peer (P2P) lending has emerged as an alternative to
bank lending. The failure of banks to provide adequate loans to small and
medium-sized enterprises (SMEs) is where P2P development offers a significant
opportunity. Peer-to-peer lending is a form of direct lending of money to
individuals or businesses without an official financial institution participating as an
intermediary in the deal. P2P lending is generally done through online platforms
that match lenders with the potential borrowers. P2P lending offers both secured
and unsecured loans. However, most of the loans in P2P lending are unsecured
personal loans. Secured loans are rare for the industry and are usually backed
by luxury goods. P2P lending carries inherent risks. Investors risk losing invested
funds, and SMEs that rely on P2P services for funding face the possibility of
capital drying up or becoming more expensive if the investor pool shrinks. Also,
there is no insurance/government protection and the source of funding relies on
investors retaining confidence in the platform to maintain lending levels.

• Crowdfunding;
Crowdfunding platforms are websites that enable interaction between fundraisers and
the crowd. Fundraisers are usually charged a fee by crowdfunding platforms if the
fundraising campaign has been successful. In return, crowdfunding platforms are
expected to provide a secure and easy to use service. The major types of crowdfunding
are:
1. Peer-to-peer lending- The crowd lends money to a company with the
understanding that money will be repaid along with the interest. It is very similar
to traditional borrowing from a bank, except that you borrow from lots of
investors.
2. Equity crowdfunding- It refers to sale of a stake in a business to investors in
return for investment. The idea is similar to how common stock is bought or sold
on a stock exchange, or to a venture capital.
3. Rewards-based crowdfunding- Individuals donate to a project or business with
expectations of receiving in return a non-financial reward, such as goods or
services, at a later stage in exchange of their contribution.
4. Donation-based crowdfunding- Individuals donate small amounts to meet the
larger funding aim of a specific charitable project while receiving no financial or
material return.
5. Debt-securities crowdfunding- Individuals invest in a debt security issued by the
company, such as a bond.
6. Hybrid models- Offers the opportunity to combine elements of more than one
type of crowdfunding.
The main issue in crowdfunding is providing credibility of MSME’s. Many
investors tighten their pockets because of credibility.
Source: https://ec.europa.eu/growth/access-finance-smes/guide-crowdfunding/swhat-
crowdfunding/crowdfunding-explained_en
• Digital or Virtual Banks;

Digital/Virtual banking refers to the digitisation of banking services, thus

eliminating the need for consumers to physically visit a bank branch. Fintech
revolution disrupted the traditional banking. Consumers now demand efficiency,
accessibility which comes with automation and digitization.

Tech titans like Google, Facebook, Apple and Amazon are offering banking and
financial services products directly to the consumer, at the tap of a button. Big
Tech firms leverage their vast user base and can build on existing infrastructure
to offer a wide variety of digital products and services to consumers.

Source- https://www.oracle.com/industries/financial-services/banking/digital-banking-
virtual-banks/

• Internet Banking;
Internet Banking/online banking/net-banking is an electronic payment system
which enables the user to make transactions online via the internet. This gives
access to almost every banking service in online mode. Internet banking can be
accessed by bank’s customers who have registered for online banking at the
bank, having an active bank account. After registering for online banking
facilities, a customer need not visit the bank every time he/she wants to avail a
banking service. It is not just convenient but also a secure method of banking.
Net banking portals are secured by unique User/Customer IDs and
passwords. Some of the basic services available on the bank’s internet banking
portal are Account Balance Check, View Bank Statements, NEFT & RTGS Fund
Transfer, IMPS Fund Transfer, Utility Bill Payment, start a Deposit, Open/Close a
Fixed Deposit, Make Merchant Payments etc.
(Paisabazaar)

• Open Banking;
 Open banking is also known as "open bank data." Open banking is a banking
practice that provides third-party financial service providers open access to
consumer banking, transaction, and other financial data from banks and non-
banking financial institutions through the use of application programming
interfaces (APIs). Open banking will allow the networking of accounts and data
across institutions for use by consumers, financial institutions, and third-party
service providers. Open banking is becoming a major source of innovation that
is poised to reshape the banking industry.
(Investopedia)

• Digital Wallets (e-wallets)

A digital wallet (or e-wallet) is a software-based system that securely stores
users' payment information and passwords for numerous payment methods and
websites. By using a digital wallet, users can complete purchases easily and quickly
with near-field communications technology. They can also create stronger passwords
without worrying about whether they will be able to remember them later. Digital wallets
can be used in conjunction with mobile payment systems, which allow customers to
pay for purchases with their smartphones. A digital wallet can also be used to store
loyalty card information and digital coupons. For e.g.: Google's Wallet service allows its
users to “store” cash on their phones. Customers can spend this cash both in-store, as
well as online at businesses that accept Google payments.
(Investopedia_Digital_Wallet)

• Robo-advisory services;
A robo-advisor is a digital financial advisor that provides financial advice or
manages investments with moderate to minimal human intervention. Robo-
advisors are designed to deliver advice digitally based on inputs received
from the investor. Although robo-advisors are meant to work with minimal
human input, in practice, this scenario is far from true. Most robo-advisors in
India are still quite simplistic and use a basic questionnaire to understand
investor behaviour.

(Milan Ganatra, Ashika Jain, n.d.)

• Cryptocurrencies.
Capital crunch is the biggest challenge for Indian MSMEs as many of them either
lack or have no physical assets to pledge as collateral for bank loans that
continue to be the go-to channel for credit. To back such high-risk businesses in
India, there could be an investor class with an almost natural high-risk appetite
coupled with a global outlook to back such assets, Cryptocurrencies can be used
by MSME sector to meet their short term liquidity crisis.
 (Financial_Express)

 Development worldwide
 lending,
The result of broken process at traditional banks has resulted in the
emergence of specialized lenders that can process mortgages, auto loans,
personal loans, student loans and even credit cards far more efficiently
than in the past. This has resulted in an unprecedented shift of market
share away from traditional banks to fintech players that leverage a laser
focus on experience, modern technology, marketing acumen and low cost
acquisition models to deliver digital loans at scale. With the ability to
deliver approvals in seconds and close loans in a fraction of the time,
physical interaction is avoided and loyalty is created.

 personal finance
There is a shift in approach towards the point of sale of financing. Earlier
people first arranged finance and then used it. But now due to digital
advancements and growth of fintech easy approval of loans have led to a
shift in point of sale wherein the finance is made available the moment
one needs. So basically one doesn’t need to arrange finance beforehand.
It can be made available as and when required.

 payments
Payments are becoming faster, more secure and more embedded into every part
of our lives, as consumers expect to be able to execute a transaction with a push of
a button on their mobile device. Speed of payments as well as the speed of
payments innovation is increasing. Solutions like Buy Now, Pay Later
(BNPL) have gained popularity almost overnight, creating a unique form of
real-time point-of-sale financing. While most solutions are for short-term
deferred payments, new alternatives have been created for larger
purchases with longer-term instalments. As a result, BNPL has impacted
not just debit issuers, but also credit card and personal loan providers. As
has been seen in other financial product areas, new payment innovations
often have emerged faster than the regulations to protect consumers. As
regulators sort through the risks to consumers associated with new
solutions, financial institutions have an opportunity to create competing
solutions with improved transparency and better risk/reward models.
 Development in India
 lending,
As the fintech industry continues to grow, many fintech lenders are attempting to disrupt
the small business lending market by leveraging the latest technology in AI and data
analytics. This is providing huge benefits to MSME sector that may be more likely to
struggle when it comes to landing financing from traditional lenders. Research reveals
that almost 80% of small business loans were rejected by big banks in
2019. Fortunately, emerging fintech lenders are providing a solution to this problem
and moving beyond traditional credit scores by doing a more intelligent assessment of
creditworthiness with real-time analysis of other data points. This helps unlock capital to
more businesses that were impeded by old-school metrics such as credit scores and tax
returns.
(Izgelov, n.d.)

