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Notes Fintech
1.0 What is Fintech?
1.01 History and Evolution of Fintech
1.2 Benefits of Fintech
1.3 Major Enablers of Indian Fintech
2.0 Fintech Innovations
2.1 Mobile and Web-based Payment Applications
2.2 Digital Currency
2.3 CBDC
2.4 Distributed Ledger
2.5 Blockchain
2.6 Crowdfunding
2.7 Peer-to-Peer (P2P) Lending
2.8 Smart Contracts
2.9 E-Aggregators
2.10 Cloud Computing
2.11 Robo Advice
2.12 E Trading
2.13 Big Data
2.14 Artificial Intelligence (AI) & Robotics
2.15 E-Rupi
2.16 Tokenisation of Cards
3.0 Fintech and its Impact on Indian Financial Services
3.1 Regulatory Environment for Fintech in India
3.1.1 Regulation of Payment Systems
3.1.2 Regulatory Sandbox

1.0 What is Fintech?

Notes Fintech 1
 Financial technology (better known
as Fintech) is used to describe new
tech that seeks to improve and
automate the delivery and use of
financial services.

Fintech is technologically enabled

financial innovation that could
result in new business models,
applications, processes, or products
with an associated material effect on
financial markets and institutions.

There are companies that provide financial services through software or other
technology mediums and includes anything from mobile payment apps to
cryptocurrency. These are considered fintech-enabled firms.

In India, Fintech companies and digital players are an important segment of

the Indian financial system, alongside large banks, mid-sized banks, small
finance banks, regional rural banks and cooperative banks.

Fintech companies have the potential to transform the financial landscape

where consumers will be able to choose from broader set of alternatives at
competitive prices, and financial institutions could improve efficiency through
lower costs.

1.01 History and Evolution of Fintech

India has made a move towards a radical and disruptive Tech-Finance alliance. This
alliance between technology and finance is upgrading, all the while enhancing
operations.

Fintech in India is increasingly becoming an indispensable part of everyday

transactions. From a broader perspective, it is serving as a critical catalyst for
financial inclusion in the country by creating lucrative opportunities for the poor
and unbanked.

The shift from traditional to digital payments has proven to be rewarding for
both individuals and businesses, including the self-employed, rural

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 entrepreneurs, small borrowers, SMEs and MSMEs.

Fintech plays a critical role in breaking barriers such as lack of financial

awareness, high-cost of traditional banking services and policy-gaps that can
prevent a large percentage of Indians to be a part of the formal financial landscape.

The ‘new’ Fintech sector gained momentum in its modern incarnation after the
Global Financial Crisis (GFC) as Fintech entrepreneurs realised that banking
services should be transparent, facilitative and economical.

Technology-induced financial innovation has a long history.

In the 1950s, credit cards appeared for the first time, followed by Automated Teller
Machines (ATMs) in the 1960s, electronic stock trading and banks’ new data
recording systems in 1970s and 1980s, and e-commerce and online brokering
in 1990s.

The internet has brought about a major online revolution, connecting the world
altogether, enabling e-commerce, Internet banking, acting as an aid for online
payment platform.

The traditionally cash-driven Indian economy has responded well to the fintech
opportunity, primarily triggered by a surge in e-commerce, and smartphone
penetration.

Overtime there has been an emergence of smart technology. The smartphone

materialised as a powerful computer in human palms, and the movement to app-
based operating systems spurred innovation.

Bitcoin came as another important development in 2009.

The present decade is dedicated to the ‘rise of the robots’, where the emergence
of big and unconventional datasets has enabled Artificial Intelligence to provide
accurate predictions and personalised banking.

1.2 Benefits of Fintech

1. Financial Inclusion: It enables all individuals and businesses to get access to
appropriate and affordable financial products and services in a timely manner.

2. Cost Reduction: The services are provided through apps and other such digital
modes. With each innovation comes a potential reduction in cost as there are no

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 physical branches, meaning no overheads to pay. For fintech companies,
rendering such services saves on cost and they can then pass these savings to
customers in the form of low prices.

3. Speed: The automated processes not only save costs, but also help get access to
services in a timely and quick manner.

4. Efficiency Enhancement: Fintech companies, because of their speed and

economical ways of rendering services, play a key role in making the financial
sector more efficient.

5. Flexibility: Fintech companies allow you to carry out all kinds of operations from
wherever and whenever you want in a very simple way.

