Why Fintech Firms Cannot Directly Offer Deposits: An Insight from the RBI Deputy Governor

The Reserve Bank of India (RBI) has long maintained a clear stance on the limitations around fintech firms dealing directly with deposits. This stance was elaborated during a speech by Deputy Governor Rabi Sankar at the Global FinTech Fest 2021. His comments shed light on the regulatory challenges and the reasoning behind why entities other than banks cannot deal in deposits directly.

The Regulatory Perspective

During his speech, Sankar touched on the activity-based versus entity-based regulation paradigm. He highlighted that any fintech entity providing liquidity services is essentially acting as a bank. As a result, it should be subject to the same regulatory framework as traditional banks. This view aligns with the practices in nearly all countries, where only financial institutions like banks are authorized to directly handle deposits.

The Evolving Regulatory Landscape

The discussion during the conference emphasized the need for regulatory frameworks to evolve with the advancement of technology. Sankar noted that the regulatory approach must shift towards being activity-based rather than entity-based, especially for large tech firms or non-financial entities that engage in financial activities. The approach has to be adapted to the size and nature of the fintech firm.

Impact of Big Tech on the Financial Sector

The presence of big tech firms in the financial sector raises significant questions about competition and concentration. On one hand, setting limits on the number of market participants could create opportunities for new entrants. However, it could also stifle innovation, a critical aspect of progress in the tech-driven finance sector.

“Slowing down the process of change can attract criticism that the regulator is stifling innovation, but that is often the best way to protect customers,” said Sankar. This underscores the delicate balance regulators must strike, ensuring that while fostering innovation, they also protect financial stability and consumer interests.

Deputy Governor Sankar also discussed the pivotal role banks play in the financial intermediary process. Banks provide essential liquidity services and bridge the temporal and spatial gaps in financial transactions. They create and manage money and credit, and are uniquely positioned in the realm of digital payments, where all transactions are essentially transfers between banks.

While fintech can effectively bridge the spatial gap due to their extensive reach, they cannot replace the essential temporal functions that banks provide. These services are crucial for the financial ecosystem and cannot be replicated by technology alone.

The evolving financial landscape necessitates a corresponding evolution in regulatory frameworks. As fintech continues to transform the financial services industry, the focus on transparency, consumer protection, and effective regulation will remain paramount. The insights provided by the RBI Deputy Governor highlight the complexity of regulating the space and the need for an adaptive approach.

Keywords: fintech, deposits, regulatory landscape