 personal finance
1. Buy now, Pay Later schemes: BNPL models act like digital credit
cards, allowing consumers to utilise credit lines at various merchant
checkouts. Just like credit cards, users enjoy interest-free credit
lines (as long as payments are made within due dates). BNPL
players are looking to capitalise on the low credit card penetration
in the country to provide credit lines to the underserved segments.
2. RBI Retail Direct scheme: Retail Direct scheme is a one-stop
solution to facilitate investment in Government
Securities by Individual Investors. Under this scheme Individual
Retail investors can open Gilt Securities Account – “Retail Direct
Gilt (RDG)” Account with the RBI.

 payments
India has globally positioned itself as a benchmark in digital payments
owing to its resilient payments infrastructure, market practices and
proliferation of digital payments across various segments, including both
retail and merchants. The volume and value of digital payments in India
have been on an upward trajectory with the volume increasing at a
compound annual growth rate (CAGR) of approximately 50% between
2015–16 to 2019–20.13 In January 2020, the RBI Governor claimed that
digital payments account for around 97% of daily payments system
transactions in terms of volume.
(Vivek Belgavi, n.d.)
 Table 1: Trends in Major Indicators of FINECH Banks/Lending Companies in
India: 2015-2019
Type of FINTECH Number & Capital/ Assets SME Net Non-
Companies % (to total Investment & % (to Lending Income Performing
No. of & % (to total & % (to & (% to Loan Ratio
Banking total of assets total total of (in %)
Sector) sector) of SME Sector)
sector) Lending)
1. Fintech Banks/ 365 $16.5 Bn
Lending Companies
2. Fintech Non- 1807
Bank Lending
Companies
3. Digital/Virtual/
Online Lending
Bank
4. P2P Lending 30
Fintech Companies
5. Croud funding
FinTech Companies
5. FINTECH 10
Incubators and
accelerators
distribution
6. SME Banks
7. Consumer Banks 138
8 Other FINTECH 747
Companies
(including third-
party payment,
cryptocurrency,

(Statista_Fintech) (Bankbazaar)
 Table 2: Trends in Distribution of Fintech Banks/Lending by Various Indicators
Companies in India: 2015-2019
Indicators By Number By Amount of By By By Net Non-
and % to Capital/ Assets Amount Income Performing
total Investment Groups of SME and % Loan Ratio
Groups and and % Lending to total (in %)
% to total to total Groups
and %
to total

2. FinTech Bengaluru -
distribution by 447 Mumbai
provinces/cities - 437 Delhi -
208
Hyderabad -
133
Gurugram -
128 Chennai
- 104 Pune -
88 Noida -
77 Kolkata -
47
Ahmedabad
- 35
3. Digital/Virtual
Bank FinTech
distribution
3. P2P Lending
Fintech
Distribution
4 Croud funding
FinTech
distribution
5. FINTECH
Incubators and
accelerators
distribution
6. SME Banks
7. Consumer
Banks
8 Other
FINTECH
Companies
(Statista_By_City)

Table 4: Penetrant Rate in Mobile, Internet and Social Media in India, States and
Major Cities
 Penetration 2015 2016 2017 2018 2019 2020 2021
Rate (in %)
Mobile 19.13 22.99 29.49 35.44 46.44 54.23 60.63

Internet 27 34.8 34.4 38.02 48.48 50 45

Social Media 19.13 22.99 29.49 35.44 46.44 50.44 54.58

Bank Account

(Statista_Social_Media) (Statista_Internet) (Statista_Smartphone)

Table 5: E-commerce users by age group (age group; %); 2015-2018

Age Groups 18-25 26-35 36-45 45-60
% of E-commerce 28 42 28 2
User

(Livemint) (Fashion_United)

4. Approaches, Technologies and Business Models of Fintech worldwide and in

India
 Type of Technologies Used by Fintech Companies
Fintech development is driven by technological advances and innovation, which will continue to
generate disruptive business models in financial services. Following are five different technologies used
by fintech’s and will innovate in more in upcoming years.

1. Artificial intelligence

Artificial intelligence (AI) has the potential to add $1 trillion to the global banking industry each year.
Banks and other financial institutions are expected to embrace an AI-first approach, which will better
position them to fend off technological encroachment on their turf.

Automatic factor discovery, or the machine-based identification of the elements that drive
outperformance, will become increasingly common in financial services, assisting in the refinement of
financial modelling across the industry. Knowledge graphs and graph computing will play a bigger role as
a crucial application of AI semantic representation. Their ability to help form relationships and find
patterns across complicated financial networks by combining data from a variety of frequently divergent
sources will have far-reaching repercussions in the years ahead.

Finally, better privacy protections in analytics will encourage the use of limited data in the training of
financial models, or the use of only relevant, essential, and suitably cleansed data. These include
federated learning, a type of decentralised machine learning that avoids the issue of data centralization
by bringing the computational capacity to the data rather than the other way around. A new era in
consumer protection will be ushered in by advanced encryption, secure multi-party computing, zero-
knowledge proofs, and other privacy-aware data analysis tools.

Many financial institutions are still using AI in a haphazard and intermittent manner, focusing on certain
use cases or verticals. Leaders in the banking business, on the other hand, are using AI to alter their
operations across the whole lifecycle of their digital operations. Specifically, the financial industry is
realising that algorithms are only as good as the data they use. The focus is shifting to acquiring a
competitive edge from previously underutilised consumer behaviour data gathered through traditional
operations. This will unleash the previously untapped potential of ecosystem-based financing, in which
banks, insurers, and other financial services organisations collaborate with non-financial entities to
provide seamless customer experiences outside of their conventional remit.

The "AI-first" bank will achieve improved operational efficiency through the excessive automation of
manual activities (a "zero-ops" mindset) and the replacement or augmentation of human choices with
sophisticated diagnostics. The wide use of classic and cutting-edge AI technologies, including as machine
learning and facial recognition, to (near) real-time analysis of vast and complex customer data sets will
result in improved operational performance. Future "AI-first" banks will embrace the same speed and
agility that "digital native" businesses and users experience. They'll innovate quickly, offering new
features in days rather than months or years. Banks will also work closely with non-bank partners to
develop new value propositions that span journeys, platforms, and data sets. Kabbage, active.ai,
Numerai are some examples for AI based fintechs in USA.

2. Blockchain
DLT (Dispersed Ledger Technology) enables the recording and sharing of data across different data
stores, as well as the recording, sharing, and synchronisation of transactions and data across a
distributed network of participants at the same time.

Some DTLs use blockchains to store and transfer data, as well as cryptographic and algorithmic
approaches to record and synchronise data in an immutable manner across the network.

DTL will increasingly underlie ecosystem financing by allowing financial transactions to be stored in
numerous locations at the same time. Cross-chain technology will increasingly facilitate blockchain
interoperability, allowing chains built on various protocols to share and transmit data and value across
tasks and industries, such as payments and supply chain management.

Algorand, Blockdaemon, Recur, Coinbase, Republic, Spring labs are some of the popular fintech who
have adapted this technology successfully.

Other blockchain applications worthy of mention include:

Real-time transaction settlement: Smart contracts are being used by banks to settle the collateral and
cash parts of a transaction at the same time. To improve the efficiency and scalability of cross-border
sales, transaction processing, securities lending, and equity exchanges can all be resolved on the
blockchain. Meanwhile, using the blockchain to trade securities backed by digital collateral allows for
more efficient, transparent, and secure capital management as well as post-transaction equity
settlement.

Digital asset support services: Institutional investors are looking for DLT features including tokenization
for unlisted companies or private equity funds, spot exchange between established currencies and
cryptocurrencies on digital exchanges, and client custody services like key escrow encryption.

Authentication ecosystems based on zero- knowledge proof: Customers are verifying their identification
online, in person, or over the phone utilising agreed-to-share information from partner institutions,
streamlining authentication procedures and providing faster access to health records and government
services. Only the information required for each transaction is provided; all other data is safely stored on
the trusted provider's server.

Decentralized finance (DeFi): Decentralized non-custodial apps can eliminate intermediaries by

generating deterministic (or "always correct") data. This allows users to get loans, make investments,
and trade financial items without relying on centralised financial firms. DeFi uses deterministic smart
contracts, which minimise counterparty risks and the expenses associated with rent-seeking
intermediaries, while also enhancing market efficiency and allowing for real-time transparency.

