Briefing on the Fintech and Regtech Landscape in India
Executive Summary
This document provides a comprehensive overview of India's dynamic Financial Technology
(Fintech) and Regulatory Technology (Regtech) landscape. India has emerged as a global leader in
Fintech adoption, with an 87% adoption rate, second only to China. This growth is propelled by
government initiatives such as the Unified Payments Interface (UPI) and a burgeoning ecosystem of
startups.
The regulatory environment is characterized by a "mosaic of specialized authorities" rather than a
single governing body. Key regulators include the Reserve Bank of India (RBI) for payments and
lending, the Securities & Exchange Board of India (SEBI) for investments, and the Insurance
Regulatory & Development Authority (IRDAI) for InsurTech. A central theme in recent regulation is
the shift from a restrictive to an enabling posture, aimed at balancing innovation with consumer
protection. This is exemplified by the introduction of theme-based Regulatory Sandboxes by RBI,
SEBI, and other bodies, allowing for live testing of new financial products.
Regarding Virtual Digital Assets (VDAs), including cryptocurrencies, India has adopted a cautious
"tax-and-monitor" approach rather than an outright ban. The landmark 2020 Supreme Court case,
Internet and Mobile Association of India v. RBI, struck down a banking ban, establishing a legal space
for the industry. Subsequent government action has focused on taxation (a 30% tax on gains and 1%
TDS) and anti-money laundering compliance under the Prevention of Money Laundering Act
(PMLA). Concurrently, the RBI is actively developing its own Central Bank Digital Currency
(CBDC), the Digital Rupee (e₹).
Significant regulatory developments include the 2020 Guidelines for Payment Aggregators (PAs) and
Payment Gateways (PGs), which formalized their roles and established strict authorization, capital,
and governance requirements. More recently, the October 2023 framework for Payment Aggregators
– Cross Border (PA-CBs) brought non-bank entities facilitating international trade under direct RBI
supervision, streamlining processes and enhancing oversight. These measures reflect a clear trend
towards bringing all facets of the digital financial ecosystem under a structured and robust regulatory
umbrella.
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1. The Fintech Ecosystem in India
1.1. Definition and Scope
Financial Technology, or Fintech, describes technological innovations in financial services that result
in new business models, applications, processes, or products. As defined by the Financial Stability
Board, "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 and the provision of financial services." Fintech has disrupted the traditional
monopoly of banks in financial services, with key offerings focused on reducing costs, increasing
efficiency, building client relationships, facilitating regulatory compliance, and enhancing security.
Key areas of Fintech innovation include:
• AI & Robotics
• Cloud Technology
• Blockchain Technology
• Regtech
• Financial Inclusion
• Payments
• Cybersecurity
• Insurtech
• Open Banking
• WealthTech, Captech, & EdTech
1.2. Adoption and Foundational Infrastructure
India has the second-highest Fintech adoption rate globally at 87%, trailing only China. This
widespread adoption is built upon a state-of-the-art national payments infrastructure developed with
significant government support.
Key Government-led Payment Services:
• Immediate Payments Service (IMPS)
• Unified Payments Interface (UPI)
• Bharat Interface for Money (BHIM)
• Bharat Bill Pay System (BBPS)
2. The Regulatory Framework
India's Fintech sector is not governed by a single entity but by a mosaic of specialized authorities,
each overseeing different aspects of the financial industry.
Regulator Domain of Regulation
Payments (UPI, Wallets), Credit (Lending, NBFCs, P2P), and
Reserve Bank of India (RBI)
oversight of banking partners.
Securities & Exchange Board Investments (Stockbroking, Advisory, Mutual Funds), Wealth Tech
of India (SEBI) (Robo-advisors).
Insurance Regulatory & Dev.
InsurTech (Digital brokers, web aggregators, corporate agents).
Auth. (IRDAI)
Pension Fund Reg. & Dev.
Pension Tech (National Pension System platforms).
Auth. (PFRDA)
Financial Intelligence Unit Anti-Money Laundering (AML) compliance for all fintechs,
(FIU-IND) including Virtual Digital Asset service providers.
2.1. Regulation of Payment Intermediaries
A significant evolution in Fintech regulation occurred with the introduction of the ‘Guidelines on
Regulation of Payment Aggregators and Payment Gateways’ on March 17, 2020. These guidelines,
issued under the Payment and Settlement Systems Act (PSSA), 2007, replaced the outdated
"Directions for Intermediaries 2009" and addressed critical gaps in consumer data protection,
settlement timelines, and grievance redressal.
The 2020 Guidelines distinguish between two types of intermediaries:
• Payment Aggregators (PAs): Entities that handle the flow of funds. They facilitate e-
commerce sites and merchants in accepting payments, pooling the funds, and transferring
them to merchants. Examples include Razorpay, PayU, and Cashfree.
