William Gibson's seminal cyberpunk science-fiction novel 'Neuromancer' (1984) is often cited for its comment on the accessibility of technological innovations for the masses, artfully captured by the phrase "the future is already here – it is just not very evenly distributed". Recent fintech developments seem to embody the essence of this theme perfectly.
While measures such as updating the framework for regulatory sandboxes and international partnerships for broadening the expanse of cross-border UPI payments were undertaken on one hand, concerns also loomed over the non-compliant conduct of a few players in the space, which the Reserve Bank of India ("RBI") sought to address. Further, regulators such as the International Financial Services Centres Authority ("IFSCA") and the Securities and Exchange Board of India ("SEBI") also continued to actively work towards ensuring regulatory compliance and balance the needs of innovation through their regulatory action.
Separately, fintech funding globally still remained on an upward trend in 2024, with the months of February and March showing significant growth compared to January. Notably, March was the first month this year to surpass USD 1 (one) billion in funding, reflecting a substantial improvement in funding from February. A detailed account of the regulator deals has been provided below. In this backdrop, we present to you our Fintech newsletter which captures key developments and updates in the Indian fintech landscape from February 01, 2024, to March 31, 2024.
Amendments to Master Directions on Prepaid Payment Instruments
On February 23, 2024, the RBI vide a notification, amended the Master Directions on Prepaid Payment Instruments ("PPI") dated August 27, 2021 ("PPI-MD"). The amendment allows authorized bank and non-bank PPI issuers to issue PPIs for payments within different public transport systems.
Such PPIs referred to as "PPIs for Mass Transit Systems" ("PPI-MTS") are mandated to incorporate an Automated Fare Collection application designed for transit services, toll collection, and parking. These PPI-MTS are specifically designated for transactions solely within public transportation modes such as rail, metro, buses, and waterways, as well as for tolls and parking fees. The maximum outstanding balance in a PPI-MTS is capped at INR 3,000 (Indian Rupees Three Thousand Only) at any given time, although they can be reloadable. Importantly, PPI-MTS can be issued without requiring Know Your Customer (KYC) verification of the holders. The PPI-MTS may have perpetual validity wherein they are exempt from being subject to the conditions regarding 'Validity and Redemption' outlined in the PPI-MD. In the case of PPI-MTS, cash withdrawals, refunds, or fund transfers are not permitted.
RBI issues Master Directions on Bharat Bill Payment System
On February 29, 2024, the RBI introduced the Master Direction - Reserve Bank of India (Bharat Bill Payment System) Directions, 2024 ("BBPS Directions")1. This new directive replaces the Guidelines on Implementation of BBPS ("BBPS Guidelines") issued in 2014, along with other related guidelines and circulars issued over time. Scheduled to take effect from April 01, 2024, the BBPS Directions mark a significant shift in the regulatory landscape surrounding bill payments in India.
Key features of the BBPS Directions include provisions allowing both banks, non-bank payment aggregators and other existing entities authorised as a BBPS Operating Units ("BBPOU") to participate in the BBPS ecosystem without requiring separate authorization. Unlike the previous BBPS Guidelines, which mandated entities intending to function as BBPOUs to seek explicit approval from the RBI, the BBPS Directions streamline the process. Under the BBPS Directions, banks and non-bank payment aggregators intending to operate as BBPOUs, will not require separate authorisation, but only need to notify the Department of Payments and Settlement Systems at the RBI's Central Office before commencing operations.
This revised framework is expected to facilitate easier entry into the BBPS ecosystem, potentially leading to a surge in BBPOUs as perceived by industry stakeholders. The BBPS Directions also clarify the roles and responsibilities of each party in the ecosystem, operations of the escrow account as well as grievance redressal mechanics to be implemented.
RBI updates the framework for regulatory sandbox
On February 28, 2024, the RBI introduced an updated framework for its regulatory sandbox ("Updated Framework"), amending the previous framework from 2019 ("2019 Framework")2. This revision comes after gathering feedback from fintech companies and stakeholders, as well as insights gained from overseeing four cohorts under the initial framework.
Under the Updated Framework, a regulatory sandbox cohort is now extended to run for a period of 9 (nine) months, compared to the previous duration of 7 (seven) months under the 2019 Framework. Entities engaging in the regulatory sandbox must ensure that all data handled during their activities align with the obligations outlined in the Digital Personal Data Protection Act 2023. Furthermore, a new concept of "theme-neutral" cohorts has been introduced, allowing participation for cohorts comprising of innovative products/services/technologies from diverse sectors within the RBI's regulatory domain in the regulatory sandbox regime of the RBI.
Entities interested in applying for a cohort under the Updated Framework must meet the eligibility criteria outlined, which allows fintech companies including startups, banks, financial institutions, any other company, limited liability partnership and partnership firms, partnering with or providing support to financial services businesses. The focus of the regulatory sandbox will be to encourage innovations wherein, there is (a) absence of governing regulations; (b) a need to temporarily ease regulations for enabling the proposed innovation; or (c) the proposed innovation shows promise of easing/ effecting delivery of financial services in a significant way. In addition to such factors, the applicants will also have to ensure it maintains a minimum net worth requirement of INR 10,00,000 (Indian Rupees Ten Lakh Only), compliance with the "Fit and Proper" criteria proposed under the Updated Framework, possesses a satisfactory credit history for both the entity and its promoters/partners/ directors, amongst other conditions.
IFSCA issues regulations for payment system providers proposing to operate in GIFT City
The IFSCA has introduced the IFSCA (Payment Services) Regulations 2024 ("PS Regulations") delineating the legal framework governing entities offering diverse financial services within or from the Gujarat International Finance Tec-City (GIFT City).
The PS Regulations encompass a range of payment services, including account issuance services, crossborder money transfer services, merchant acquisition, e-money issuance services, and escrow services. You can find a detailed read of our article on this here.
Key highlights from the RBI's Statement on Developmental and Regulatory Policies
On February 08, 2024, the RBI released its Statement on Developmental and Regulatory Policies, outlining proposed measures spanning financial markets, regulations, payment systems, and fintech. Noteworthy updates from the statement include plans to review the regulatory framework for Electronic Trading Platforms ("ETP") and solicit public feedback on a revised framework. This review comes in response to the growing integration of onshore forex markets with offshore counterparts and advancements in technology, along with industry requests for access to offshore ETPs.
Recognizing the evolving landscape of digital payment authentication beyond SMS-based OTPs, the RBI intends to introduce a principles-based framework to authenticate digital payment transactions, aligning with its focus on enhancing security in digital payments.
Further, in its Central Bank Digital Currency-Retail ("CBDC-R") pilot, the RBI proposes to introduce programmability and offline functionality to broaden CBDC-R use cases, allowing users to define payment parameters, specify geographical areas of use, and set validity periods, while also enhancing access in areas with limited internet connectivity.
Additionally, the RBI aims to streamline the onboarding process for Aadhaar Enabled Payment System ("AePS") touchpoint operators and issue enhanced requirements to mitigate fraud risks in AePS transactions, aiming to bolster security and curb recent increases in AePSrelated frauds.
To view the full articles click here
Footnotes
1. https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=9368&Mode=0.
2. https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=47869.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
