Compliance costs may spur fintech sector consolidation: Industry experts
Mumbai, Dec 24, 2023
The minimum cost of compliance has nearly doubled over the past year, say companies
The frequent changes announced by the Reserve Bank of India (RBI) and the rising compliance costs may lead to consolidation in the fast-growing fintech sector, according to industry players.
Some recent changes that the central bank has announced include new norms such as digital lending guidelines (DLG), first loss default guarantee (FLDG), and increased risk weights for unsecured personal loans. Though the players are working towards complying with the required changes, the sudden introduction has meant rethinking of each firm’s growth strategy.
The companies that Business Standard spoke to shared that the minimum cost of compliance has nearly doubled over the past year. These overheads include investments in technology, data protection and privacy, and internal and external audits, among other expenses.
"The cost of compliance is going up. For a small non-banking financial company (NBFC) like us, the compliance cost has doubled, but at the same time, business has also been growing. So, things are balanced out at the moment. The rising cost of compliance may not have a major impact on the operational sustainability and growth outlook of the bigger players," said Aditya Damani, Founder and CEO, Credit Fair, a fintech firm.
Damani expects the cost of compliance to keep increasing over the longer term. "Bigger players are in a position to absorb the higher compliance cost. Smaller players may find it challenging to manage the cost implication, which will lead to consolidation. As a result, I expect certain smaller players to eventually become part of bigger regulated entities," he added.
With rising costs, other players suggest the requirements for compliance have been ‘too demanding’ and ‘more dialogue’ is necessary to avoid confusion regarding the interpretation of regulations, even as they are keen on complying with norms set by the RBI.
“Compliance costs are something every player will have to navigate around. There is a need for a formal channel to interact with the regulator or supervisor to interpret the regulations that are being put forth. More time and space for dialogue should be given to implement them,” an industry player said, requesting anonymity.
"I think, the regulator, by design, may want bigger players where they can absorb these costs. This way, it would then have to deal with fewer players in general leading to consolidation. Smaller players may find it difficult to survive on account of higher compliance costs," the player said.
In some cases, it’s the compliance costs, while in other cases the RBI’s decision has meant looking for other avenues for growth.
For instance, after the RBI placed an embargo on companies such as Razorpay, Cashfree Payments, PayU, Paytm, among others, against taking on board new merchants last year, companies explored diversification into additional financial services and value-added offerings.
Last week, the regulator lifted the year-long ban from Razorpay, Cashfree, Google Pay, and Enkash. An embargo to take on board new customers implies slower business growth, affecting revenues.
Similarly, earlier this month, Paytm announced the reduction of the disbursement of small-ticket size loans, specifically those less than Rs 50,000, in the wake of the central bank’s tightening norms for unsecured personal loans.
The company said that this adjustment will result in a roughly 50 per cent decline in these disbursements, also known as post-paid loans. In the second quarter (Q2) of 2023-24 (FY24), the company expended post-paid loans amounting to Rs 9,010 crore, reflecting a 122 per cent year-on-year (Y-o-Y) increase from Rs 4,050 crore in Q2 of 2022-23, according to regulatory filings.
One97 Communication, the parent company of Paytm, hit the lower circuit price on the Bombay Stock Exchange (BSE) following the development.
However, Srinivasu MN, co-chair at the Payments Council of India (PCI) and co-founder of BillDesk, disagrees. He believes the innovation hubs and sandboxes run by the RBI are aimed at providing a stimulus to companies of all sizes.
“The innovation hub and the regulatory sandboxes that RBI offers, facilitate the newer, younger companies. These companies are able to leverage these platforms, test their products in the sandbox and take them to market quicker after establishing viability, without the need for larger, more expensive rollouts,” Srinivasu said.
Similarly, others believe fintechs will have to forge partnerships with multiple NBFCs to drive scale in terms of business operations.
“The market is huge and dynamic, and there is room for different models with capital, compliance, and customer-centricity. In 2024, fintechs with their own NBFCs and partnering with multiple other NBFCs may be drivers of the scale,” said Sugandh Saxena, CEO, Fintech Association for Consumer Empowerment (FACE), an industry body for digital lenders.
As the regulator atmosphere evolves in the country, investors suggest they have been reading through the guidelines put forward by the regulator and only invest in companies they find compliant.
“Companies who do not tend to pay heed to regulations will suffer when it comes to funding. Meanwhile, sometimes the regulator revises guidelines which may have an impact on a company’s business after we have made an investment. But that is a chance that we have to take,” said Shashank Randev, founder VC at 100X.VC, a venture capital firm.
Coupled with the funding winter, the uncertainty from the regulator's side has impacted the funding scenario as well.
Fintechs in the country received $2.1 billion in funding in 2023, a decrease from $5.8 billion last year, according to data from market intelligence platform Tracxn.
Rahul Khanna, managing partner, Trifecta Capital, one of the leading venture debt firms in India said: “With Fintech, there is always the possibility of changing regulations so our investment team is looking at the policy side of things more closely as well as engaging with experts to manage risks in a proactive manner.”
RBI Interventions
- Sep ’22 Introduces digital lending norms to regulate digital lending, protect customers, address concerns on fraud and unethical loan practices
- Jun ’23 Approves the implementation of the first loss default guarantee with the amount capped at 5% of the loan portfolio
- Nov ’23 Hikes risk weights for unsecured personal loans and those on credit card from 100 to 125%
[The Business Standard]