• Payment Gateways (PGs): Entities that handle the flow of information. They provide the
technology infrastructure to route and process online payment transactions without handling
funds directly. Examples include Juspay and Paytm Gateway.
Key Requirements for Payment Aggregators under the 2020 Guidelines:
• Authorization: Must obtain authorization from the RBI.
• Capital Requirements: A minimum net worth of ₹15 crore by March 31, 2021, increasing to
₹25 crore by March 31, 2023.
• Governance: Promoters must satisfy the RBI's ‘fit and proper’ criteria.
• Compliance: Must adhere to strict frameworks for Customer Grievance Redressal,
AML/KYC, Security, and Fraud Prevention.
• Merchant On-boarding: PAs must conduct background checks on merchants and ensure
their infrastructure is compliant with PCI-DSS and PA-DSS standards.
• Settlement: Must manage funds through an escrow account for risk management.
2.2. Other Key Regulatory Frameworks
• Prepaid Payment Instruments (PPIs): Regulated by the RBI's Master Direction on Issuance
and Operation of Prepaid Instruments 2021, PPIs (e.g., digital wallets, gift cards) facilitate
purchases against a pre-loaded value. The regulations define KYC levels, usage limits, and
classify PPIs as either open (bank-issued, cash withdrawal permitted) or semi-closed (bank or
non-bank issued, no cash withdrawal).
• Payment Banks: A niche type of bank licensed under the Banking Regulation Act, 1949, that
can accept deposits and provide remittances but cannot perform lending activities. They can
issue debit cards but not credit cards.
• Unified Payments Interface (UPI): Managed by the National Payments Corporation of India
(NPCI) under RBI oversight. While only banks can directly integrate with the UPI network,
they can engage technology providers (Third Party Application Providers or TPAPs like
PhonePe and Google Pay) to build applications. NPCI sets operational rules, such as the 30%
market cap for TPAPs.
3. Analysis of Key Fintech Business Models and Their Regulation
3.1. Lending Models (Regulator: RBI)
• Digital Lending (LSP Model): Most fintechs operate as Lending Service Providers (LSPs)
for regulated banks or NBFCs.
o Examples: ZestMoney, LazyPay, KreditBee.
o Regulation: RBI's Digital Lending Guidelines mandate direct disbursement of funds
to the borrower's account and cap Default Loss Guarantees (DLG) from LSPs at 5%
of the portfolio.
• Peer-to-Peer (P2P) Lending: Online platforms that act as marketplaces connecting
individual lenders with borrowers, bypassing traditional financial institutions.
o Examples: Faircent, RupeeCircle.
o Regulation: Governed by the Master Direction for NBFC-P2P Lending Platforms
(2017), which requires platforms to register as NBFC-P2P and sets exposure caps for
lenders (₹50,000 per borrower, ₹50 Lakhs across all platforms).
• Account Aggregators (AA): Facilitate consent-based sharing of financial data (e.g., bank
statements) between institutions.
o Examples: CAMSFinServ, Onemoney.
o Regulation: Regulated by the Master Direction for NBFC-Account Aggregators
(2016). AAs cannot see or store user data, only manage its flow.
3.2. Investment Tech (Regulator: SEBI)
• Registered Investment Advisers (RIA): Platforms providing investment advice.
o Examples: Kuvera, Scripbox.
o Regulation: SEBI (Investment Advisers) Regulations, 2013, mandate registration,
segregation of advisory and distribution functions, and impose fee caps.
• Stockbrokers & Trading Platforms: Digital platforms for trading securities.
o Examples: Zerodha, Groww, Upstox.
o Regulation: SEBI (Stock Brokers) Regulations, 1992, require registration with SEBI
and exchanges, client fund segregation, and strict KYC compliance.
3.3. InsurTech Models (Regulator: IRDAI)
• Insurance Web Aggregators: Platforms that allow comparison of insurance products.
o Examples: Policybazaar, Turtlemint.
o Regulation: IRDAI (Insurance Web Aggregators) Regulations, 2017, permit them to
compare products but not provide advice. Their primary function is lead generation.
• Corporate Agents: Entities that distribute insurance products, often as an embedded service.
o Examples: PayTM, PhonePe.
o Regulation: IRDAI (Registration of Corporate Agents) Regulations, 2015, allow
them to partner with up to nine insurers per business line (Life, General, Health).
3.4. Neo-Banking
Neo-banks are digital-only banking platforms without physical branches, targeting tech-savvy users,
MSMEs, and underserved populations. In India, they operate on a "Partnership Model," where the
tech-driven neo-bank provides the user interface and services while a licensed bank or NBFC partner
handles core regulated functions like holding funds.