6. Personalized Customer Service: If there is one thing that fintech products have
been able to enhance, it is their ability to meet the particular needs of the user and
the company in a personalized way.

1.3 Major Enablers of Indian Fintech

Penetration of internet and smart
phones has given a big boost to
fintech companies.

Favourable demography is another

enabler as the Indian market is
blessed with a higher proportion of
young population, who are more
likely to trust and adopt Fintech.

The indigenous set of technologies and policies also act as enablers to

innovation. Let us have a look at such sets of technologies:

Fintech firms are no longer viewed by banks as disruptive forces but as

enablers of banking and finance. Banks are relying on a number of strategies to
embrace technological innovation, ranging from investing in Fintech companies to
collaborating with Fintech companies for various operational functions.

2.0 Fintech Innovations

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 Categorization
of major Fintech
Innovations

Payments, Deposits, Data Analytics

Market Investment
Clearing & Lending & & Risk
provisioning management
Settlement capital raising Management

• Mobile and
Web-based • Crowd-funding •
Payments • Peer to Peer • Smart • Big Data •
• Robo advice •
Digital Currencies Lending • Digital Contracts • Artificial
Smart Contracts
• Distributed Currencies • Cloud Computing Intelligence &
• e-Trading
Ledger • Distributed • e-Aggregators Robotics
Blockchain Ledger
Technology

2.1 Mobile and Web-based Payment Applications

Mobile payment app is simply a
mobile app acting as an alternative
payment method where instead of
paying with cash, cheque, or credit
cards, a consumer can use a
mobile app to make a payment.

There are a number of web-based

and mobile-based payment
applications that primarily focus on
payment transactions and facilitate
better customer experience.

Immediate Payment Service (IMPS)

is an instant payment inter-bank
electronic funds transfer system in
India. IMPS offers an inter-bank
electronic fund transfer service
through mobile phones.

2.2 Digital Currency

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 Digital currency is a form of currency
that is available only in digital or
electronic form, and not in physical
form. It is also called digital money or
electronic money.

Digital currencies (DCs) are digital

representations of value, currently
issued by private developers and
denominated in their own unit of
account. They are obtained, stored,
accessed, and transacted
electronically.

Recently, RBI also issued concept note on digital currency – called the Central Bank
Digital Currency.

A cryptocurrency is another form of digital currency which uses cryptography

to secure and verify transactions and to manage and control the creation of new
currency units. Bitcoin and Ethereum are the most popular cryptocurrencies.

2.3 CBDC
Reserve Bank defines CBDC as the legal tender issued by the central bank in a digital
form. It is the same as a sovereign currency and is exchangeable one-to-one at par
(1:1) with the fiat currency. While money in digital form is predominant in India—for
example in bank accounts recorded as book entries on commercial bank ledgers—a
CBDC would differ from existing digital money available to the public because a CBDC
would be a liability of the Reserve Bank, and not of a commercial bank.

Features of CBDC

CBDC is sovereign currency issued by Central Banks in alignment with their

monetary policy

It appears as a liability on the central bank’s balance sheet

Must be accepted as a medium of payment, legal tender, and a safe store of value
by all citizens, enterprises, and government agencies.

Notes Fintech 6
 Freely convertible against commercial bank money and cash

Fungible legal tender for which holders need not have a bank account

Expected to lower the cost of issuance of money and transactions

CBDC could further enhance resilience in payments and provide core payment services
outside of the commercial banking system. It can provide a new way to make payments
and also diversify the range of payment options, particularly for e-commerce (where
cash cannot be used, except for the Cash on Delivery (COD) option). The CBDC based
payment system is not expected to substitute other modes of existing payment options
rather it will supplement by providing another payment avenue to the larger public.

As has been the experience with many payment products, once CBDC is introduced,
innovations around the product would only expand the choices available and healthy
competition will help bringing about both cost and time efficiencies.
Types of CBDC
Based on the usage and the functions performed by the CBDC and considering the
different levels of accessibility, CBDC can be demarcated into two broad types viz.
general purpose (retail) (CBDC-R) and wholesale (CBDC-W).
CBDC-R is potentially available for use by all private sector, non-financial consumers
and businesses. In contrast, wholesale CBDCs are designed for restricted access by
financial institutions. CBDC-W could be used for improving the efficiency of interbank
payments or securities settlement, as seen in Project Jasper (Canada) and Ubin
(Singapore). Central banks interested in addressing financial inclusion are expected to
consider issuing CBDC-R.
Role of Central Bank and Other Entities: Who administers the CBDC

Single Tier model –

This model is also known as “Direct CBDC Model”. A Direct CBDC system would be
one where the central bank is responsible for managing all aspects of the CBDC
system including issuance, account-keeping, transaction verification et. al.