3. Cloud computing-

Public cloud, hybrid cloud, and private cloud are the three basic types of cloud services that financial
institutions should be aware of. The infrastructure of a public cloud is owned by cloud computing service
providers, who sell cloud services to a variety of enterprises or the general public. Hybrid cloud
architecture is made up of two or more types of cloud (private and public) that are kept separate yet
linked by proprietary technologies. The infrastructure is developed for an individual customer's exclusive
usage, and it can be deployed in the company's data centres or through external hosting facilities.
Cloud computing frees financial firms from non-core activities like IT infrastructure and data centres,
while also allowing them to use more flexible storage and computing services at a cheaper cost. At the
same time, new cloud-based formats such as open banking and banking-as-a-service are shaking up the
traditional customer-financial-service provider relationship.

Financial institutions will continue to rely on the cloud as they add more agile capabilities and establish
new businesses that require high market and customer responsiveness as well as scalability flexibility.
Meanwhile, demand for cloud-based elastic computing, which allows computer resources to be
dynamically modified to match demand variations, will rise as big data analytics is used at scale.

GuideWire, Blend, Tracxn from USA and ZETA from India are good examples of cloud based fintechs.

4. Internet Of Things

In banking, IoT-based inventory and property financing, which combines IoT with blockchain, is
improving risk management by verifying that accounting records match real-world transactions, allowing
for a brand new system of trust. IoT is shaking up traditional trade finance in shipping and logistics,
allowing banks to build new products based on commodities movement tracking, such as on-demand
liquidity and other smart contract-based innovations. Another way that IoT is bringing banks closer to
their clients is through embedding banking services into wearables, such as digital payments.

Stripe ,Kontakt.io, Armis are companies which provides the services of IOT banking.

(Mobindustry)

5. Robotic process automation

RPA is already automating financial processes and accounting reconciliation for financial organisations
across middle and back-office functions. Automation of accounts receivable and payable processes, fund
appropriation at shared finance and accounting service centres, work hour adjustment and review,
automation of financial recording, reporting, and treasury processes, and period-end accounting and
settlement are all areas where RPA is being used.

Automation replaces manual labour, which not only improves productivity but also minimises human
error and allows businesses to respond to demand variations. While RPA is currently well-established
among major financial institutions, we expect it to spread further across the industry. Robots that mimic
human movements for basic paperwork and decision-making, for example, have the potential to
automate 60% of accounts payable procedures.

Informed, cobase, Harmoney,finkraft and orovault.co are top RPA based fintechs world wide.
(Startus)

(McKinsey)

 Various approaches Used by Fintech Companies

1.Loyalty programmes-

To encourage uptake, PSPs have introduced loyalty programmes for end users. This is beneficial when launching a new product.
Consumer loyalty programmes are a significant tool for customer engagement and retention, as well as a driving force behind
numerous marketing efforts. They've progressed from a buy-now-pay-later approach (reward points acquired on plastic cards) to
instant cashbacks and omnichannel deals available both online and in stores.

2. Service portfolio

To enable universal client acceptance, any merchant's primary payments service offering must enable the acceptance of an
extensive selection of payment choices. However, value-added services that enable merchants to conduct peripheral payments
services like KYC, API hubs, reconciliation, and data analytics must be included in the overall service offering.

3. Payment application localisation

Due to several considerations such as language hurdles, end-user responsiveness, and literacy rates, a digital payments solution
designed for the masses may not be suitable for distant places in a country as diverse as India. These considerations need the
development of localised ways to fill/address these gaps via customised payment applications. The addition of local languages on
a payments application interface, for example, makes it more accessible to a wider audience.

4. Digital financial literacy model

It is critical to raise customer understanding of their rights and processes in order for payments to be used efficiently and
securely. Banks have traditionally leveraged the physical approach to increase adoption and literacy through banking channels.
Newer players, on the other hand, are propelling this paradigm forward with merchants, significant digital promotion, and digital
media.

5. Targeted payment offering

To encourage need-based adoption, businesses have targeted certain digital payment mechanisms integrated into applications. In
locations with limited internet access, for example, offline payment systems based on alternative technologies such as interactive
voice response (IVR) and SMS are gaining popularity.

6. New overlay services

In order to assist introduce innovative and relevant rural payments products with better acceptance, newer overlay services such
as request to pay, QR, and electronic bill payment using BBPS have been employed to enhance the payments value proposition.

(Monindro Saha, 2021)

 Various business models adopted by Fintech Companies

1. P2P Lending: P2P lending, or peer-to-peer lending, is the practise of lending money to individuals or
businesses via online services that connect lenders and borrowers. Peer-to-peer lending firms frequently
operate online, attempting to operate with fewer overhead and deliver services at a cheaper cost than
traditional financial institutions. Faircent, i2iFunding, LenDen Club, and Lendbox are a few examples of
such companies.
2. Loan Marketplaces: Customers can use these sites to compare loan possibilities from banks and non-
banking institutions. In India, BankBazaar and Paisabazaar are two such portals.

3. Line Of Credit: A revolving account that allows borrowers to draw, repay, and redraw from available
money is known as a line of credit. For example, Moneytap fintech in India provides the option of
getting many loans from a bank or financial institution using a single line of credit. The average rate of
interest charged is from 15% to 17%. The loans might range in size from INR 2,000 to INR 5 lakh. A line of
credit has a minimum term of two months and a maximum term of 36 months.

4.Supply Chain Financing: Direct lending is a type of credit that is given NBFCs partner with wholesalers
and marketplaces to reach out to massive networks of merchants that buy their goods from them. These
platforms store massive amounts of data on these merchants' sales cycles, which are then fed into
complex analytical models for credit underwriting.

5. Alternative Credit Scoring: It aids in the development of a broad-based credit rating system. It goes
beyond the standard criteria used by organisations such as CIBIL. This methodology use technology to
evaluate a variety of indicators, including the loan seeker's payment history. e.g., utility bill payment,
bank balance, ecommerce shopping, travel size, and spending trends.

6. Crowdfunding: Crowdfunding involves raising external finance from a large group of lenders through
a platform wherein investees showcase their business ideas, funding requirements, business cases and
potential. Investors can view investees’ communication, interact with them and find the best option to
meet their needs. Each participant (investor) provides a small portion of the requested funding and the
pooled funding is used by the requestor (investee) for the declared cause(s).

7. SME Lending: SME loans are loans designed specifically for small firms. These are tailored to meet the
specific needs that small businesses face at different stages of their operations. New product launches,
warehousing needs, expansion to new locations, entering new product categories, recruiting new
workers, marketing, and many other business-related requirements are common. One example of this
model is agri-lending. Eg- Agrostar, Unnati, Agdhi.

8. Invoice Financing: Invoice financing is a short-term working capital facility extended by lenders for
MSMEs based on the unpaid customer invoices. It is often used to meet the short-term liquidity
requirements of MSMEs, enabling them to accelerate their accounts receivables.

9. Digital Mortgage: These lenders fully digitise the traditional and cumbersome process for availing of
mortgage loans from the application stage and credit underwriting to the delivery of mortgage loans via
online channels to customers, thereby decreasing the turnaround time and improving customers’
experience.

10. Buy now pay later (BNPL)- BNPL models function similarly to digital credit cards, allowing customers
to use credit lines at a variety of merchant checkouts. Users have access to interest-free credit lines, just
like they do with credit cards (as long as payments are made within due dates). BNPL players are aiming
to take advantage of the country's low credit card usage to give credit lines to the underserved.

11. POS lending-A partnership concept between financial services lenders and merchants is used in POS
lending. In this concept, shoppers are financed at the point of sale by lenders based on their transaction
history as well as traditional data. Such lending gives new-to-credit and thin-file consumers more
options for obtaining loans and building credit histories.
12. Mobile lending -People can acquire immediate digital loans using their smartphones thanks to
mobile lending. The entire process is carried out on a smartphone with little or no interaction from the
lender. Most mobile lenders use data from the borrower's smartphone to make quick lending decisions
utilising various data models that broaden the scope of credit to previously underserved sectors.

