Daybreak - Why the RBI's two-year-old Innovation Hub is intimidating fintechs

Episode Date: October 22, 2024

There is an unusual one-of-kind competition brewing within the Indian fintech space. It is so disruptive that its leaving founders and chief executives of some of India’s biggest fintechs feeling pretty intimidated and also helpless. The funny thing is, the brains behind this new competitor that’s left the whole industry feeling pretty blindsided is the Reserve Bank of India itself. It is a wholly-owned subsidiary of the banking regulator. And it’s called the Reserve Bank Innovation Hub or RBIH. The RBIH has been around for two years now. It's a first-of-its kind sort of company, because it is led by a central bank. Now, perhaps its closest counterpart, would be the National Payments Corporation of India or NPCI. We all know it for creating the unified payments interface or UPI. The NPCI is owned by a consortium of banks, whereas the RBIH is wholly owned by the regulator. It’s raison detre is simple: it’s meant to accelerate innovation across the financial sector. But unlike the NPCI, which collaborates with lenders in some way or the other to develop its products, the RBIH asks lenders to participate. But for the most part, a lot of fintech founders say that it works in a silo. Tune in. We are now on WhatsApp at [phone]! Text us or send us a voice note to tell us what you thought of this episode. Daybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.

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There is an unusual, one-of-a-kind competition brewing within the Indian fintech space. It's so disruptive that it's leaving founders and chief executives of some of India's biggest fintechs, feeling pretty intimidated and also kind of helpless. The funny thing is, the brains behind this new competitor that's left the whole industry feeling blindsided

is the Reserve Bank of India itself. The competitor in question is a subsidiary of the banking regulator and it's called the Reserve Bank Innovation Hub or RBIH. The RBIH has been around for two years now. It's a first of its kind sort of company because it is led by a central bank. Now perhaps its closest counterpart would be the National Payments Corporation of India or NPCI.

We all know it for creating, the Unified Payments Interface or UPI that we use so often. But there is a key difference. The NPCI is owned by a consortium of banks, while the RBIH is owned entirely by the regulator, by the RBI. Now, the RBIH exists for one simple reason. It's meant to accelerate innovation across the financial sector. But unlike the NPCI, which collaborates with lenders in some way or the other,

to develop its products, the RBIH asks lenders to participate, but for the most part, a lot of fintech founders say that it works in a silo. And because of that, a growing complaint is that it is stepping on people's toes by doing the job of the companies it regulates in the ecosystem. Take for instance its latest product, which is a unified lending interface or ULI. It was launched in August and is meant to act as a central repository of customers' financial. and non-financial data for banks and non-banks in order to help them provide loans to underserved customers.

Now, so far, most of that process was taken care of by account aggregators and technology service providers like Safe, One Money and Finvo. But now, ULI has come in with a standardized platform design for a plug-and-play. Plus, it is backed by the regulator, which means it is far more likely to become the default choice for a lot of banks. And that's just one of its many products.

Another product is called Mule Hunter AI. The RBIH launched it in September and it's supposed to help lenders detect mule accounts using an artificial intelligence and machine learning-based model. This in turn is causing several fraud detection companies to return to the drawing boards. And the RBIH's list of products is only getting longer. There are several other launches in the works, which is naturally making fintechs feel pretty intimidated. But the RBIH says there is no reason to worry.

It isn't trying to compete, it's only trying to identify gaps in the ecosystem and plug them. So is it really the villain here? Welcome to Daybreak, a business podcast from the Ken. I'm your host Rahil Philippos, and I'll be joining my colleagues Niktha Sharma every day of the week to bring you one business story that is worth understanding and worth your time. Today is Tuesday, the 21st of October. The Ken reporter Rauna Kumar Gunjan spoke to Shrikant Rajgopal. He's the chief executive of Perfios account aggregation.

services. Ronak wanted to understand what the purpose of the RBIH actually is. And Shri Khan put it pretty well. He said it has a bold and admirable vision to make credit as accessible and frictionless as payments. So to that end, one product it is creating is meant to help lenders with their process of reviewing invoices. For those of you who aren't familiar with invoice financing, It is a credit facility where businesses use their unpaid invoices to borrow from banks and non-banks. So, once an invoice is generated, businesses forward it to the chosen financier who then reviews it and disperses a percentage of its value as a loan to the business. Now, the RBIHs platform will come in at this point to make sure that the invoices are legit.