In this model, the central bank operates the retail ledger and therefore the central
bank server is involved in all payments. In this model, the CBDC represents a direct
claim on the central bank, which keeps a record of all balances and updates it with
every transaction.

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 It provides an advantage of a very resilient system as the central bank has complete
knowledge of retail account balances which allows it to honour claims with ease
since all the information needed for verification is readily available.

The major disadvantage of this model is that it marginalises private sector

involvement and hinders innovation in the payment system.

This model is designed for disintermediation where central bank interacts directly
with the end customers.

This model has the potential to disrupt the current financial system and will put
additional burden on the central banks in terms of managing customer on-boarding,
KYC and AML checks, which may prove difficult and costly to the central bank.

Two-Tier Model(Intermediate model)

The inefficiency associated with the Single tier model demands that CBDCs are
designed as part of a two-tier system, where the central bank and other service
providers, each play their respective role.
There are two models under the intermediate architecture viz. Indirect model and Hybrid
Model.

Indirect Model - In the “indirect CBDC” model, consumers would hold their CBDC in an
account/ wallet with a bank, or service provider. The obligation to provide CBDC on
demand would fall on the intermediary rather than the central bank. The central bank
would track only the wholesale CBDC balances of the intermediaries. The central bank
must ensure that the wholesale CBDC balances is identical with all the retail balances
available with the retail customers.

Hybrid Model - In the Hybrid model, a direct claim on the central bank is combined with
a private sector messaging layer. The central bank will issue CBDC to other entities
which shall make those entities then responsible for all customer-associated activities.
Under this model, commercial intermediaries (payment service providers) provide retail
services to end users, but the central bank retains a ledger of retail transactions.

2.4 Distributed Ledger

Notes Fintech 8
 A distributed ledger is a database
that is consensually shared and
synchronized across multiple
sites, institutions, or geographies,
accessible by multiple people.

The participant at each node of the

network can access the recordings
shared across that network and can
own an identical copy of it.

Any changes or additions made to

the ledger are reflected and copied to
all participants in a matter of seconds
or minutes.

A distributed ledger stands in contrast to a centralized ledger, which is the type

of ledger that most companies use.

Blockchain is a type of distributed ledger.

2.5 Blockchain
Blockchain is a type of shared database that differs from a typical database in the
way that it stores information; blockchains store data in blocks that are then
linked together via cryptography.

As new data comes in, it is entered into a fresh block. Once the block is filled with
data, it is chained onto the previous block, which makes the data chained together
in chronological order.

Different types of information can be stored on a blockchain, but the most common
use so far has been as a ledger for transactions.

In Bitcoin’s case, blockchain is used in a decentralized way so that no single

person or group has control—rather, all users collectively retain control.

Decentralized blockchains are immutable, which means that the data entered is
irreversible. For Bitcoin, this means that transactions are permanently recorded
and viewable to anyone.

Notes Fintech 9
 2.6 Crowdfunding
It refers to the solicitation of funds (small amount) from multiple investors through a
web-based platform or social networking site for a specific project, business venture
or social cause.

2.7 Peer-to-Peer (P2P) Lending

Peer-to-peer (P2P) platforms connect lenders and borrowers, using advanced
technologies to speed up loan acceptance.

These technologies are designed to increase the efficiency and reduce the time
involved in access to credit

P2P platforms are different from banks, because they do not take positions in loans.
These platforms more directly match the risk appetite of lenders with the risk
profile of borrowers.

2.8 Smart Contracts

Smart contracts are computer protocols or self-executing program based on if
/when-then logic that can self-execute, self-enforce, self-verify, and self-
constrain the performance of a contract.

Development of smart contracts in relation to financial services could have a large

impact on the structure of trade finance or derivatives trading and could also
be integrated into Robo-advice wealth management services.

2.9 E-Aggregators
E-Aggregators provide internet-based venues for retail customers to compare the
prices and features of a range of financial (and non-financial) products such as
standardised insurance, mortgages, and deposit account products.

E-Aggregators also provide an easy way to switch between providers and may
become a major distributor for a variety of financial products.

