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FinTechs: Growing concerns over excess regulatory guidelines, funding squeeze in ecosystem

*Stakeholders affirm in the global payments system aver excess scrutiny and licensing kills innovation and creates boundaries in the FinTech ecosystem, preventing others from entering the space with disruptive ideas

Gbenga Kayode | ConsumerConnect

The freeze in the funding environment is impacting venture-backed startups, a report has restated.

ConsumerConnect learnt the FinTech industry, again, is bracing for the twin blows of a funding winter and increased regulatory scrutiny in several economies.

The two factors are intertwined such that lots of early-stage companies are actually struggling to deal with these challenges, ETtech report said.

As the well-capitalised Razorpay, Groww, and PhonePe are setting aside Dollars to get the requisite regulatory clearances, it is the early-stage ones that are suffering the most.

Challenges in lending

Founder of an early-stage FinTech lending startup lamented “when the unicorns of today were at an early stage, they got a free pass in many spaces. But for us, the initiation has been a trial by fire.”

It was gathered that his outfit was operating as a loan aggregator in partnership with banks and large NBFCs.

The founder’s two-year plan was to scale up the business and eventually scout for an NBFC licence and build his own loan book.

He also noted: “After the digital lending guidelines came out it has become almost mandatory for us to secure a licence.

“But getting an NBFC licence has been tough for startups.”

Recently, neobanking startup Jupiter received an NBFC licence.

After Cred and BharatPe both failed to make the cut, this was a positive sign. Perhaps others can succeed as well.

As things stand, it is no wonder that FinTechs have been shopping around to acquire an NBFC licence, according to report.

Cred acquired Parfait Finance November 2021 and BharatPe acquired Trillionloans, a Mumbai-based NBFC March.

Stagnation in payments

The going has become tougher for payment companies, too.

Players, such as Razorpay, Cashfree, PayU and Paytm have all been stopped from acquiring new merchants, report stated.

Razorpay and Cashfree are awaiting their final payment aggregator licence.

PayU and Paytm, meanwhile, have been asked to apply fresh.

A top executive in one of the major payment companies reportedly said: “We are hopeful that the final clearance will come along with a green signal for us to acquire new merchants.”

It is further noted that this stop sign from the RBI has hurt some of their fundraising plans, too.

The executive quoted above added that if there is no growth in new merchant onboarding, investors will not be enthused.

Investors are awaiting the RBI’s final nod before cutting a cheque, said he.

The founder of another payments startup was quoted to have said that revenue growth is on track for now, but if the RBI does not open new merchant onboarding quickly, there will be a significant impact on his company’s revenue projections.

Regulatory flip flops

Report indicates that it is not always about strict regulatory scrutiny; sometimes, it’s also about regulatory flip flops. Global payments companies met the data localisation guidelines by toeing the RBI line.

But some of them have also been impacted by changing regulatory stances.

A recent report as well explained how Visa Safe Click was shut down by the company after the regulator expressed unhappiness with the product.

Back in 2016, the RBI had allowed card-not-present (CNP) transactions up to Rs 2,000 to go through without an additional factor of authentication. Still, Visa found itself non-compliant.

A senior executive at a global payments giant said: “Sometimes there is backdoor arm twisting from the regulator, which is creating problems for even large FinTech companies.

“A consistent approach from the RBI will help.”

Recently, the UK parliament, in a report on the India-UK Free Trade Agreement, called the mandatory data localisation requirements in India a stumbling block.

As the FinTech ecosystem matures, there is a need for sector regulators to scrutinise it further. But excess scrutiny and licensing kills innovation and creates boundaries, preventing others from entering the space with disruptive ideas.

If the regulators want to keep the ecosystem open, they should try to be light-touch with early-stage players and perhaps stricter with the late-stage ones, report noted.

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