In the process, it will protect banks against fraud. One former executive said that the RBIH started building this authenticator only after several small businesses started taking an interest in the process. You see, the thing is, not a lot of fintechs will enter the space because invoice financing just isn't as popular as taking, say, a retail loan. So the RBIH stepped in to fill this gap. But the thing is, a lot of IT companies are pretty confused by this development. You see, so far, WIPRO has been.

a major technology service provider to lenders for validating invoices. There are other software companies in the space as well, like CigNet 1, BCC services, etc. So there were people already doing this invoice validation. Which is what prompted a senior executive at WIPRO to say that there isn't really innovation here. They felt like picking an existing process and then adding certain features to it and releasing it into the market does not qualify as innovation, which is what the RBIH promises to do. Another situation a lot like this prevails in the customized, fixed and recurring deposits. Here too, the RBIH is looking to launch a women-centric product

that will specifically target dairy farmers from rural regions as well as young professionals. The Innovation Hub is also partnering with banks for a pilot. But the thing is, again, banks already have similar products. Take access, for instance. It's working with a regulator's subsidiary on a pilot to offer Kisan credit cards and unsecured loans to MSMEs. But both are now powered by the RBIH's ULI platform. In the process, external partners are starting to feel pretty helpless.

More on that in the next segment. First, we need to understand the role played by account aggregators. Ronak says they work somewhat like pipes. Let me explain. The RBI licenses them to transfer encrypted data from financial information providers like banks, non-banks, insurance and mutual fund companies to financial information users, which would also be insurance and mutual fund companies.

Now, a key part of this data exchange is that it only happens when the customer consents to it. Now, these entities, these account aggregators, are an unmissable lever for any lender. They're able to transfer data from bank accounts, credit card statements, payroll accounts, investment accounts, though, works. India has about 15 such entities.

today, and the thing is, it's taken these entities close to a decade to build these pipes into the right data sources. Now, once ULI is launched, the RBI will essentially undo all of that hard work, or at least that is what they are afraid of. RBI executives, of course, say there is no cause for concern. ULI is being built to aid banks with just non-financial data, things like land records or pincodes. But the Innovation Hub's official website tells another story. The project overview section states that the platform is unlocking critical financial, non-financial and alternate data for lenders. It also says that it will eliminate the need for lenders to carry out multiple bilateral integrations with each data and service provider. So, it doesn't seem quite as harmless as some RBI executives claim it to be.

Industry executives say the RBIH is looking to be like a super technology service provider in the system. You see, most large account aggregators have two major revenue sources. A smaller portion of their top line usually comes from account aggregation, and the remaining is generated by their technology services, like onboarding lenders on the account aggregator ecosystem, connecting with other aggregators, and monitoring the flow of information. They all compete on price, thus lowering their margins. While most account aggregators have access to more or less similar kinds of data,

technology services, which may differ in terms of their tech stack, become deeper pools of revenue for these entities. One fintech co-founder said ULI will essentially make it unnecessary for lenders to work with technology service providers. So account aggregators stand to lose out big time. Even with the RBIH's fraud protection platform, other startups are being forced to completely rethink their strategies. Founders fear that banks will easily switch over to these platforms

because they will naturally be more comfortable siding with a regulator-backed product. But some industry executives disagree. They say it just isn't that simple. Some bankers say that there is a lot of grey here. The RBIH isn't just going to throw businesses under the bus. It's just going to push them to rethink their strategies. Put simply, financial information users will now have a combination of account aggregator and ULI data. That's data from bank accounts, investment,

land records, farm data, etc. ULI was after all born to fill a glaring gap. Meanwhile, two former RBIH executives drew attention to the hub's other initiatives. They insist that those could provide some relief to the fintech's feeling a little threatened at the moment. One of them is the fintech and startup acceleration program, which brings regulators, enablers and innovators under one roof to foster a thriving ecosystem. At least that's what the Bangalore-based entity's website says. Eventually, the organisation wants to settle into a space

where it innovates only in areas where no one else has access. It wants to create new but necessary products only. While that sounds reassuring, products like Mule Hunter don't align with the philosophy of non-competition. And that's exactly the problem fintech founders and chief executives have with the Innovation Hub. There's no clear line that defines its scope and bifurcates between business competition and national issues. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform.

What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters and podcast extras. Head to the Ken.com and click on the red subscribe button on the top of the website. Today's episode was hosted by Rahil Filippos and edited by Rajiv Sien.