2.10 Cloud Computing

Cloud computing is the delivery of different services through the Internet. These
resources include tools and applications like data storage, servers, databases,
networking, and software.

Notes Fintech 10
 Rather than keeping files on a proprietary hard drive or local storage device, cloud-
based storage makes it possible to save them to a remote database.

As long as an electronic device has access to the web, it has access to the data
and the software programs to run it.

2.11 Robo Advice

Robo-advisors are digital platforms that provide automated, algorithm-driven
financial planning services with little to no human supervision.

A typical robo-advisor collects information from clients about their financial situation
and future goals through an online survey and then uses the data to offer advice
and automatically invest client assets.

2.12 E Trading
The electronic trading refers to a method of trading securities, financial
derivatives or foreign exchange electronically.

Both buyers and sellers use the internet to connect to a trading platform such as an
exchange-based system or electronic communication network.

2.13 Big Data

Big data refers to the large, diverse sets of information that grow at ever-
increasing rates.

As more business activity is digitised, new sources of information are becoming

available.

Combining these data sources with the availability of increased computing

power is delivering faster, cheaper, and more comprehensive analysis for better
informed decision-making.

2.14 Artificial Intelligence (AI) & Robotics

Companies looking to achieve a competitive edge through AI need to work through
the implications of machines that can learn, conduct human interactions, and
engage in other high-level functions at an unmatched scale and speed.

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 They need to identify what machines do better than humans and vice versa,
develop complementary roles and responsibilities for each, and redesign processes
accordingly.

2.15 E-Rupi
PM Modi has launched E-RUPI as the new digital payment system to send
Government’s monetary benefits directly to the beneficiaries by leveraging mobile
phones.
ABOUT E-RUPI: Developed by the National Payments Corporation of India (NPCI). e-
RUPI is basically a digital voucher which a beneficiary gets on his phone in the form of
an SMS or QR code. It is a pre-paid voucher, which he/she can go and redeem it at any
centre that accepts its.

Features

Person and purpose specific cashless digital payment solution. It could be used
only by the person it is meant for and only for the purpose it is issued.

Cashless and Contactless instrument for digital payment

QR code or SMS string-based e-voucher, which is delivered to the mobile of

beneficiaries.

It is offline hence can be accessible even in the remotest areas.

Runs on UPI platform.

A beneficiary must carry an SMS or QR code which is then scanned to make

payments.

It works even on basic phones (No requirement of smart phones)

It does not require any physical interface for transactions and could be taken up
in the remotest area of the country.

2.16 Tokenisation of Cards

Tokenization is the process of replacing the customer's account number with a
unique alphanumeric token which can then be used for transactions. The token will
act as the card at point of sale (POS) terminals, instead of the card’s details. The token
allows payments to be processed without exposing actual account details.

Notes Fintech 12
 Hence, the online portals would not be allowed to store card details

How Tokenisation Works?

Before shopping online or booking tickets, customers enter card details and opt
for tokenisation with the merchant (say, Amazon, Flipkart etc.)

The merchant forwards it to the respective Bank and Card networks (VISA,
Mastercard, RuPay etc.) and requests for token

Token gets generated and is sent back to the merchant. Merchant would be
allowed to save only the token and not the card details.

Customer can complete the transaction using the CVV and OTP.

Next time, the customer need not enter the card details. The Customer needs to
select the saved token with the merchant to complete the transaction.

Note: One token is limited to just one card and one merchant (online portal).
For instance, if you have, say, an ICICI credit card tokenized on Amazon, then, this
token will be applicable only on Amazon. You would have to generate different token
for the same card on Flipkart.

Benefits of Tokenisation

Tokenisation provides added layer of security and convenience for the

customers.

It eliminates the need to enter the account number multiple times when shopping on
a smartphone or tablet.

Less risk in storing tokens online. Even if it is hacked, it would not be possible for
the fraudsters to decrypt the account details.

3.0 Fintech and its Impact on Indian

Financial Services
India’s Fintech sector is growing rapidly, fuelled by a large market base, an
innovation-driven startup landscape and friendly government policies and
regulations.

Notes Fintech 13
 In India, Fintech has the potential to provide workable solutions to the problems
faced by the traditional financial institutions such as low penetration, scarce credit
history and cash driven transaction economy

FinTech service firms are currently redefining the way companies and
consumers conduct transactions on a daily basis.