Neo-Bank Key Services Target Audience Banking Partner
Jupiter Digital savings, investments, AI budgeting Millennials & Gen Z Federal Bank
Salary accounts, spend insights, gamified Working
Fi Money Federal Bank
finance professionals
Equitas Small Finance
Niyo Global cards, zero-fee forex, savings Students & travelers
Bank
Business banking, payroll, vendor
RazorpayX MSMEs & startups Yes Bank
payments
Credit-seeking
Freo Credit cards, flexible loans, rewards SBM Bank India
youth
4. Regulation of Virtual Digital Assets (VDAs)
India's approach to cryptocurrencies and other VDAs is characterized by regulation through taxation
and monitoring, not an outright ban.
4.1. The Role of the Judiciary
The landmark Supreme Court case, Internet and Mobile Association of India v. RBI (2020), was
pivotal. The Court struck down the RBI's 2018 circular that had banned banks from dealing with
crypto businesses, ruling it was disproportionate and violated the fundamental right to trade. This
judgment created the legal space for the crypto industry to operate.
4.2. Legislative and AML Framework
• Taxation (Income-tax Act, 1961):
o Section 115BBH: A flat 30% tax on any income from the transfer of VDAs.
o Section 194S: A 1% Tax Deducted at Source (TDS) on VDA transactions to create a
trail. This tax regime implicitly treats VDAs as a legitimate asset class for taxation
purposes.
• Anti-Money Laundering (PMLA, 2002): In March 2023, VDA service providers
(exchanges, wallets) were designated as "reporting entities." They are now required to register
with FIU-IND, perform KYC on users, maintain transaction records, and report suspicious
activities.
• Pending Legislation: The Cryptocurrency and Regulation of Official Digital Currency Bill,
2021, which aims to create a framework for an official digital currency while prohibiting
"private cryptocurrencies," remains pending.
4.3. Enforcement and the Official Alternative
Enforcement actions have been taken against non-compliant entities, such as a ₹18.82 crore fine on
Binance in 2023 for operating without registration. Meanwhile, the RBI is proactively developing its
own Central Bank Digital Currency (CBDC), the Digital Rupee (e₹), with pilot projects for both
wholesale (e₹-W) and retail (e₹-R) versions underway.
5. Fostering Innovation: The Regulatory Sandbox Model
A regulatory sandbox provides a live testing environment for new financial products on a limited set
of customers with certain regulatory relaxations. This model allows regulators to shift from being a
'restrictor' to an 'enabler' of technology while ensuring core principles like KYC and AML are not
compromised.
• RBI Regulatory Sandbox (2019): Initially used theme-based cohorts (e.g., retail payments)
but has since become "theme-neutral." It is open to banks, NBFCs, and fintech startups.
• SEBI Regulatory Sandbox (2020): Offers an "Innovation Sandbox" for offline testing and a
"Regulatory Sandbox" for live testing by SEBI-registered entities. It operates on a rolling
application basis and can grant explicit exemptions from SEBI regulations.
• Other Sandboxes: IRDAI runs a sandbox for insurance products, and the International
Financial Services Centre (IFSC) at GIFT City hosts multiple sandbox categories managed by
the IFSCA for a wide range of domestic and international applicants.
6. Modernizing Cross-Border Payments
On October 31, 2023, the RBI issued a circular bringing all entities facilitating cross-border payment
transactions for imports and exports under direct regulation. This new framework for Payment
Aggregators – Cross Border (PA-CBs) replaced the older, bank-dependent Online Payment
Gateway Service Providers (OPGSPs) system.
Key Features of the PA-CB Framework:
• Direct Regulation: Allows non-bank entities to act as PA-CBs, directly regulated by the RBI.
• Objective: To streamline online payments, increase participation of non-bank fintechs, and
support India's global trade ecosystem under Payments Vision 2025.
• Categories:
o PA-CB-E: For export-only transactions.
o PA-CB-I: For import-only transactions.
o PA-CB-E&I: For both export and import transactions.
• Authorization: Non-bank entities must apply for RBI authorization and meet minimum net
worth requirements (₹15 crore on application, ₹25 crore within three years).
• Transaction Limit: Capped at ₹25 lakh per unit of goods or services.
7. Enhancing Transaction Security
The RBI issued the “RBI (Authentication Mechanisms for Digital Payment Transactions) Directions,
2025” to enhance security for Card-Not-Present (CNP) transactions, such as online international
purchases. Effective from April 2026 (October 2026 for cross-border), these directions mandate
Additional Factor of Authentication (AFA), such as OTP or biometrics, for non-recurring transactions
while allowing for risk-based verification for recurring payments like subscriptions. This measure
aims to balance robust security with a smooth user experience.