13. Cash flow based lending-Lenders use this model to assess a company's credit worthiness based on
its predicted cash flows. Merchants selling on e-commerce platforms use a variation of this concept.
Such platforms partner with lenders to provide credit to merchants based on their gross merchandise
value (GMV) trends/sales made on the platform, helping small businesses to obtain credit.
(Inc42)

14. Payment Gateways-

All the online transactions across eCommerce, food ordering, or other product/service websites require
payment gateways. However, it costs companies heavily to set up and maintain these payment
gateways. This fee goes to banks, developers, and many other resources, making payment gateways an
expensive transaction option. Fortunately, the issue can be resolved by integrating these transactions
into apps that online merchants can comfortably afford. Ideally, the user base of these apps will include
businesses selling their products or services through their own website.
(Appinventiv)

 Suggesting suitable approached, technologies and models suitable for

MSME financing in India
For companies seeking long-term corporate investment, equity financing is critical to sustaining
innovation, value creation, and growth. Equity funding is particularly important for enterprises
with a high risk-to-reward profile, such as young, innovative, and fast-growing businesses. Other
equity instruments, such as specialised Fintech-platforms for MSME public listing, can provide
financial resources for growth-oriented and innovative MSMEs. Seed and early stage equity
capital can help companies start and flourish. Introducing Bonds of private MSMEs on fintechs is
also the best strategy india can adopt where credit gap can be reduced. Efficient use of
technology can used by fintechs as it is in agile model so that make over of the entire process is
comparatively easier than large scale financial institution

5. Prospects and Benefits of FinTechs in Enhancing MSME finance

Financial stress in an organization gives rise to real damages to them in the form of impaired decision
making. So, for this reason financial institution has come up with solutions like small term credit that
improves the liquidity in the small businesses as and when required. At the cost of long term harm,
these short term high cost liquidity injections are done periodically by these small businesses. Here is
where FinTechs come into play where they have various low cost products for the short term liquidity
problem. What makes FinTech lending to stand out as compared to a traditional lending is that the
borrower with a low credit score or history can also avail their services.

(Baker, 2017)

Traditional banks are lagging in the lending segment due to tighter regulation, which has actually given
birth to the New Age lending models by FinTech.

There are four issues with the traditional banking system –

1. Lack of Financial Knowledge

2. High cost of current financial system
3. Complexity of the process
4. Mindset preventing customers from access to their required financial services

Here, FinTechs come in as a saviour for the customers by targeting these four issues of traditional
banking system. What mobile phone technology over the last 2 decades has done to the Communication
sector, FinTechs are going to disrupt the financial services sector in the same way.

A broader understanding of the term FinTech itself is that it provides new age technological solutions to
financial services such as Lending, Payments, Transfers, Insurance, Advice, Billers, Budgeting and etc.

Innovative products are offered, where Lenders and Borrowers meet online and negotiate on Interest
rate, people with weak financial health are advised online by a robot about their investment strategy,
bringing out traditional banking product at a free of cost for processing, loan underwriting is enhanced
with usage of Big Data analytics and AI that has the ability to screen down customers who may default
on their obligations which was not possible through traditional channel and improving the speed of
payment and transfers. These are, nowadays, not just done using tapping on the phone or on computer
system, these are controlled by the user’s voice too.

Customer’s biometric is captured for enhanced security of data. Distributed ledger technology is
replacing the conventional banking operations to have a check on the products and their maintenance
and borrowers are getting access to online comparison of these products to zero down their target
FinTech to be chosen which suits them well.

Square reader, a device used for payments, is very beneficial for the MSMEs who are into business
where they have to collect their payments from their customers. It acts as a simple device that gets
connected to the phone and speeding the payment process and creating a digital record of the inflow of
the payments for the MSMEs.

OnDeck, a FinTech in collaboration with JPMorgan, facilitates small business lending.

A 2017 survey by Price Waterhouse Coopers found that 50% of world’s financial service companies are
in talks to acquire FinTechs in next 5 years.

A bank at one hand has a huge loyalty from the customer base and their cost of funds remain low, but
the shift in their technology and customer experience still remain low, on the other hand FinTechs are
more innovative – with their products and user interfaces, and use their data for varied purposes but
also face the problem of funding and customer acquisition.

Usually, millennials are fast adopters of newer technologies and seek products that are more customer
centric and low cost. A traditional banking product may not be able to suffice that today’s generation is
demanding, that is why FinTechs are concentrating on millennials in the initial phase. Generally,
FinTechs view them as market entry gate.

Big Data – Capturing of new kind of information and storing it in cloud. Thus, enabling the usage of these
voluminous data and cutting down the cost.

Artificial Intelligence and Machine Learning – It enables the system to analyse the data, identify certain
patterns and take decisions based on this. AIML in collaboration with Big Data, gives way to analysis of
larger database, higher understanding of creditworthiness and finer risk management practices.

Voice enabled Technology – It replaces the Graphic User Interface and provides a more personalized
assistance to the customers.

Digital Ledger Technology – It improves transparency, with usage of blockchain, it is shareable, real time
and anyone who has the access of the chain can view it. It has the ability to make transfer of payment
service as instant as an email or a text message.

Affordability and Accessibility –

Internet services – FinTechs have always focussed on new online solutions to the real world problems.
So, they leverage the low cost internet access to their customer base as a facilitator to provide their
financial solutions to customers at a lower cost.

Credit Scoring – With the new credit scoring system to score the borrower, it has been highly reliable
and efficient enough in predicting credit risk, that too at a lower cost.

(Barefoot, Digitizing Finance : Fintech As A Solution For Consumer Financial Health and Inclusion, 2020)

A single lending method to many customers has shown that Entrepreneurs may have been able to
increase their business investments, but could not push up their profits. A short term credit during non-
season led to 10% increase in farm output, a consumer loan for shorter tenor lead to 11% increase in
stability of job in South Africa.

Digital payments have the potential to improve customer well-being both directly and indirectly by
enabling a larger ecosystem. M-PESA enabled households in Kenya to improve their informal risk-sharing
networks, allowing them to better respond to shocks by borrowing and non-users of M-PESA lowered
their consumptions by 7% in response to the shocks. Cash transfers are also made through digital
means, for examples, to pay for salaries. The use of digital technology by the government has been a
commendable job for the citizens of India. Digital financial services were used for direct benefit transfer.
This resulted in a 38% decrease in programme expenditures and a 25% reduction in corruption.
Household transfers were unaffected, indicating a significant increase in efficiency.

(Dean Karlan, 2016)

6. Various Risks and Challenges Faced by the Fintech Sector

There is no doubt that FinTechs have improved the services enormously and made their products more
convenient and flexible for the customers. But, when the products and processes become smooth with
increased ease of access, there comes the hidden risks involved in them.

Operations Risk –

Due to swift shifts in technology and ever evolving customer demand, the operations team or
department have to be on their foot to tackle the forthcoming risks involved to avoid any kinds
of mistakes that will cost the company.

Non-compliance with the Regulations –

The regulators, sometimes, fail to keep up with the pace of ever-changing environment around
the FinTechs. There are regulations which the FinTechs in Europe need to follow, such as
General Data Protection Regulation (GDPR) and Payment Services Directive – 2 (PSD2) which
states down the requirement for Data Protection and securing System Infrastructure. There are
some more layers of regulations laid down by Financial Conduct Authority (FCA) in United
Kingdom, AMF and ACPF in France, BaFin in Germany and SEC and CFTC in United States of
America. Non-compliance to the regulations by these regulatory bodies will put the FinTechs in
the risk of paying heavy fines and losing their reputation among their customers.

Sudden Market changes –

The Covid – 19 lockdown had a sudden impact on the business environment in FY2020. Market
reacted in a similar way after onset of Ukraine – Russia war. These past events have led to
severe Liquidity and Solvency crisis which the FinTechs have also faced. Due to such
circumstances, the operations department are left for contingency plan Just in Time.

(Walker, 2021)

Consumer Risk –

Misconduct – As the FinTechs are relatively new and their business models are complex in
comparison to a conventional or traditional financial system, customer is at a higher risk of
getting into the trap of fraud or loss of money.
 Platform Vulnerability – If financial solutions offered by the FinTechs are vulnerable to external
threats, this puts customers at a risk of third-party fraud.

Disclosures – Risk on customers increase when the complete information about the product is
not conveyed to them, also about any new features added or product added to the company’s
basket.

