Fraud in fintech being fought with regulatory tech

Technology has made financial transactions ridiculously easy. Hundreds of millions are transferring billions with a few taps on a screen. 

Not surprising then that fraud and illegal activity has picked up in the fintech space, too. App platforms are teeming with lending companies who are mostly unregistered and unlicensed. 

Regulatory bodies may have begun to crack down on illegal lending and other financial fraud, but they will have to deploy even smarter tech to fight online thievery. 

“From a peripheral supporting role a few years ago, fintech-led innovation is now at the core of the design, pricing and delivery of financial products and services. While penetration of digital methods in the financial sector is a welcome development, the benefits and certain downside risks are often interwoven in such endeavours,” said the Reserve Bank of India (RBI) while setting up a group to probe financial fraud.

“A balanced approach needs to be followed so that the regulatory framework supports innovation while ensuring data security, privacy, confidentiality and consumer protection. Recent spurt and popularity of online lending platforms/ mobile lending apps (‘digital lending’) has raised certain serious concerns which have wider systemic implications”, the central bank went on to say.

The RBI has been using technology to monitor illegal activities, but it will have to scale up its efforts. In a recent report, the RBI said, “Our evaluation throws up sobering concerns regarding the future of FinTechs, such as the status of digital hygiene, data use and privacy.”

The central bank and regulator is now moving ahead rapidly with the use of technologies, including artificial intelligence and automation, which can throw up alerts on suspicious activities. 

In its Report on Trend and Progress of Banking in India, the RBI says that it will use emerging technologies to track fraud. Anomalies in reporting data by companies will be monitored, using machine learning techniques. Micro-prudential supervision, predictive assessment and stressed exposures will be identified with greater speed and accuracy with such tools.

The RBI is putting in place an Integrated Compliance Management and Tracking System (ICMTS) and a Centralised Information Management System (CIMS) to keep track of the activities of regulated entities.  


Illegal lending apps, which are yet unregulated, will pose a different set of problems for the RBI. It will have to adopt increasingly innovative solutions to keep pace with digital platforms that allow illegal financial transactions. 

Various estimates infer that more than 1,200 lending apps are active in India. While some have been shut down or removed from Google or Apple platforms, many others can pop up with frightening speed. 

The fintech ecosystem, which includes payment gateways, will have to be equally alert and proactive in monitoring the presence of unregulated entities. Policymakers and regulators will have a challenge on their hands. Too much regulation can stifle innovation while too little will allow illegal lending. Credible and licensed players in the fintech ecosystem must collaborate with the regulator to weed out criminal activities. 

More than 700 million people in India are now using mobile phones. Most of them are first-time users of smartphones and such numbers will rise as digital inclusion grows. Each of them will be increasingly exposed to sophisticated frauds through apps. It is not just about data and privacy issues. 

As digital payments rise, financial fraud could hurt the most vulnerable. Regulators like the RBI and policymakers will have to move faster and be better equipped to counter criminal activity in the fintech space. Smart monitoring of criminal activity has to be done with the smartest tools in the market. Regulatory tech companies should be drafted into this war against fintech fraud.



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