According to Tracxn reports, the fintech sector saw a 63% decline in 2023 in terms of funding. It received $2 billion in funding in 2023, compared to $5.4 billion in 2022 and $8.4 billion in 2021. This year, the sector raised $551 million between January and March 2024, an increase of drop of 50% a year earlier.
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Shreya Suri, associate, Indus lawclaims that over the last 5-7 years, the Indian financial sector has suddenly been flooded with multiple technology startups operating at the edge of regulation, relying on authorizations, registrations and licenses from entities regulated under models of rental license to infiltrate. the market.
“Some of these companies were clandestine operators and tools to defraud unsuspecting users. Given the systemic risk involved, financial regulators (particularly the RBI) began cracking down on the sector, leading to stricter regulation and higher thresholds and standards for security as well as the “outsourcing (whether for technology or financial support services),” she says. .
SEBI and IRDAI were also quick to follow suit. This created an environment in which only compliant players could operate, thereby streamlining an otherwise highly fragmented market, she pointed out. As the market has matured, investors have also become more cautious and aware of the compliance levels of potential target companies.Arun Tiwarico-founder, Saswat Finance said that earlier, in the name of innovation, little attention was paid to compliances and regulations set by the government and the RBI.
“In recent times, regulators have taken a much stricter approach wherever there have been lapses on the part of financial institutions, be it Fintech, banks or NBFCs. The regulator’s job is to strengthen the system as a whole by ensuring the structural stability of the system and balancing the interests of all market stakeholders, including customers. On the positive side, people who comply, who create businesses that can endure beyond the current setup, I don’t think investors are reluctant to give them money,” he says.
He adds that these regulations help the market become more mature, thereby helping fintechs prepare for better growth and more sustainable growth in the long term.
The problems are not just related to one fintech segment such as lending, but are spread everywhere, including customer service and KYC.
Tiwari co-founder Ravi Ranjan Chaudhary says that when the fintech space came to India, there was virtually no regulation as there was no critical mass available in the market.
“Regulators were also trying to determine the best approach. This has led to a period of creative freedom within the fintech ecosystem,” he says.
Things have now taken a turn as the regulator gets smarter by analyzing the data it has collected over the past decade in fintech.
Rohit Krishna, general partner of WEH Ventures, believes that this is just a cyclical phenomenon and is not a problem in itself.
“Companies just needed time to adjust their business models now that the regulatory framework is no longer ambiguous. We still think there will be a lot more innovation in fintech in 2024/25,” he says.
Tiwari and Chaudhary believe that regulation should not be seen as an obstacle to the growth or fundraising of fintech startups, but as a tool to strengthen the structural stability of the fintech system as a whole.
Chaudhary says the current regulations are not made without any consultation with fintech.
“The majority of this is happening in collaboration with fintechs. The regulator does not operate in silos. They are actively engaging with the industry, conducting numerous discussions and consultations with fintech companies while developing certain rules and regulations,” he says.