Product fit – FinTechs are involved in a riskier product segment, or a new-age products.
Customers who lack in knowledge of such products and when they are exposed to them, it
increases the risk of delivering unfit products to customers.

Algorithmic Decision Making – To fasten the processes involved, FinTechs are using Algorithmic
decision making for customer related decisions. This may lead to biased outcomes if the
Algorithm is not trained properly or the samples for training are biased or discriminatory.

(Boeddu, Chien, & Istuk, 2021)

Types of Risk –

Fraud Risk

Merchant Risk

Regulatory Risk

Anti-money laundering and countering terrorist financing

Consumer Risk

Cybersecurity and Data Privacy

Credit Risk

Operational Risk

Outsourcing Risk

(Morgan McKinley, 2021)

Cybersecurity Risk –

Hacking – All the banks to transfer and receive information use SWIFT system. Recent cyber attack in
SWIFT system showed that this system is vulnerable and Hackers take this as a route to attack financial
institution to install their malwares.

Application – FinTechs develop App for banks that use these Apps for accessing customer data /
information. If the data protection is weak, or the coding for security is not appropriate, attackers can
easily get access to these data.
Money Laundering – There are FinTechs that are working towards a platform for Cryptocurrency trading.
As Cryptocurrency is yet not legalised and regulated in many countries, including India, there is a
possibility of Money Laundering through these platforms in the form of financing illegal activities, and
traceability of origin also becomes difficult because of the nature on Cryptocurrency.

Encryption – Blockchain has brought a radical change in the IT systems and has been seen as a boon to
the FinTechs. In spite of being a disruptive technology, it comes with its own drawback. Transactions on
the blockchain system works on trust from the associated parties. A breach in trust will endanger the
security of parties associated. Blockchain also does not ensure that hackers cannot attack the FinTechs
using this technology.

Identity – With 2FA, the customers using the products of FinTechs feel that their accounts are secured
from any third-party attack. But, if the security system is weak or could be breached, then in spite of
2FA, security codes, One Time Passwords and etc. the accounts could be accessed by an unknown
person.

Cloud based Security – Cloud services are used to store customer data, financial data and company
related data. These are highly sensitive data which should be secured from any data leak. But when the
FinTech goes with an inexpert cloud service provider, the FinTech bears the risk of significant data loss.

Device Security – FinTech in retail segment majorly depend on the mobile phone and internet
penetration. Retail customers mainly use mobile, laptop, or computer for their day-to-day transactions.
In spite of the FinTech’s application or website is equipped with robust security, if the user’s device is
prone to malware attack or hacking, again the FinTech may face the issue of security risk.

(Gehlot, 2020)

Fintech Risk for Consumers –

Privacy and Data security Fraud – It opens up multiple arenas to introspect the fraud. Multiple questions
arise – who has accessed the data, from which location the data has been accessed, whether the
accessed data is sensitive, whether the person who has access is Legally correct, if it is legally correct
why are the restrictions on the data privacy not robust. According to a survey conducted by Pew
Research Centre, 33% of adults are using Internet in a way so that they are not under the scanner of
Hackers or Criminal, i.e., they are concerned about their privacy and data leak to Hackers or Criminal.
 Others 12%

Judiciary 4%

Government 5%

Employers 11%

Family Members 14%

People who might criticize 17%

Friends 19%

People from past 19%

Advertisers 28%

Hackers or Criminals 33%

0% 5% 10% 15% 20% 25% 30% 35%

% of Adults
(Pew
Research Center, 2016)

There are several instances in recent past on Data Privacy issue –

1. Equifax – Information of 143 million US accounts and 200000 Credit Card numbers were
compromised.
2. Heartland Payment System – 100 million Debit and Credit card details were compromised.
3. J P Morgan Chase – 76 million household and 7 million small business information compromised.
4. Korea Credit Bureau – 20 million social security and credit card numbers exposed
5. Educational credit management Corp. – 3.3 million clients’ personal information exposed

(Session Guardian, n.d.)

Biometric Thumbprints, Retina Scan, Homomorphic encryption, Zero Knowledge Proof and Differential
Privacy techniques are such alternative options for Passwords that are commonly compromised because
of the reason that customers set guessable passwords in order to not to forget it or may get into trap of
phishing. By these technological tools, Privacy and Data security fraud can be minimised.

Consumer Data rights – This segment of risk is related to the permissions that we give in the Apps or to
third parties to enhance our experience or who will perform the task on behalf of us. In this condition, in
case of any data leak, who will be held responsible, the Customer or the FinTech. Clarification on this
aspect from the regulatory bodies will confirm whom to be held responsible. Even in any case, the
FinTechs would worry about the reputation damage that they would face for other’s mistake. Here,
blockchain technology for data movement, because it can ensure traceability of data leak and point out
source of breach.

Scam – Senior citizens and disabled people are highly exploited by scamsters. Online platforms are at
higher end when it comes to scams as compared to a branch banking. Here is where FinTechs carry a
higher risk of falling prey to scams. There is a type of scam called “Friendly Fraud”, where the customer
purchases the product on their credit card, they consume it and claim for unauthorized charges and
keep the product as well as the money spent. These kinds of fraud actually have a negative impact on
the customer base only, as it raises the cost of operations for the company in turn raising the transaction
costs to be incurred in the future, also customers with similar details as that of fraudsters may get
rejected if the customer profiles are screened by computers.

Behaviour – FinTechs offer various financial and non – financial services including services such as
Chatbot and Voice assistants. There are payment services which makes the payment effortless, such as
debiting the wallet once the product is purchased or the services are used, examples could be purchases
done on Amazon or Flipkart and Cab services of Uber and Ola. With this effortless payment services,
there comes a dark side which is overspending without our own knowledge. The only way to avoid such
behaviour is to keep track of the expenditure, or a parallel system developed by the same FinTech which
provides such services which displays real time expenditure tracking.

Peer – to – Peer lending – A conventional money transfer goes through a clearing house before getting
remitted to the beneficiary. But in a peer-to-peer lending, which bypasses the clearing house
architecture and directly gets credited to the beneficiary, it gives rise to problem to the FinTech as well
as the Customers. In a conventional transfer, if the customer finds that the transaction is a fraud one,
before getting remitted, customer can alarm the bank and stop the payment, unlike in the case of peer-
to-peer lending.

(Barefoot, Digital Technology Risks for Finance : Dangers Embedded in Fintech and Regtech, 2020)

If past development conditions are poor, then the risk in FinTech industry increases, and if present
Internal Macroeconomic conditions are favourable, then the risk in FinTech industry would decrease.
This study was performed on Chinese FinTech Industry.

(Yinhong Yao, 2021)

Heartland Payment System –

In the year 2009, Heartland payment system was under cyber attack by hackers which exposed Credit
Card details of its customers and resulted in a damage of $300 million. Hackers used a way called
Structured Query Language injection by which they had access to such sensitive data. SQL Injection is a
method by which attackers can enter a server with inserting malicious statement. By this the attackers
got inside the company’s server and got access to the whole database. Protection against such breach
could be using anti-sniffers, switched network or high-end encryption. This vulnerability went unnoticed
during internal auditing and also during the monitoring periods. Intruders were there in Heartland’s
server for more than 6 months, they installed sniffer software, through which they got access to the card
data that moved through the Heartland’s system.

