Let’s end the fintech lending modes of the Wild West

The internet promised to revolutionize the way we live, work and play. This commitment is largely if not fully fulfilled. Gaps between assurances and reality have arisen due to fundamental misunderstandings of what the web can (or should) deliver, as well as regulatory gray areas that allow intruders to justify unethical business practices. It’s a bit like wild capital markets before regulatory frameworks minimized inequality and made trade more democratic and rule-based. Nearly 150 years after the gold rush, some companies are now doing business on the Internet like prospecting in the Wild West; their business model is based on unfair business practices and zero liability. Fintech lending is quickly becoming one such activity, belying its original promise of efficient and cheaper credit transactions without borrowers having to spend harrowing days filling out meaningless forms or ticking innocuous boxes. Yet it seems, from reports and recommendations on digital lending from a task force set up by the Reserve Bank of India (RBI), that fintech lenders in India have been playing fast and loose with the rules. and existing regulations and have engaged in unethical practices.

Many fintech lenders and their lobbyists believe they should be free from regulation. In their view, any business on the Internet should be spared these hassles, as they operate in what is considered the closest thing to a free market, which, according to a myth propagated over the last half-century, is a self-correcting mechanism that will single-handedly mitigate all asymmetries. This is another issue that the industry actively fails to recognize – likely due to blind self-interest – the empirical limits of an unregulated market. It might be instructive to review the definition of “fintech”. In a recent podcast, Aditya Narain, Deputy Director of the International Monetary Fund, defined fintech as “technological innovation in financial services”. He also made a crucial distinction by stating that the term has nothing to do with the product or the service provider. ; fintech covers all kinds of businesses, from small startups to sprawling universal banks.

This classification implicitly implies that any business whose financial products are at its core must be regulated in the interest of orderly growth, the stability of the financial system and the protection of the interests of depositors and customers. In the Indian context, the existing regulatory framework and legal structure requires entities to be regulated by the RBI to engage in any lending business. This is necessary for two reasons. First, regulatory compliance imposes a cost on regulated entities. As society becomes more complex, there is a concomitant increase in the number of regulators and touchpoints, requiring regulated entities to employ additional compliance staff and invest more management resources in them. This has cost implications, and fintech startups gain an unfair cost advantage by avoiding regulatory compliance. More importantly, failure to comply with regulations can lead to negative market outcomes or the unintended consequences of widespread instability. This not only imposes additional costs on all players, but could also erode public confidence in the online lending ecosystem, which would be the cruelest cut of all, especially when innovation in the financial system , products and credit delivery platforms and mechanisms are seen as essential to achieving meaningful financial inclusion.

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