Increased scrutiny of bank fintech alliance puts start-up ecosystem at risk

To effectively meet the diverse financial needs of Indian consumers, achieve rapid stability for necessary cost efficiencies, and share risks, there has been a noticeable increase in the number of financial institutions and banks tying up with financial technology companies (fintechs). They have jointly introduced a range of products and solutions, enabling the rapid growth of fintechs in India.

However, the increasing role of fintechs in the financial sector has led to a noticeable increase in scrutiny of arrangements between regulated entities of the Reserve Bank of India (RBI) and such fintechs.

The RBI has been working towards bringing the activities of fintechs under its purview, vide regulations such as the Guidelines on Digital Lending andMaster Direction on Credit Cards. To assess the risks arising from such arrangements with fintechs, the RBI has asked banks to provide it with reports of their contractual arrangements with fintechs.

Specifically, the RBI has been stressing on compliance with know your customer (KYC) regulations, due to the increased anti-money laundering and combating the financing of terrorism (AML/CFT) concerns arising from the use of digital means by fintechs.

The RBI has been imposing monetary penalties on regulated entities found to be non-compliant with KYC regulations. AmazonPay, Bank of India and Axis Bank are some of the entities that have been fined recently for such non-compliance.