India-Singapore corridor bridges fintech regulatory hurdles

The fourth industrial revolution has allowed fintech companies to transform the delivery of financial services through technology and innovation-driven efficiency and inclusive access. Technology has automated financial services and products as well as processes like risk management. The scale of this revolution is shown by the increase in global investment in financial technology by more than 2,200% from US$930 million in 2008 to US$22 billion in 2015.

In this growing global fintech market, India is a major destination due to its demographic advantages; digital public provisions like the Unified Payments Interface and Aadhaar, the national identity numbering system; relatively benign policies, and talent and ecosystems. Venture capital and private equity funds have thus been backing fintech start-ups. The pandemic has only accelerated this trend.

While regulators have tried to balance facilitation of innovation with financial stability, systemic risk and consumer protection, the unprecedented scale of the fintech revolution has brought challenges. One of the most significant is cybercrime and fraud, leading to calls for stringent data localisation. Rather than local agencies trying to solve such complex and constantly changing issues by themselves, cross-border fintech corridors could encourage meaningful and collaborative experimentation and risk management. This will not only foster the growth of the fintech industry but also allay concerns over systemic risk. Cybercrime concerns can be solved without compromising data-based and cross-border collaboration, both of which are critical for innovation-driven financial inclusion. An example of this is the fintech corridor launched in 2020 between Belfast and Dublin, connecting the EU and the UK fintech industries. It is supported by fintech businesses, and governmental and academic institutions providing R&D, partnership opportunities and support services for enterprises, including start-ups.

A similar corridor has been promoted following a memorandum of understanding (MoU) in 2018 between the Ministry of Finance and the Monetary Authority of Singapore. A joint working group supports it, strengthening cooperation between national regulators and growing a healthy fintech innovation ecosystem. A 2019 MoU between the Federation of Indian Chambers of Commerce and Industry and the Singapore Fintech Association shares information and reaches out to the global market, and a 2021 MoU between the Singapore Indian Chamber of Commerce and Industry and the IIT Kanpur Start-up Incubation and Innovation Centre backs tech-based startups.

There are four ways in which fintech corridors can overcome the regulatory lag worrying the industry. First, the government established the International Financial Services Centre Authority (IFSCA) to promote and solely regulate financial activity within the GIFT [Gujarat International Finance Tec-City] City IFSC. A fintech corridor between the GIFT City IFSC and Singapore would address regulatory lag. The corridor can use the international experience of IFSCs to transform the financial sector.

Second, the corridor can provide a robust regulatory sandbox for innovative payments products. This would balance facilitating international payments through fintech platforms and restricting convertibility as required by monetary policy. Such restrictions could be observed, for instance, in education-related outward-bound remittances by fintech companies. Liberalised rules in this area can be tested in the digital corridor.

Third, innovative fintech digital products like crypto assets can be tried out. The estimated daily trading volume of digital assets exceeds $100 million even in the current unregulated environment. Proper regulatory mechanisms supporting this market could be tested in the corridor.

Lastly, the digital corridor would allow the trialling of alternatives to data localisation, and of amendments to mutual legal assistance treaties in a safe test environment. This would forge digital economy partnerships, modelled on the agreements Singapore has with other countries.

The corridor would be a bridge over current regulatory hurdles, leading to an innovation-driven expansion of the fintech industry, while adequately managing risk. The global footprint of Indian fintech will significantly expand.

Arjun Goswami is director of public policy at Cyril Amarchand Mangaldas