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Indian fintech firms have no data advantage over banks: Moody’s

Indian fintech firms have no data advantage over banks: Moody’s

 

According to a new study released on Thursday, the Reserve Bank of India (RBI) has prevented Paytm from accepting new users for its Payments Bank. 

The launch of the Unified Payment Interface in 2017, which allows cash to be transferred instantly, has been a crucial stimulant for the development of digital payments, according to Moody’s Investors Service, due to its simplicity of use of apps running on the system.

“However, their dominance may not translate into advantages over banks,” said Srikanth Vadlamani, Moody’s Vice President and Senior Credit Officer. “Because of the UPI’s open architecture, a huge user base does not automatically make a service provider more competitive than others on the system,” he added.

Banks, which play a critical role in facilitating UPI payments, also access the network’s transactions.

“As a result,” the paper stated, “fintechs’ dominance in digital payments may not result in a major data advantage over banks.”

On the other hand, large banks have increased their digital capabilities for essential retail services dramatically.

Private sector banks and industry leader SBI have vastly upgraded their digital solutions, primarily adopted by customers in other sectors.

“This will aid these banks in fending off fintech competition outside of the payment industry. Public sector banks other than SBI, on the other hand, have fragile digital products and will be harmed by the increased competitive intensity. “According to the analysis, Fintechs will keep branching out into other financial services, particularly personal loans and loans to small businesses.

According to Moody, “the total industry may increase as technology creates greater options, allowing banks to offset margin pressure with business development.”

Overall, fintech payment companies in India have been at the forefront of its rapid growth in digital payments. Still, their dominance may not transfer into competitive advantages in expanding into other financial services.

According to the survey, India’s main banks have greatly increased their digital product offerings and can withstand competition from fintech.

 

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What does the RBI order signify for Paytm Payments Bank?

 

Customers have raised concerns over the Reserve Bank of India’s (RBI) ruling on Paytm Payments Bank. Paytm’s parent firm, One97 Communications, has clarified that the RBI directive will not affect existing Paytm Payments Bank users (PPBL).

The RBI ordered Paytm Payments Bank, which was recently pushed by Vijay Shekhar Sharma, to suspend creating new accounts due to “serious supervisory concerns” in the bank.

 

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RBI ORDER TO PAYTM PAYMENTS BANK

 

“The Reserve Bank of India has today, under section 35A of the Banking Regulation Act, 1949, directed Paytm Payments Bank Ltd to cease onboarding of new customers with immediate effect”, according to a statement from the central bank.

The bank has been ordered to hire an IT auditing firm to undertake a full system audit of its IT system.

Paytm Payments Bank’s onboarding of new customers will be subject to RBI’s specific clearance, provided when the IT auditors’ reports are reviewed.” According to the statement, this action is being taken as a result of “some material supervisory concerns discovered in the bank,” according to the statement.

 

FREQUENT PROHIBITIONS

Since its start in May 2017, the banking authority has targeted Paytm Payments Bank three times. According to a PTI report, it has been barred from opening new accounts for the second time.

Paytm Bank was established in August 2016 and started operations in May 2017 from a Noida branch. According to the most recent figures, PPBL had roughly 6.4 crore customers.

PPBL was barred from onboarding new customers by the RBI in June 2018 due to supervisory concerns. On December 31, 2018, the limitations were eliminated.

The central bank also issued a show-cause notice to Paytm Payments Bank on July 29, 2021, alleging that the company had violated the Payment and Settlement Systems Act, 2007, by submitting false information to RBI confirming the completion of One97 Communications’ transfer of the Bharat Bill Payment Operating Unit business to PPBL.

The Reserve Bank of India fined Paytm Payments Bank Rs 1 crore for the offence.

Sharma owns 51 per cent of Paytm Payments Bank (PPBL), while One97 Communications owns the remaining 49 per cent.

Alibaba Group, based in China, is the largest shareholder in One97 Communications, owning around 31% of the company through its subsidiaries.

 

TOP POINTS FOR CUSTOMERS

According to a BSE filing, “the Company would like to underline that this has no impact on any existing PPBL customers, who can continue to use all banking and payment services without interruption.”

According to One97 Communications, all existing users of Paytm UPI, Paytm Wallet, Paytm FASTag, and bank accounts can continue to use these instruments for payments, including debit cards and net banking.