The Indian Fintech industry has grown over the years. The broad Fintech
products/services offered in Indian financial markets includes the Peer-to-Peer
(P2P) Lending Services, e wallets, payment gateways, ATMs, Personal Finance or
Retail Investment Services, crowdfunding platforms, Developments in Blockchain
Technology and much more.

India saw various developments in the payments landscape. The modes of

payments in India have leapfrogged from cash to alternate modes of payments
registering phenomenal growth including the Immediate Payment Service (IMPS),
Unified Payments Interface (UPI), Aadhar Enabled Payment System (AEPS), etc.

Customers are taken into a new world of multi-channel banking, where they can
access services from home, at the office, or on-the-go through Mobile Banking,
SMS Banking, Phone Banking, ATMs and Net Banking.

The RBI as regulator and supervisor of payment systems has been playing the role
as the catalyst / facilitator for innovations in payment systems. RBI has taken
various initiatives in the technology-enabled banking space as listed below:

Issued in-principle approvals for Payments Banks (A payments bank is like any
other bank, but operating on a smaller scale without involving any credit risk. In
simple words, it can carry out most banking operations but can’t advance loans or
issue credit cards.)

Allowed entry of non-banks in the payments space both as payment system

operators and technology service providers

Introduced Bharat Bill Payments System (BBPS)

Issued Directions on Account Aggregators

Authorised payment solutions provided like IMPS, Unified Payment Interface (UPI)
and much more.

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 The Government of India and the RBI are actively promoting financial inclusion
with schemes like Jan Dhan Yojana, Aadhaar enrolment and licensing of Payment
Banks /Small Finance Banks etc.

SEBI on its part has also made its best efforts to evolve with the changing
technological landscape.

India still has a large untapped market for financial service technology
startups as a large percent of the population is still not efficiently connected to
banks and use cash modes for payments.

Moreover, a major portion of small businesses are still not linked to formal
financial institutions. These gaps in access to institutions and services offer
important scope to develop Fintech solutions and expand the market base in our
country.

3.1 Regulatory Environment for Fintech in India

The primary regulator for Fintech in India is the Central Bank, i.e., the RBI.

RBI currently regulates the majority of fintech companies dealing with account
aggregation, peer-to-peer (P2P) lending, cryptocurrencies, payments, etc.

3.1.1 Regulation of Payment Systems

The Payments and Settlement Systems Act, 2007 is the principal legislation
governing payments regulation in India. The PSS Act prohibits the commencement
and operation of a “payment system” without prior authorization of RBI.

The Reserve Bank regulates some Fintech companies directly by granting them
NBFC licenses (such as NBFC-P2P), or indirectly by regulating the banks and
NBFCs associated with them.

The forms of business which can be undertaken by, say, a banking company are
specified in section 6 of the Banking Regulation Act, 1949; and no banking company
can engage in any form of business other than those referred to in that section.

The National Payments Corporation of India (NPCI) is the umbrella

organisation for operating retail payments and settlement systems in India, as
an initiative of the Reserve Bank and the Indian Banks’ Association (IBA) under the

Notes Fintech 15
 provisions of the Payment and Settlement Systems Act, 2007. The UPI payments in
India are primarily governed by UPI Procedural Guidelines issued by the NPCI.

3.1.2 Regulatory Sandbox

The RBI planned to implement (in 2018) the recommendations of inter-regulatory
Working Group (WG) set up in July 2016 to look into and report on the granular
aspects of Fintech.

The RBI, thus, came up with a framework for a Regulatory Sandbox (RS) to
increase efficiency, manage risks and create new opportunities for consumers.

The Regulatory Sandbox (RS) refers to live testing of new products or services
in a controlled/test regulatory environment for which regulators may (or may not)
permit certain regulatory relaxations for the limited purpose of the testing.

The RS allows the regulator, the innovators, the financial service providers (as
potential deployers of the technology) and the customers (as final users) to
conduct field tests to collect evidence on the benefits and risks of new financial
innovations, while carefully monitoring and containing their risks.
Benefits

The benefits include that users of a RS can test the product’s viability without
the need for a larger and more expensive roll-out. If any concerns arise, during the
sandbox period, appropriate modifications can be made before the product is
launched in the broader market.

RS will help thousands of Fintech companies and upcoming start-ups to build solid
products.

RS fosters ‘learning by doing’ on all sides. Regulators obtain first-hand empirical

evidence on the benefits and risks of emerging technologies and their implications,
enabling them to take a considered view on the regulatory changes or new
regulations that may be needed to support useful innovation, while containing the
attendant risks.

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