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India Cracks Down on ‘Sketchy’ FinTech KYC Rules


India’s banking regulator has made some high-profile enforcement moves in recent weeks.

Last month, the Reserve Bank of India (RBI) ordered Paytm Payments Bank to halt its businesses after an audit uncovered “persistent non-compliances and continued material supervisory concerns.”

More recently, the RBI has directed Visa and Mastercard to suspend domestic transactions for business payment solution providers (BPSPs).

Writing about these developments Wednesday (Feb. 21), Bloomberg opinion columnist Andy Mukherjee argues that the regulator’s moves follow the growth of neo-banking that’s arisen from cloud computing, which has let India move vast swaths of small payments instantaneously. 

This has also opened the door for more fraud, with know-your-customer (KYC) rules becoming harder to enforce.

“If individual KYC is this sketchy, the process of onboarding businesses isn’t ironclad, either,” wrote Mukherjee. “It used to be that only large retailers accepted online payments, as cards were too expensive for small players. But now more than 50 million merchants accept QR code-based settlements over an ubiquitous smartphone-based protocol known as Unified Payments Interface,” or UPI.

To combat fraud, he recommends a three-pronged solution, the first of which is making India’s Aadhaar ID verification more secure.

Mukherjee also notes that most UPI transactions are free, meaning traditional lenders have no incentive to upgrade their technology. He also argues that the National Payments Corporation of India, which manages the UPI, is a monopoly, and says more competition will help reduce fraud in the system.

Last week, RBI Executive Director P. Vasudevan said the regulator wants to take a “hands-off” approach to its FinTech oversight, while still expecting these companies to stick to the rules of customer verification and data protection.

There are “no harsher measures coming on FinTech,” Vasudevan told Bloomberg News.

This month also saw reports that Paytm, which owns Paytm Payments Bank, was under investigation by India’s financial crime-fighting agency for potential violations of foreign exchange rules.

The investigation is aimed at determining whether platforms operated by One97 Communications, also known as Paytm, took part in any unlawful activities related to foreign exchange transfers, Reuters reported , citing unnamed sources.

A spokesperson for Paytm has denied any violations of FEMA, calling the accusations “unfounded and factually incorrect.”