(Fishman, 2020) (Cheney, 2010)

7. Fintech Regulation and Policy Framework: International Good Practices for
Selected Countries

FINTECH REGULATIONS and Policies

Country Regulations Remarks( this column
should explain what
risks are addressed by
the regulations and
what is the purpose of
a policy for fintech
development such as
sandbox policy for
development of
fintechs , financial
inclusion policy
Singapore Most, if not all, financial products and services With over 750
[1][2] provided by banks and organisations that affect organisations,
the public interest are regulated in Singapore. Singapore is expected
For the various sorts of services/products to be the preferred site
delivered, distinct legislation has been for over 40% of all
implemented. The following are some of the most fintech enterprises
significant acts of legislation in this regard: (payments, blockchain,
data management,
 In Singapore, the Payment Services Act crowdfunding, and
2019 governs the licencing and regulation others) in Southeast
of payment service providers and Asia by 2020.
payment services.
 The Securities and Futures Act governs the On January 28, 2020,
securities and derivatives industry's the much-anticipated
activities and institutions, including Payment Services Act
leveraged foreign exchange trading of 2019 went into force,
financial benchmarks and clearing establishing a new
facilities. licencing regime for a
 The Moneylenders Act governs variety of payment
moneylending, credit bureau designation services.
and regulation, and the gathering, use,
and disclosure of borrower information
and data.
 The Commodities Trading Act is a piece of
legislation that governs certain aspects of
commodity trading.
 The Insurance Act governs Singapore's
insurance industry, including insurers,
intermediaries, and related organisations.
Digital Banking License initiative by Singapore:

The Singapore Monetary Authority (MAS) has

authorised digital banking licences, making
financial services more accessible to
underprivileged groups like SMEs. Traditional
banks provide the same financial services as digital
banks, but they do it without the need for physical
infrastructure. Digital banking licences are divided
into two categories: digital full bank licences (DFB)
and digital wholesale bank licences (DWB).

An company with a DFB licence can use its online

platform to provide deposits, loans, and
investment products. DFB licensees can only
provide retail and corporate banking services,
whereas DWB licensees can only provide services
to companies, namely small and medium-sized
firms (SMEs).

The granting of digital banking licences is expected

to boost Singapore's banking and finance industry,
ensuring that it stays robust, inventive, and
competitive, particularly given Hong Kong's
approval of eight digital banking licences in 2019.

Digital banks may be able to swiftly develop in

ASEAN due to its low-cost structure and efficient
set-up and operation systems. Many companies
will use Singapore as a base from which to expand
into other regional markets.

Financial services will be more accessible to

underrepresented groups, such as millennials and
small businesses, thanks to digital banks.
Indonesia, with 42 million underbanked and 92
million unbanked individuals, would have the
largest market potential in ASEAN. Despite this
enormous figure, the digital economy of the
nation is expected to reach US$124 billion by
2030.

The fastest path to formation and development

for digital banks will be through strategic
partnerships, notably with payment solution
platforms or e-commerce marketplaces. As a
result, digital banks will have access to a larger
 client base, allowing them to provide more
consumer-centric goods and services than
traditional banks.This might involve using
alternative credit score evaluations to grant
microloans to numerous underprivileged SMEs in
the region, as well as potentially offering deposit
accounts to individuals with no minimum deposit
requirements.

Australia In terms of financial services regulation, Australia The Government and

[3] has a dual peaks model: ASIC have established a
sandbox for fintech
 Australia's major corporate, markets, businesses to test
financial services, and consumer credit financial services,
regulator is the Australian Securities and financial products, and
Investments Commission (ASIC). It is in credit activities for up
charge of ensuring consumer protection to 12 months without
and market integrity within the financial holding an AFSL or an
sector. ASIC is in charge of overseeing and ACL under the
regulating Australian businesses, financial Corporations (FinTech
markets, and financial service and Sandbox Australian
consumer credit providers. Financial Services
Licence Exemption)
 Australian Prudential regulating authority Regulations 2020 and
maintains safety and soundness of National Consumer
financial institution,promote financial Credit Protection
stability in the country and protect the (FinTech Sandbox
interest of policy-holders,depositors and Australian Credit
superannuation fund members. Licence Exemption)
Regulations 2020. The
The Australian Competition and Consumer types of firms that can
Commission enforces the Australian Consumer enter the regulatory
Law, which may apply to fintechs. Misleading and sandbox, as well as the
deceptive conduct, false or misleading promises, products and services
unconscionable conduct, and unfair contract that qualify for the
terms are all prohibited in some form. licence exemption,
must meet tight
qualifying conditions.
Fintech companies in Australia must follow all
existing rules and regulations governing financial
services and consumer credit. The Australian
government has made steps to reduce the
regulatory burden on fintechs trying to test the
market before launching a full product or service.

Fintech companies must adhere to Australia's

financial services regime's licence, registration,
and transparency requirements.

 Fintech companies operating in the

financial services industry in Australia
must have an Australian financial services
licence (AFSL) or be exempt from the
need. Financial services are broadly
defined as providing financial product
advice, dealing in financial products (as
principal or agent), making a market for
financial products, operating registered
schemes, and providing custodial or
depository services under the
Corporations Act 2001, which is
administered by ASIC.

 Fintech companies that offer marketplace

loan products and related services will be
considered consumer credit activities,
necessitating the need for an ACL. The
Australian credit licence (ACL) regime
applies to businesses that provide
consumer credit in Australia, such as
credit under a credit contract or a
consumer lease.

 Fintech companies that operate a facility

where offers to purchase and sell financial
products are made on a regular basis may
also need to have an AML. If an entity
operates a clearing and settlement
mechanism that allows parties engaging in
financial goods to meet their
commitments to one another, the entity
must have a clearing and settlement
facility licence or be excluded from it.

Australian BNPL Market

Buy now, pay later (BNPL) has remained a hot

topic in Australia, with certain suppliers currently
dominating the financial scene. On the basis of
exemptions, several BNPL providers operate
outside of Australia's credit licencing process. This
has prompted demands for action on BNPL sector
 regulation, and ASIC conducted an assessment of
the business in 2020, reflecting on the impact on
customers and impending regulatory changes.

The Australian Finance Industry Association (AFIA),

which represents a number of BNPL providers,
established a voluntary BNPL Code of Practice
(BNPL Code), which took effect on March 1, 2021.
The BNPL Code outlines nine Key Commitments
for how BNPL products should be produced and
provided to customers, and it has been endorsed
by nearly all of the Australian BNPL market.
USA[4] Fintech is regulated at both the state and federal
levels, just like all financial services in the United
States. Each of the 50 states, as well as the federal
government, has enacted legislation that may
apply to financial services and financial service
providers.

The banking industry, including Fintech businesses

that engage in the business of banking, is primarily
regulated by four federal prudential regulators.
Despite the fact that each agency focuses on
various aspects of the industry, they have all taken
steps to accept Fintech.

 State-chartered banks that are not

members of the Federal Reserve System
are regulated by the Federal Deposit
Insurance Corporation (FDIC). The FDIC is
currently working on a major overhaul to
modernise the bank call report using
Fintech and artificial intelligence solutions.
 National banks and federal savings
associations are regulated and chartered
by the Office of the Comptroller of the
Currency. The Office of Innovation has
been formed by the OCC to develop a
regulatory framework that encourages
responsible innovation.
 The Federal Reserve Board of Governors
oversees the operations of all depository
institution holding companies and is the
primary regulator of all state-chartered
banks that are members of the Federal
Reserve System. The FRB is committed to
fostering responsible innovation, with an
 emphasis on facilitating real-time
payments, researching the dangers and
opportunities associated with digital
currencies, and encouraging the use of
artificial intelligence in financial services.
 National credit unions are chartered by
the National Credit Union Administration
("NCUA"), which also governs all national
and state-chartered credit unions. When it
comes to Fintech, the NCUA has taken a
more cautious approach.

Fintech Regulation in US

The particular restrictions that fintechs must

follow will vary depending on their activity.
However, there are a few basic rules that any
fintech operating in the United States should be
aware of.

Fund Transfer Act and CFPB Regulation E

 Many laws control payments-related

operations, including the Fund Transfer
Act and CFPB Regulation E. They put
certain criteria on financial institutions in
terms of resolving transfer issues.

Securities Act and Exchange Act

 Initial Coin Offerings (ICOs) are becoming

increasingly popular among fintech
companies. In the United States, the
handling of these actions has been
contentious, but the Howey Test has now
established a precedent. This test
establishes the ICO's legal standing, and it
will be subject to the Securities Act and
Exchange Act if it fulfils the threshold
criteria.

US Anti-Money Laundering regulations (AML)

 The Bank Secrecy Act and the USA Patriot

Act are the two primary anti-money
laundering laws in effect in the United
States. These regulations impose duties on
anti-money laundering risk management
 programmes, customer due diligence
(CCD), and numerous record-keeping
responsibilities. Specific regulations for
cross-border transactions are also
included in the Patriot Act.

JOBS Act

 The JOBS Act requires crowdfunding

platforms and other financing gateways to
register with the SEC and FINRA.
Additionally, the JOBS Act imposes new
duties and constraints on these
enterprises, such as fundraising limits and
transparency requirements.

