FINTECH BASED NBFCs – EVERYTHING YOU NEED TO KNOW

FinTech which is short for financial technology, is an industry segment consisting of companies that use technology to make financial services efficient. These are usually start-ups founded with the purpose of disrupting incumbent financial systems and corporations that rely traditional way of servicing rather than using the latest technological trends.

Oxford University defines Fintech as “Computer programs and other technology used to support or enable banking and financial services”.

Reserve Bank of India stated “FinTech is broadly used to describe emerging technological innovations in the financial services sector, with ever-increasing reliance on information technology.

The Financial Stability Board or FSB quoted “technology-enabled innovation in financial services that could result in new business models, applications, processes or products with an associated material effect on the provision of financial services”.

RBI (Indian Reserve Bank) encourages greater use of electronic payments by all sections of society to achieve a society that thrives on a “cashless” payment system. Apart from giving subsidies or investing in them, the Government can help Fintech firms by introducing start-ups friendly policies, creating required talent pool to support these firms, regulations, and lowering entry barriers are just some of the initiatives to achieve the goal of “cashless” society.

Background, Working, and Main Story behind Fintech

Chief Financial Officers (CFOs) and Chief Technology officers (CTOs) play a vital role in managing cost control initiatives in line with the growth plans of the financial services institutions like Fintechs. They are the main people who take initiatives that affect the profitability of the organization as well as its long-term sustenance and stability. Many years of existence as the central pillar of the ecosystem has made most financial institutions slow on growth and equally slow in lowering cost unless driven to. Though, the birth of Fintechs has changed the age-old slow process drastically by forcing banking organizations to transform and retain their financial stronghold.

Start-ups like Fintechs do not have a legacy of technological systems or large brick-and-mortar infrastructures to support them. On the other hand, these Non-banking innovators have specialized technical knowledge, skills, and experience with respect to the emerging technologies and trends. Therefore, the NBFCs collaboration with and Fintechs can gain benefit from their partnership. With strategic and prudent collaboration, NBFCs and banks can gain access to new technologies, and nonbank innovators can gain access to funding sources and large customer bases.

Prime Area of Focus for Fintechs

Generally, FinTechs find their area of expertise in institutions having a need for resources of innovation, traditional financial services, digital world, innovative tech talent, collaborative support, progressive regulatory powers, and capital as raw material. Indian regulators released the framework for the payment and settlement system of fintech in India, which is intended towards developing a cashless society. It also focuses on ensuring access to mobile banking facilities or mobile payment systems to basic phone users as well as people using services of Fintech in foreign countries.

How Fintechs Support Cashless Payments?

Mobile payment is being defined as “completion of a process of exchange of goods or services with Money (Any form) in digital form, the action or process of paying someone or something or of being paid.” 

Tech players like apple and amazon build their e-payments systems on top of existing bank systems and payment rails because the money transfer system is regulated by RBI and only allowed to work under the hood of big banks.

Blockchain and Cryptocurrency Technologies have also been used extensively by Fintechs as a mode of payment. Coinbase and Gemini are examples of Cryptocurrency exchanges that connect users for buying and selling cryptocurrencies like bitcoin or litecoin.

Councils and Governing bodies

 The Financial Stability and Development Council – Sub Committee (FSDC-SC) after observing the growing significance of FinTech innovations and their interactions with the financial sector entities held a meeting on April 26, 2016. The meeting was called to create a Working Group to report on the granular aspects of FinTech and their implications. The report can be used to review or reorient the regulatory framework and respond to the dynamics of the rapidly expanding FinTech segment.

After observing wide-ranging issues involved, the Reserve Bank of India also set up an inter-regulatory Working Group (WG) and with the purpose to investigate and report on the granular aspects of FinTech and its implications for the financial sector.  

The group included representatives from RBI, IRDA, SEBI, PFRDA, and from a few selected financial entities regulated by these agencies. Rating agencies such as CRISIL and FinTech consultants/companies were also included.

Advantages in Lending Process through NBFCs and Fintech Companies

1. Cheaper to set up an easy to expand because of minimal regulations.
2. Loans are disbursed quickly without many hassles.
3. They have faster speed of processing international money transfers.
4. As it is not mandatory to seek assurance through a collateral, the documentation process and the registration is minimal.
5. Borrowers who do not have enough CIBIL score have an alternative credit scoring system in case of Fintech-NBFCs.
6. Reliable fraud management, because of technological intervention.
7. Can be stored flexibly and can be retrieved whenever needed as the Financial data is transparent

Licencing and Registration Requirements

According to the report in Economic Times, many Fintech companies applied for NBFC license and NBFC registration. The reason behind it is lending is termed as a major source of revenue for Fintech companies. By getting a license, the cost of capital will decrease, and the loan process will be quicker.

As NBFC Licensing is crucial and a major requirement for the Non-Banking Financial Companies Fintechs to function and undertake various banking activities, they cannot commence their business without doing the same. So, we can say that the Fintech companies who wish to get a license as an NBFC must go through the same registration process and must comply with the same requirements as an NBFC needs to go through. Though there is no particular registration process is not mentioned but a fintech who is willing to register itself as NBFC must fulfill the following conditions and go through the following steps: –

1. NBCF are companies whose main activity is financial and whose financial assets constitute not less than 50 percent of total assets and financial assets income is not less than 50 percent of gross income. This test is also called the 50-50 test. So, we can say that a fintech company willing to incorporate as an NBFC also needs to comply with this point.
2. Should have a net owned fund of 2 crores that means the authorized capital also needs to be 2 crores.
3. The fintech needs to register itself as a start-up company as per the Companies act. That means they need to comply with all the requirements like memorandum of association, article of association, DSC, GST certificate if applicable, TAN, PAN, DIN for directors, minimum one director with NBFC background, etc. If it registers as a start-up, then the required compliances as per the Companies act need to be followed.
4. A Fintech firm also needs to apply for its license to the Reserve Bank of India and should comply with relevant requirements mentioned by the Reserve Bank of India.
5. If the Fintech is in some other business, then they may have to comply by the norms of other regulatory bodies like SEBI or IRDAI.

Why You Need Legal Consultation?

Registering a fintech is a complex and hard process and moreover it is a new concept in India. A consultation firm is a place where you can get a complete service under one room through the professionals like CA, CS, CMA, Advocates, and experienced merchant bankers. It will save you money and time by making the company registration process smooth.