New users can sign up for the Paytm app and conduct transactions by registering UPI handles and attaching them to their bank accounts, or by utilizing third-party payment instruments, according to the business.

However, users cannot open new PPBL wallets, savings, or current accounts until further notice.

 

NO DATA LEAK

Paytm Payments Bank said on Monday that it complies fully with the Reserve Bank of India’s data localization guidelines and that all of the bank’s data is stored in India.

According to CEO Vijay Shekhar Sharma, investors in India’s Paytm do not have access to the payments bank’s client data. He responded to accusations that user data had been leaked to Chinese enterprises.

 

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Paytm says that restrictions on Payments Bank won’t hamper its business

 

Paytm’s parent company, One 97 Communications, has reiterated that the Reserve Bank of India’s recent restrictions on Paytm Bank will have no meaningful impact on Paytm or its ability to sign up new consumers on its app.

“Paytm thinks that the PPBL [Paytm Payments Bank Limited] actions will have no meaningful impact on Paytm’s overall business.” In a stock exchange filing on March 15, One 97 Communications noted, “This direction does not influence the services that Paytm delivers in conjunction with other financial services companies.”

This Bank is a joint venture between Paytm and Vijay Shekhar Sharma, the company’s creator. Paytm Payments Bank is an associate entity of One 97 Communications and is not included in the public offering of One 97 Communications. Paytm Payments Bank is the backbone of many Paytm operations, including insurance, digital payments, and lending, even though it is not open to the public.

From March 11, the Reserve Bank of India stopped Paytm Payments Bank from opening any new accounts. The central bank has requested an independent technological audit from Paytm Payments Bank, but only after engaging with them. According to reports, the payments bank would have to choose potential auditors, who the RBI would then finalize.

According to a Bloomberg article citing sources, the central bank put this restriction on Paytm Payments Bank since the business enabled data to travel to servers that shared information with China-based entities. One97 Communications, directed by Vijay Shekha Sharma, has refuted these charges, calling the news “totally false” and “simply sensationalizing.”

“Paytm Bank is happy to be a wholly-owned subsidiary of Paytm and is fully compliant with the RBI’s data localization directives.” The Bank’s data is kept entirely within the country. The company’s representative stated, “We are true believers in the Digital India project and are dedicated to driving financial inclusion in the country.”

Paytm Payments Bank will have independent tech audit regulations set up by the RBI, according to a report.

After banning the company from onboarding new customers for alleged violations of customer acquisition and privacy standards with a possible data flow to Chinese entities, the Reserve Bank of India (RBI) will now develop audit criteria for an independent technological examination of Paytm Payments Bank.

Paytm Bank will submit a list of third-party auditors for clearance in the coming days. The central bank will next choose the final candidate from the list of candidates provided. The RBI will define the terms and references for the independent technology audit based on its findings, including the corporation failing to meet Know Your Customer (KYC) requirements.

“The payments bank failed to rectify the system’s flaws despite several relevant referrals from the regulator.” “Repeated vulnerabilities in the bank’s KYC procedure were uncovered,” according to the ET article, “including such accounts that required a full KYC were not completed.”

The RBI revealed during its investigation that data from payments banks was being transmitted to the wallet operator in an insecure manner, in violation of RBI guidelines. The RBI’s compliance has been either pending or unacceptable, according to the sources.

Under Section 35A of the Banking Regulation Act, 1949, the RBI stopped Paytm Payments Bank from onboarding new customers last week. The bank stated that the approval to onboard new customers would be conditional on special authorization being granted once the RBI evaluates the IT auditors’ findings. The action was taken due to the RBI’s material supervisory concerns.

Vijay Shekhar Sharma, the founder of Paytm, denied any data sharing with Chinese companies.

“The RBI has laid forth a list of tasks that Paytm Bank must complete in order to complete the audit. I also want to confirm that no duty in the letter of observation mentions data access, unlawful data access, allowing data access, data localization, data system or servers, or any foreign shareholder or foreign access.” Sharma expressed his point of view.

The stock of Paytm is now worth less than a third of what it was when it was first sold. On March 14, the stock fell to a 52-week low. On the National Stock Exchange, Paytm dropped 13% on the day, closing at Rs 674.80 a share (NSE).

 

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What Is Fintech?

 

Consider your life before COVID-19 for a moment. Fintech was the unsung hero of your lonely night in those less socially distant days.

