By Sajai Singh
Fintech is the new buzzword in India’s financial sector. Every company – be it a start-up or a prestigious financial institution–wants to have a piece of the pie. Interestingly, using technology to handle money has been a pet peeve of humanity since the 1900s.
From the credit cards of the 1950s to the ATMs of the late 1960s to electronic trading by NASDAQ in the 1970s, technology has transformed the customer’s relationship with banks. It took the Internet, a few decades later, for Fintech to make its entry. Paypal introduced payment platforms in the 1990s, Bitcoins became current in the 2000s, and Google Wallet was launched in the 2010s.
Today, with the unprecedented lockdown across the world amid the COVID-19 pandemic, consumer dependence on online shopping, mobile banking, and electronic payments is fast becoming the norm. Clearly, technology has reshaped the financial sector and will continue to drive it in the future.
As Fintech emerges into the spotlight of asset management, it attracts investors in several sections of the financial sector, including retail investment and commercial banking, fund transfers and payments, insurance and brokerage services, and investment and wealth management. And with the world in the grip of the
COVID-19 pandemic, the enthusiasm for Fintech services and Fintech software in daily transactions involving monies has been palpable everywhere. India is no exception. Fintech is being touted as the obvious solution in the country’s journey to a cashless society. Not only funds and private players, but the banking sector and the Government too are opting for the electronic service provider.
In India’s traditional brick-and-mortar habitat, it is interesting to see Fintech’s lack of presence on the ground. How much of the hype is credible? Is there a lesson the Indian Fintech ecosystem can learn from Germany’s quandary, and in particular the Wirecard debacle? The question brings to attention the role of market regulators in the Fintech ecosystem.
The Reserve Bank of India (RBI) regulates digital payments, allowing security and ease of operation for customers, as per the Payment and Settlement Systems Act 2007. While online banking offers more facility than traditional banking in India, the risks cannot be overlooked. Is the level of compliance prescribed by RBI enough? Does the Prevention of Money Laundering Act, 2002, check the flow of money and potential accounting frauds? Or does the pressure to show results discourage Fintech companies from taking a stringent approach to controls and compliance? Such questions trigger financial angst.
Wirecard’s crisis has truly shaken the German corporate sector, especially the Fintech world. News reports suggest that the media heard the alarm bells, yet Wirecard continued its customary operations without inquiry for years. It became a prominent DAX30 member, and a noteworthy and trusted German payment service provider. Backed by the respect of the German Government, Wirecard’s value escalated upwards of EUR 25 billion! If the warning signs of financial malpractices were clear, why didn’t the ecosystem of a compliance-focused country like Germany pick them up? The jury is out on this issue while the world waits for investigations to reveal more. In particular, the role of BaFin (Federal Financial Supervisory Authority), the German Financial Regulator, during this unicorn-like rise of Wirecard needs to be probed.
Unlike elsewhere in the world, in Germany, the law is more focused on protecting the company, its officials, and national interest rather than shareholder interests. This is a far cry from the US perspective, where the stock exchange vagaries provide shareholders primary power. Wolf-Georg Ringe’s post in the HLS Forum on Corporate Governance and Financial Regulation suggests that the old ‘Deutschland AG’, a nationwide network of firms, banks, and directors, is eroding along three dimensions: the concentration of ownership is diffusing, the role of banks in equity participations is weakening, and the shareholder body is becoming increasingly international.
In India, the law puts shareholder and consumer interests at the forefront. Can the German experience therefore provide the Ministry of Corporate Affairs (MCA) and RBI guidance on how to avoid the accounting irregularities that caused Wirecard’s insolvency? Or could other regulators such as the Securities Exchange Board of India (SEBI) and the Insurance Regulatory and Development Authority of India (IRDAI) be able to pick up rising Fintech companies that remain a mere house of cards?
By the same token, is the Ministry of Electronics and Information Technology (MeitY) adequately addressing the cybersecurity concerns of the Fintech market? It is common knowledge that the banking, finance, and insurance sectors are the most prone to cyberattacks. Cybercriminals are constantly seeking to steal financial and other confidential data. MeitY may need to engage with the Fintech sector more closely to anticipate potential risks and address them.
If India is to sustain its position among the leading nations in the Fintech innovation space, our regulators have a key role to play with the industry and investors. Maybe Indian regulators would be wise to focus on the market manipulation in the Wirecard operations in a reassessment of where its Fintech aspirations are heading.
Be it the ‘Jan Dhan Yojana’ promising to open a bank account for every citizen, or the tax rebates on accepting over 50% payment through electronic payment systems, the Government is moving fast on the ‘Digital India’ track. As financial technology reforms the lives of Indians, even more now amid the global pandemic, the Wirecard accounting scandal provides all players in the financial ecosystem, especially the regulators, key lessons for creating a sustainable digital economy.
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The writer is, Partner, JSA)
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