Areas of Service
- Capital Markets
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- Technology Law
- 5G Sector
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- Crypto & Blockchain
- Digital Health
- Digital Lending
- Education FinTech
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- Pharmaceutical and Life Sciences
- Quantum Computing
- Real Estate Investments
- Social Sector
- Space Exploration and Technology
The role of Financial Technology i.e. FinTech in the Indian digital payments, lending, and virtual digital assets space has been highly disruptive and impactful. Coupled with fast-paced growth in internet services and access to mobile phones in India, FinTech products/services from regulated entities as well as non-regulated intermediaries have rapidly grown in innovation and volume in the past few years. At the same time, regulatory developments have been fast-paced in the FinTech space, which oftentimes requires assessment of business strategies to achieve compliance. The FinTech industry also continues to support many new-age business models in this digital era.
KEY INDUSTRY VERTICALS / OFFERINGS
Unified Payments Interface: Unified Payments Interface (“UPI”) is a payment system operated by the National Payments Corporation of India (“NPCI”) and subject to regulation by the Reserve Bank of India (“RBI”). UPI enables real-time bank-to-bank payments, relying on mobile applications such as BHIM, Google Pay, PhonePe, etc.
Prepaid Payment Instruments: Prepaid Payment Instruments (“PPIs”) are instruments issued by authorized banks and non-bank entities with stored value such as e-wallets or virtual cards which can be used for purchase of goods and services. PPIs also include gift cards, vouchers, and metro cards.
Digital payments and lending: Digital payments include UPI, PPIs, cards as well as other payment mechanisms that do not involve physical exchange of legal tender. Digital lending is providing credit-linked FinTech products/services through websites or mobile applications such as staking, derivative products in the crypto space, white-label lending, buy now pay later (BNPL) models, P2P and Non-banking Financial Companies (“NBFCs”) lending structures. However, new age business models operating both locally and cross-border are facing various challenges around structing payment models, foreign remittances and data related compliances.
Virtual digital assets: Virtual Digital Assets (“VDAs”) are cryptographic tokens recorded on a digital ledger (the blockchain) and are transferred using a peer-to-peer method, eliminating the requirement for banks and other financial institutions. While a Supreme Court of India judgment in 2020 supported trading activities in VDAs, the crypto industry at large still faces numerous regulatory gray areas. However, VDAs are taxable at a flat 30% income tax rate coupled with tax deduction at source of 1%, and VDA service providers have been brought under the GST regime.
Payment aggregators collect payments from customers on behalf of e-commerce merchants, and pool them to transfer the funds to the merchants periodically. They enable e-commerce merchants to undertake business without requiring a separate payment integration system. Payment gateways offer the technological infrastructure required to process online payment transactions without handling funds.
Strategic and Regulatory Advisory: Nishith Desai Associates (“NDA”) advises routinely on regulatory issues surrounding various national and multi-jurisdictional FinTech models flow of funds, cross-border remittances, VDAs and crypto-backed products, tax issues, sectoral storage and data localization issues and AML/CFT concerns.
Structuring: We advise on business models of multi-national payment service providers, intermediaries, crypto exchanges, etc. including models that are subscription based or those that involve cross-border fund transfers.
Documentation: We assist in drafting, negotiating and advising on payments services, merchant on-boarding, outsourcing and tech infrastructure service agreements, with banks, NBFCs, payment service providers and other FinTech companies. We also assist with platform documentation and employment documentation.
Policy Development: We regularly assist and prepare position papers on issues of FinTech policy, submit representations to the Government, participate in public consultations and hold industry focused sessions with stakeholders.
The Banking Regulation Act, 1949 establishes a regulatory framework for banking providers in the country and imposes registration as well as compliance requirements on banks. The Reserve Bank of India Act, 1934 (“RBI Act”) is the parent act of the RBI and provides regulatory powers to the RBI making it the primary financial services regulator in India. The Payment and Settlement Systems Act, 2007 (“PSS Act”) governs payments systems in India and mandates authorization from the RBI for all entities that intend to commence and operate a payment system. Under the RBI Act and the PSS Act, the RBI is empowered to regulate financial services providers and payment systems service providers through directions, notifications and circulars. The RBI is also endowed with rule making power under the Foreign Exchange Management Act, 1999 to implement foreign exchange controls for cross-border transactions.
There are also other sectoral regulators that industry participants may be regulated by such as the Securities and Exchange Board of India established under the Securities and Exchange Board of India Act, 1992, which regulates securities related products/services. The Insurance Act, 1938 and the Insurance Regulatory and Development Authority of India Act, 1999 regulate FinTech services that provide insurance products/services. There are also other regulators such as the NPCI which operates certain payments systems (UPI, RuPay, Bharat Bill Payment System, etc.) and the Unique Identification Authority of India which oversees the framework on Aadhaar, a Government identifier that is relied on heavily by many FinTech service providers.
It is important to have a close eye on a space that is as rapidly evolving as FinTech. The trends in the space include:
Driven by financial inclusion, the RBI, in January 2022, released the “Framework for Facilitating Small Value Digital Payments in Offline Mode”, which enables transactions of up to INR 200 per transaction and an overall limit of INR 2000 without telecom or internet connectivity.
To safeguard customer data, the RBI has restricted storage of card data by merchants and payments systems providers, prompting the industry to implement alternate solutions such as tokenization (also suggested by RBI).
A regulatory framework for e-mandates on payment instruments to facilitate automatic payments was also introduced with regular tweaks by the RBI in coherence with industry demands.
The VDA industry has also witnessed the entry of several crypto exchanges offering varied products from typical trading to derivative and staking products.
Neobanks are also garnering popularity as they provide completely digital banking platforms in partnership with traditional banks, allowing an individual to access a whole array of banking services without stepping out of their homes.