You uploaded a photo of your paycheck to your bank’s mobile app by taking a picture with your smartphone. You used Mint to figure out how much money you had set aside for entertainment each month. You and your friend split the bill during dinner using Venmo. Later, you used Apple Pay to pay for a drink at the bar with your phone. When it was time to go home, you took an Uber and delivered it with a stored credit card—or even Bitcoin—for the ride.

Fintech is undoubtedly a massive part of your personal and professional life, even if you don’t recognize it. According to Ernst & Young’s 2019 Global FinTech Adoption Index, more than two-thirds of the world’s population (64 per cent) has adopted fintech, up from 16 per cent in 2015. Last year, 3 out of every 4 consumers used money transfer and payment options, according to the research.

Fintech, like many other rising technology sectors, maybe a hazy idea due to the vast array of tools, platforms, and services that lie under its extensive umbrella. If you’re still unsure what fintech is, here’s a quick rundown.

Fintech is a combination of “financial technology” and “portmanteau.” Any technology used to augment, streamline, digitize, or disrupt traditional financial services is referred to as fintech.

Software, algorithms, and applications for both computer and mobile-based tools are referred to as fintech. Hardware, like smart, connected piggy banks or virtual reality (VR) trading platforms, is sometimes included. Depositing checks, moving money between accounts, paying bills, and apply for financial aid are all possible with fintech platforms. They cover more technical topics like peer-to-peer lending and cryptocurrency exchanges.

The Forbes Fintech 50 is an annual list of some of the most exciting platforms. Chime, a financial technology startup whose banking services are supplied by, and whose debit card is issued by, The Bancorp Bank or Stride Bank, and Affirm, a resource for fast, fixed-rate, point-of-sale loans, were the companies on the 2020 list. This year, stripe has become an investor darling, receiving a $1 billion investment from Sequoia Capital, General Catalyst, and Visa, among others.

Wealthtech, invest tech, and insurtech are all subsets of fintech.

Banks use fintech for back-end procedures, like account activity monitoring and consumer-facing solutions, like the app you use to check your balance. Individuals use fintech for tax calculations to market speculation, and no prior investing experience is required.

Businesses use fintech for payment processing, e-commerce transactions, accountancy, and, more recently, government aid programmes like the Payroll Protection Program (PPP). Following the COVID-19 pandemic, many companies turn to fintech to offer features like contactless payments and other tech-enabled transactions.

 

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How Has Fintech Changed Over Time?

 

Fintech isn’t spanking new just because it’s popular. Although the phrase was only added to Merriam-lexicon Webster’s in 2018, the concept has been around for decades. ATMs, for example, were once considered cutting-edge fintech, as were signature-verification technology, which banks first utilized in the 1860s.

Fintech has evolved from being associated with scrappy startups to becoming a major component of established and legacy financial institutions in recent years. Whereas the word was initially primarily associated with Silicon Valley-based disruptors shaking up the big banks, several businesses have partnered with the incumbents they ostensibly aimed to dethrone.

As a result, several of the world’s most well-known institutions now have their own fintech savings account. In 2019, JP Morgan made a $25 million investment in fintech firms. To attract youthful, digitally aware consumers, Capital One has built fintech-infused “banking cafés.” Citi also developed the Citi Developer Hub in 2016 to allow third-party programmers to test and provide input on application programming interfaces (APIs).

Even as some of its incarnations falter, fintech has proven its worth in the face of the coronavirus outbreak. Although the Capital One cafés are temporarily closed, banks and credit unions across the United States have been able to transact digitally and provide COVID-19 support and services. Going online or using a bank or credit union’s mobile app can also help you avoid longer-than-usual phone wait times.

 

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How Does Fintech Affect Me?

 

The financial services industry isn’t usually associated with agility. Today, consumers and business owners expect—and, increasingly, require—adaptability and rapid iteration (not to mention fast pleasure).

Fintech helps speed up activities like seeking a credit report or sending an international money transfer that used to take days, weeks, or even months. Platforms like Upstart and TransferWise can complete these activities a fraction of the time it took five years ago. Fintech has been proposed to speed up typically time-consuming operations like distributing economic stimulus funding.

Fintech has the potential to improve financial inclusion in some parts of the world, where governmental or institutional backing is insufficient.

