Introduction
The Indian Fintech ecosystem is currently ranked third in the world in terms of size and is a digital phenomenon that has revolutionized how a billion people spend, save, and borrow. Yet with rapid growth and progress come systemic risks and data breaches. In May 2024, RBI finalized the framework for recognizing Self-Regulatory Organisations (“SROs”) for the SROs Fintech (“SRO-FT”). These SROs serve as a link between Fintech and RBI to ensure that industry standards are met. By making Know Your Customer (“KYC”) regulations more streamlined and introducing a comprehensive framework for SROs, it enables recognized SROs to undertake front-line monitoring tasks, thus allowing RBI to focus more on systemic monitoring.
The Rise of Self-Governance (SRO-FT)
For several years, fintech companies operated in a so-called “grey zone” because they were too tech-intensive for financial sector regulators and too financial for information technology regulators. To address this problem, the RBI has issued the Omnibus Framework for Recognising SROs for Fintech Companies. The RBI cannot possibly regulate every line of code and every marketing flyer put out by the thousands of fintech companies which lead to the need of SROs. An SRO is a “middleman” between the RBI and the fintech companies. Thus, it is more attuned to the pulse of the fintech industry than the RBI. By using the small industry itself to regulate itself through an SRO-FT, the RBI hopes to achieve the following:
- Bridging the Regulatory Gap: The fintech industry is changing so fast that the law cannot possibly keep up. An SRO is more likely to be able to deal with emerging technologies such as artificial intelligence and blockchain than the RBI.
- Protection of Consumers from Unethical Practices: An SRO is obliged to put in place mechanisms for the resolution of disputes fairly and transparently.
- Building a “Culture of Compliance”: By promoting self-regulation and the voluntary adoption of best practices in data privacy, security, and transparency, the RBI creates a more reputable and sustainable fintech ecosystem with its choice of SRO.
- Maximizing Creative Potential: Self-regulation enables the RBI to use its direct supervisory resources on high-risk, systemic issues while leaving the SRO to deal with the day-to-day frontline monitoring of smaller or more diverse fintech activities.
Key Pillars of the SRO Framework
- An SRO-FT must be a Section 8 company. Importantly, the RBI has mandated that no single entity can hold 10% or more of its paid-up share capital. This ensures that the ‘big players’ in fintech do not bully the smaller fintech startups.
- The SRO must represent the entire spectrum of fintech, including WealthTech, InsurTech, AgriTech, etc.
- The SRO has the powers to investigate its members, reprimand them, or even expel them for violating the code of conduct. If a fintech company is expelled from the SRO, this sends out a massive ‘alert’ to the RBI and the public at large.
- The SRO offers data-driven insights to the RBI about emerging trends, such as AI-based lending, while conveying the RBI’s apprehensions to the fintech companies.
Revolutionizing KYC: Speed Meets Security
The KYC verification of a customer’s identity is one of the major hurdles for digital finance services due to the time and documentation involved in it. Therefore, in order to simplify the KYC verification process for digital finance services in India, the RBI updated its Master Direction on KYC in November 2024 and June 2025. One of the key inclusions of the updated version is the strengthening of the Central KYC Records Registry (“CKYCR”), which enables financial institutions to access the existing KYC details of customers through a unique KYC Identifier without having to submit documents like Aadhaar and PAN Card repeatedly. Another change is the implementation of a risk-based approach for periodic updation of KYC details. Now, customers with low-risk profiles must update their KYC details once in ten years, medium-risk profiles once in eight years, and high-risk profiles once in two years. Improvements have also been made in the Video Customer Identification Process (“V-CIP”) for KYC verification in order to make it more inclusive for differently labeled individuals through AI-based verification instead of facial gestures.
Key Challenges Faced by the RBI and the Reforms Adopted to Tackle These Challenges
- Preventing Exploitative Lending Practices: There were many unregulated loan apps in the market, which were adopting exploitative recovery practices. By making it mandatory for the fintech companies to join the SRO, the RBI has ensured that these companies comply with the Fair Practices Code, which includes the disclosure of interest rates and the use of ethical recovery practices.
- Data Privacy and “Co-Branding”: The RBI has also tightened the rules on Co-branded cards. For example, if a travel app launches a credit card with a bank, then the travel app, which has co-branded the card with the bank, cannot access the transaction data of the customer. Only the bank, which has issued the card, will be the authority of the financial data of the customer.
- Cybersecurity and Frauds: To curb the practice of “mule accounts,” the streamlined KYC has included the monitoring of Unique Customer Identification Code (“UCIC”) to ensure that if one individual has created many suspicious accounts with different banks, the regulatory authority will be able to track the same.
The Impact on the Consumer
For the average consumer of these platforms, such as PhonePe, Google Pay,etc the impact will be positive in multiple ways. First, the trust factor, as SRO-FT, it will be regulated and supervised both by their industry peers and the government. Second, the convenience factor, as the process of opening bank or demat accounts could be much faster with the integrated CKYCR. Finally, the security factor, as the clear delineation between fintech partners and banks will ensure that user information will not be shared with any third-party marketing companies.
AMLEGALS Remarks
The RBI’s emphasis on SRO-FTs and simplified KYC norms is a definite change from reactive governance to proactive governance. The institution of SOBs by RBI is a way of convensing the industry to adopt high ethical standards, ensuring that “speed” in fintech does not compromise “safety.” The shift to a risk-based digital KYC is another step in removing barriers to financial inclusion. The elimination of paperwork and adoption of a “once-and-done” digital identity are a blessing for consumers, offering them unparalleled convenience without exposing them to the rising risks of cyber-fraud and predatory lending practices. The message from RBI is loud and clear, the “move fast and break things” philosophy is now replaced by a “move fast and build safely” philosophy. The message for the Indian consumer is a financial system that is not only the most innovative in the world but also one of the safest. As we look to 2026, success of this system would depend upon the participation of fintechs in SROs and further development of Digital Public Infrastructure to protect the last-mile consumer.
For any queries or feedback, feel free to connect with Hiteashi.desai@amlegals.com or Khilansha.mukhija@amlegals.com