Fair Credit Reporting Act (FCRA)

 The Fair Credit Reporting Act (FCRA)

establishes the methods through which
financial organisations can acquire
consumer credit information and expands
consumer rights to view credit reports.

Gramm-Leach Bliley Act (GLBA)

 The GLBA, also known as the Financial

Modernization Act, mandates all financial
institutions to educate their clients about
how their information is handled and
protected.

STATE REGULATORS

 The Conference of State Banking

Supervisors , a group of state banking
regulators, works to coordinate and
maintain uniformity and consistency
among state banking regulators on these
topics.

 Some state regulators have launched an

aggressive agenda to both regulate
Fintech and stimulate innovation, with the
goal of protecting consumers. Several
states have created "sandboxes," which
 are designed to allow businesses to test
new Fintech products and services in the
market without having to secure the
necessary licences. Nevada, Utah, West
Virginia, Arizona, Florida, and Wyoming
are among the states that have created
Fintech sandboxes.
Brazil[5][6]
Participants in the financial and payments markets
are regulated by the Brazilian Monetary Council
(CMN) and the Brazilian Central Bank.

Competition issues are regulated by the

Administrative Council for Economic Defense
(CADE). When financial or payment institutions
are involved, the Brazilian Central Bank and CADE
are expected to work together.

Regulation for Fintech Involved in Alternative

Finance activities.

Currently, the only legislation pertaining to

alternative financial activities done by FinTech
enterprises that have been issued are:

 CVM Instruction regarding crowdfunding

through securities issues on electronic
platforms

 CMN Resolution No. 4,656 of 26 April

2018, which regulates two kinds of
financial institutions specialised in
granting loans through electronic
platforms, that is direct credit
company(SCD) and peer-to-peer (P2P)
loan company(SEP)

The following are the main points of Resolution

No. 4,656:

 The SCD is only allowed to grant loans and

financings through electronic platforms,
and to purchase receivables with its own
capital (that is, they cannot take deposits
or raise funds from sources other than
shareholders), but they can sell
receivables from their loans to financial
 institutions and securitization vehicles,
and fund their loans with lines of credit
from the National Economic and Social
Development Bank (BNDES).

 The SEP can link lenders and borrowers, as

well as facilitate loan and finance
negotiations using electronic platforms.

 Only a SEP can use electronic channels to

facilitate peer-to-peer lending.

 SEP loans and financings are restricted to

BRL15,000 each (except loans granted by
qualified investors, as defined in CVM
regulation).

 The SCD and SEP must have a minimum

net worth and capital of BRL1 million on a
permanent basis.

FinTech firms that want to participate in finance

operations other than those of a SCD or SEP must
follow the same regulations as traditional financial
services firms. Businesses that want to engage in
financial intermediation must follow these rules:
Obtain a licence from the Brazilian Central Bank.
Comply with the National Monetary Council
(CMN) and the Central Bank's broad requirements.

FinTech enterprises that want to engage in

payment-related operations must follow the same
standards as regular businesses. Activities
involving payments are governed at the national
level. Law No. 12,865 of October 9, 2013, as well
as CMN and Central Bank rules, control them.
Unless an exception exists, businesses that
provide the following payment services must get a
licence from the Central Bank of Brazil and are
subject to Law No. 12,865 of October 9, 2013, as
well as National Monetary Council (CMN) and
Central Bank regulation:
 Issue of electronic currency in Brazilian
currency, such as pre-paid cards or e-
tokens.
  Credit cards and other post-paid payment
devices are issued.

 Acquirer Services.

 Services for initiating payments.

Payment service providers with a low transaction

volume or a narrow scope (as determined by
legislation) are free from licencing, including the
following:
 Purchasers and issuers of post-paid
payment instruments having a transaction
volume of less than BRL500 million in a
12-month period.

 Only one chain store accepts pre-paid or

post-paid instruments.

 Pre-paid or post-paid instruments used to

pay for certain public utilities like public
transportation and telecommunications.

 Payment services connected to the

provision of employment legal benefits,
such as pre-paid cards provided by
employers to their employees for meal
payment.

 Services for initiating payments.

China[7][8] China, like the majority of countries throughout

the world, has yet to establish or designate an
independent supervisory authority to oversee the
FinTech industry's legislation.

The FinTech industry's related firms will be

supervised by traditional financial regulatory
agencies depending on the special characteristics
of the respective financial services.

 The China Banking and Insurance

Regulatory Commission (CBIRC) will be in
charge of overseeing FinTech businesses
that rely on services (or similar services)
 provided by commercial banks (such as
Internet banking, Internet lending, P2P
lending, and so on) and insurance
companies (such as Internet insurance).

 The China Securities Regulatory

Commission (CSRC) will be in charge of
overseeing FinTech businesses that are
related to securities market investments,
such as Internet funds, Internet securities.

 The People’s Bank of China (PBOC) will be

in charge of overseeing FinTech
enterprises that deal with currency
issuance, circulation, and
clearing/settlement, including as third-
party payment services, digital currency,
and so on.

In 2019, the PBOC published the FinTech

Development Plan (2019-2021) (FinTech
Development Plan), bringing the long-awaited
Chinese FinTech regulatory framework to a close.

 The FinTech Development Plan aims to

Create a set of comprehensive, scientific,
and quantitative assessment criteria for
the development and optimization of
financial technology in China
 Improve the FinTech industry's top-down
design.
 Strengthen risk controls, including
provisions for a cross-market and cross-
industry financial risk early warning
system.
 Prudently regulate FinTech companies to
ensure that risks including data security,
transaction security, and business
continuity are managed.

Regulation for crowdfunding Platforms

To date, there is no regulation on crowdfunding

financing as such. However, in July 2015, the PBOC
published its Guideline Opinion on Promoting the
Healthy Development of Internet Finance
(Guideline Opinion), which indicated that equity
crowdfunding should be regulated by the CSRC at
a national level. The Guideline Opinion defined
equity-based crowdfunding as equity financing in
small amounts through an internet-based
platform, such as a website or other digital
medium.

In addition, in August 2015, CSRC published its

Notice on Special Inspection of Institutions
Carrying Out Equity Financing Activities through
the Internet, which provided that:

 Equity-based crowdfunding is an open and

public equity offering for a small amount
of money. As a result, it is distinct from
private equity financing as a type of online
equity financing.

 The Securities Association of China must

first approve equity-based crowdfunding
operations (SAC)

Regulation for Payment services

The PBOC, together with 14 other State Council

Ministries, announced the Implementation Plan of
Special Risk Remediation for Non-bank Payment
Institutions in April 2016, declaring that the PBOC
will no longer accept applications for new
payment institutions in principle.

The PBOC produced the following documents on

September 27, 2012, and December 28, 2018, to
carry out the spirit of these administrative
measures:

 Payment Institutions' Prepaid Card

Business: Administrative Measures

 Administrative Measures for Non-banking

Payment Institutions' Online Payment
Business
The regulatory system for online payments and
online payment institutions is established by these
administrative acts. Institutions must comply with
the regime's requirements:

 Establish a reliable customer identification

system in accordance with Know-Your-
Client regulations.

 Securities, insurance, finance, trust,

wealth management, currency exchange,
and withdrawal services are prohibited.

The PBOC announced Measures for the

Administration of Online Payment Business of
Non-bank Payment Institutions in December 2015,
which increased the payment platform reserve
funds ratio requirement from 20% to 50%. This
essentially puts more of payment providers' client
e-wallet deposits and escrow funds under the
PBOC's centralised supervision, making it simpler
for customers to trace how their money is spent.

The PBOC initiated the formulation of the

Regulations on Non-banking Payment Institutions
(Draft for Comment) in January 2021, with the
goal of:

 Increasing the consistency of regulated

institutions' compliance operations.

 Provisions for management requirements

should be improved.

 Make anti-monopoly norms and measures

more clear.
Tax Benefits & other incentives for fintech in
china

 A 15 percent income tax rate is available

to qualified high-tech businesses
(compared to the standard rate of 25
percent ).
 High-tech businesses that register in
certain special economic zones may be
eligible for an income tax exemption for
the first two years and a 50% decrease for
 the next three years.