Fintech’s capacity to streamline historically clumsy operations is partly based on numbers rather than human talents and views. While many fintech services combine parts of traditional brokers/advisors with algorithms, others assist customers in navigating financially challenging activities without requiring them to engage with an actual, live human.

For example, today’s consumers can avoid going to a regular bank branch to apply for a loan or even a mortgage. Casual investors no longer need to meet with financial gurus face to face to go over the ins and outs of their portfolios; they can look through their alternatives online or even utilize chatbots to help them make selections.

Look no further than robo-advisors—digital platforms that provide automated, algorithm-based investment choices and financial planning guidance with little to no human oversight—to see how far fintech has moved the financial services market into a Jetsons-style reality. Betterment, an advice service that bills itself as “the smart money manager,” is one such platform in this space that made Forbes Fintech 50 for 2020.

Many fintech is also mobilizing to assist consumers in staying afloat amid the pandemic’s financial chaos. Some companies, such as Lending Club, actively give financial assistance and establish aid programmes to help the most affected individuals. Others are concentrating their efforts on aiding those on the front lines. Stripe, for example, is prioritizing telemedicine platform integration.

In the end, the answer to how fintech affects your life is a case-by-case situation. Aside from chores that have become engrained in day-to-day banking, such as online account monitoring, the impact of fintech on your life is a personal choice, determined by the number of services you choose to connect with.

 

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Is Fintech Safe?

 

Consumer trust is one-way fintechs have innovatively changed the financial services business. A startling trend emerges from the EY report: The desire to employ financial tools developed by unconventional (that is, nonfinancial) entities was stated by 68 per cent of respondents. Moreover, 89 per cent of SME adopters said they were eager to exchange data with fintech firms.

Consumers and corporations no longer require Wall Street cachet to hand over financial data or even their hard-earned cash to platforms.

However, whether this faith is well-founded or whether the advantages outweigh the risks, it needs to be seen. Engaging with fintechs, many of which are still entirely unregulated, especially in the wild west of cryptocurrencies and blockchain, might expose you to undesired or unanticipated threats.

The notion that fintech is held to a higher moral standard than central banks is also a myth. As financial expert Ron Shevlin points out, many promising firms face challenges due to and independent of the coronavirus outbreak.

With a fair dose of scepticism, it’s advisable to approach dazzling yet unproven fintech and their grandiose claims. Large-scale security snafus are becoming more common as digital data becomes more broad and crucial to day-to-day living. Recent breaches, especially high-profile Bitcoin heists, have raised awareness of these dangers.

There hasn’t been a consensus on how safe fintech products are. Given the scope and size of fintech expansion, such assurances will likely be challenging. On the other hand, consumers are wise to be cautious: “I am concerned about protecting my personal data while engaging with companies online,” said 71 per cent of fintech adopters in an EY survey.

 

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What Does the Future Hold for Fintech?

 

Nobody knows what fintech advancements are on the horizon, and the upheaval generated by the pandemic only adds to the uncertainty. Early 2020 forecasts that the mature sector will continue to grow in 2020 proved to be only partially correct. Interest rate cuts and the covid-induced economic roller coaster, according to Deloitte, have upended industry beliefs about fintech’s immediate future.

Fintechs, like their clients, have faced financial difficulties—some have had to lay off employees, while others are struggling to gain investor backing as they make fast transitions to virtual meetings with venture capitalists. Demand for fintech is perhaps at an all-time high: Businesses and banking consumers are increasingly turning to technology to manage their finances.

According to Deloitte, an economic rebound will coincide with fresh potential for fintech. This is especially true in a company context where digital banking services and e-commerce have become more readily available due to necessity.

Fintech’s larger and longer-term trends have remained unchanged. Legacy banks and fintech appear to be merging, forming alliances, and collaborating. Fintechs, like their customers, have struggled financially—some have had to lay off personnel, while others are battling for investor backing as they migrate to virtual meetings with venture capitalists. Simultaneously, demand for fintech is at an all-time high: businesses and banking customers alike are increasingly looking to technology for help with their finances.

A recovery in the economy, according to Deloitte, will coincide with new fintech opportunities. This is true in the workplace, where digital banking and e-commerce have grown more widely available due to need.

The larger and longer-term tendencies in fintech have stayed primarily constant. Fintechs and legacy banks appear to combine, create alliances, and collaborate.

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