In May 2018, a new tax benefit was introduced for

venture capital firms that engage directly in
technology companies at the seed or start-up
stage through equity investments. The specifics
may be found in the Ministry of Finance and State
Administration of Taxation's Notice on Tax Policies
Relating to Venture Capital Enterprises and Angel
Investors. A venture capital company that invests
in small or medium-sized high-tech businesses for
at least two years and meets specific conditions is
eligible to deduct 70% of its investment from its
taxable income under this programme.

UK[9][10] In UK,Fintechs are treated in the same way as

conventional financial services companies. They
will need to be approved by the Financial Conduct
Authority (FCA) or the Prudential Regulation
Authority (PRA) if they carry out activities that
come within the scope of one of the regulated
activities under the Financial Services and Markets
Act 2000 (FSMA). The FSMA (Regulated Activities)
Order 2001 defines regulated activities. The PRA
Rulebook and the FCA Handbook augment this
primary and secondary law with principles,
regulations, and recommendations.

The Consumer Rights Act of 2015, the Data

Protection Act of 2018, and the Money
Laundering, Terrorist Financing, and Transfer of
Funds (Information on the Payer) Regulations of
2017 are all important pieces of law. The second
EU Payment Services Directive, the EU Electronic
Money Directive 2, the recast EU Markets in
Financial Instruments Directive, the EU Markets in
Financial Instruments Regulation, and the E-
commerce Directive are some major EU policies
depending on a fintech's areas of concentration.

The Prudential Regulation Authority (PRA) is the

prudential regulator, while the Financial Conduct
Authority (FCA) is the conduct regulator for banks,
insurers, and the major investment businesses.
Other businesses are regulated only by the FCA.

Both the PRA and the FCA have supervisory and

enforcement authorities. Both the PRA and the
FCA have the authority to inspect businesses on a
regular basis. They also have a variety of powers
under FSMA, including the ability to compel a
company to submit certain information or
documents, commission a skilled person's report,
issue warning notices, and levy financial penalties.

They can both put particular restrictions on

businesses, such as obtaining the regulator's
permission before doing certain actions. There are
also a variety of criminal offences under the
FSMA, such as carrying on a regulated business in
the United Kingdom, or claiming to do so, without
the appropriate authorization or exemption.

Regulation of Crowdfunding, peer-to-peer

lending activities in fintech space in UK.

 The regulation of investment-based

crowdfunding platforms is dependent on
the activities that each platform engages
in. The reformed EU Markets in Financial
Instruments Directive (MiFID II) or the
Alternative Investment Fund Managers
Directive, as well as the appropriate
Financial Conduct Authority (FCA)
Handbook requirements, will be relevant
for most platforms. Under Article 25 of the
Financial Services and Markets Act (FSMA)
(Regulated Activities) Order 2001 (RAO),
investing in unlisted shares or debt
instruments through online crowdfunding
platforms constitutes a regulated activity
("Arranging deals in investments"). The
FCA classifies investment-based
crowdfunding as a high-risk investment
activity, and the FCA Conduct of Business
Sourcebook imposes special marketing
limits on retail consumers (COBS).

 Under Article 36H of the RAO ("Operating

an electronic system in connection to
lending"), the facilitation of lending and
borrowing between people or between
persons and enterprises through a peer-
to-peer platform is a regulated activity
 that needs approval by the FCA.

 The FCA's Consumer Credit Sourcebook

(CONC) mandates peer-to-peer platforms
to give basically the same safeguards as
regulated consumer credit agreements
supplied by lenders that carry on the
business of lending when the lenders are
people.

 By classifying peer-to-peer agreements as

'designated investment business' for the
purposes of implementing key aspects of
COBS, the FCA hopes to safeguard
individuals from the dangers of non-
repayment of loans and ineligibility for the
Financial Services Compensation Scheme.
By classifying peer-to-peer agreements as
'designated investment business' for the
purposes of implementing key aspects of
COBS, the FCA hopes to safeguard
individuals from the dangers of non-
repayment of loans and ineligibility for the
Financial Services Compensation Scheme.

Regulation of Payment services activities in

fintech space in UK.

 Outside of FSMA, the FCA regulates

payment services. Placing money on a
payment account, performing payment
transactions, issuing payment
instruments, acquiring payment
transactions, money transmission,
payment initiation services, and account
information services are all examples of
regulated activities. These final two
services are only available in conjunction
with online-accessible payment accounts.

 The Payment Services Regulations 2017

(PSRs) and (to a degree) the FCA Banking:
Conduct of Business Sourcebook control
the regime. The FCA Payment Services and
Electronic Money Handle Document
shows how the FCA and other relevant
bodies approach the PSR obligations.
  Payment services can be provided by
banks and e-money institutions (i.e., non-
banks producing e-money that are
regulated by the FCA outside of FSMA
under the Electronic Money Regulations
2011). Other firms must register as
payment institutions with the FCA. Instead
of becoming registered account
information service providers, businesses
that simply provide account information
services might become registered account
information service providers.

 Under the PSRs, providing payment

services without proper authorization is a
crime punishable by imprisonment, a fine,
or both.

 Payment services carried out within the

European Economic Area (EEA) in euro
and other EEA currencies are fully covered
by the payment services regulation (eg,
pounds sterling). It also applies to
payment services in other currencies and
payments made from or to a payment
services provider outside the EEA to some
extent.

 The PSRs require every company that

provides payment services to follow the
information and business behaviour
regulations.

India[11] As the fintech industry grows, so do potential

hazards such as fraud, data breaches, and
cybersecurity risks. New payment systems and
models have the potential to jeopardise market
security and integrity. Customers who are
unaware of the dangers or who are unable to
meet them may be marketed new products and
services. The risks of fraud and hacking are
growing in blockchain, crowdfunding, and
distributed ledger technology (DLT).

Financial services are the most extensively

regulated industry in the world due to the hazards
associated with the financial sector.

In India, the fintech regulatory environment is

severely fragmented. In India, there are no specific
rules or regulations controlling fintech services
and products. It's tough to steer the regulatory
environment when there's no clear set of
regulations for fintech services, yet authorities
understood it was necessary to regulate the
fintech sector in India.

 Guidelines governing P2P Lending

Platforms: The Peer-to-Peer Lending
Platform Directions of 2017 establish
lender exposure norms and borrowing
restrictions for P2P lending platform
operations in India.

 Payment Bank Regulations: Payment

banks work similarly to banks, although on
a smaller scale. It is unable to grant loans
or issue credit cards. These banks are
licenced under Section 22 of the Banking
Regulations Act of 1949 and are registered
as private limited companies. Banks'
actions are restricted by certain licencing
criteria, particularly when it comes to
accepting demand deposits and making
payments and settlements.

 Payment and Settlement Systems Act

(2007): This law is the principal legislation,
governing the payments regulation in
India. This act prohibits the initiation and
operation of any ‘payment system’ in
India; without prior authorization of RBI.
Payment structures include credit and
debit card operations, smart card
operations, money transfers, and PPIs.

 NBFC Regulations: All NBFCs are governed

by the Reserve Bank of India Act of 1934.
According to the RBI's requirements,
every company that provides fintech
services in India must be registered. No
NBFC can start or run a non-banking
financial institution without first getting a
 certificate of registration from RBI,
according to section 45-IA of the RBI Act.

 NPCI Regulations on UPI Payments: The

NPCI has developed UPI Procedural
Guidelines that govern UPI payments in
India. Money transfer services using UPI
platforms must be created by banks,
according to this framework. Banks can
work with technology suppliers to operate
mobile applications for UPI payments, but
only if they meet the NPCI's eligibility and
prudential standards.

[1] (Global_Legal_Insights), [2] (Mas_Gov), [3] (Global_Legal_Insights_Australia),

[4] (Global_Legal_insights_USA), [5] (Global_Legal_Insights_Brazil), [6] (Practicallaw_Thomson_Reuters)

[7] (Global_Legal_Insights_China), [8] (Practicallaw_Thomson_Reuters_Chn),

[9] (Global_Legal_Insights_UK), [10] (Mondaq_India), [11] (Global_Legal_Insights_India)

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