Issue: 019

APRIL 2024

Issue: 019

APRIL 2024

Message from the CEO

Dear readers,

As Artificial Intelligence (AI) continues to permeate deeper into our lives, its integration with financial services is fundamentally reshaping the way the financial sector assesses risks, streamlines processes, and improves customer experience.

In the nineteenth edition of Finwrap, we delve into some examples of how AI is transforming financial services, along with updates from the RBI and the stance of global regulators on AI.

At the Reserve Bank Innovation Hub, we are actively employing AI in our initiatives and we are committed to harnessing the technology’s potential to improve access to financial services for all Indians.

Warm regards,

Rajesh Bansal
Chief Executive Officer
Reserve Bank Innovation Hub

Message from the CEO

Dear readers,

As Artificial Intelligence (AI) continues to permeate deeper into our lives, its integration with financial services is fundamentally reshaping the way the financial sector assesses risks, streamlines processes, and improves customer experience.

In the nineteenth edition of Finwrap, we delve into some examples of how AI is transforming financial services, along with updates from the RBI and the stance of global regulators on AI.

At the Reserve Bank Innovation Hub, we are actively employing AI in our initiatives and we are committed to harnessing the technology’s potential to improve access to financial services for all Indians.

Warm regards,

Rajesh Bansal
Chief Executive Officer
Reserve Bank Innovation Hub

India Fintech News

Card Issuers to Provide Choice of Card Networks to Customers

Authorised card networks like American Express, Diners Club International, MasterCard, Rupay, and Visa collaborate with banks and non-banks to issue credit cards.

The card issuer determines the card network for customers based on bilateral agreements with the card networks. However, after a review, the RBI observed that such arrangements restrict consumer choice.

The RBI has directed that card issuers shall not enter into agreements that prevent them from using other card networks and the following terms will take effect after six months, i.e., from 7th September 2024:

Eligible customers shall be given the option to choose from multiple card networks at the time of issuing.

For existing cardholders, this option will be given at the time of the next renewal.

The above points will not apply to credit card issuers that have 10 lakh or fewer active cards in circulation.

Card issuers and card networks will be responsible for ensuring compliance with the above requirements during the execution of new agreements and the amendment or renewal of existing agreements. This rule does not apply to credit card issuers who issue credit cards on their own authorised card network.

RBI Issues Omnibus Framework for Recognising SROs for Regulated Entities

The RBI has issued a framework for recognising Self-Regulatory Organisations (SROs) for the regulated entities (REs) in the country. It is important to note that the omnibus framework for SROs is an overarching guideline that is different from the upcoming sector-specific SRO framework for fintechs.

The need for such a framework arose due to the growth of REs in terms of number as well as scale of operations, increase in adoption of innovative technologies and enhanced customer outreach.

The framework outlines general parameters, such as :

Objectives

The objective of SROs is to promote compliance through progressive practices, support smaller entities, serve as the industry’s collective voice, ensuring equitable treatment while aiding policymaking and encouraging innovation.

Responsibilities

The primary responsibility of the SRO is to promote best business practices and should aim to protect the interests of the customers, participants and other stakeholders in the ecosystem.

Eligibility Criteria

The applicant must be a Section 8 not-for-profit company with sufficient net worth and infrastructure. Its shareholding should be diverse, with no entity holding over 10% of capital, and its directors should meet RBI’s fit and proper criteria.

Governance Standards

The Board must include at least one-third independent members, with any directorship changes reported to the RBI. Directors must meet ‘fit and proper’ criteria for integrity and expertise, and the SRO must be professionally managed with appropriate Articles of Association.

The Application Process for SRO Recognition

The application should include the SRO’s Memorandum and Articles of Association, details of the Board and Directors, management roles, and a roadmap for membership criteria.

The SRO is expected to operate with credibility, objectivity, responsibility, transparency, professionalism, and independence under the oversight of the regulator to ensure regulatory compliance and foster sectoral development.

Net Banking with Interoperable Payments

The National Payments Corporation of India (NPCI) is in discussions with various banks and fintech firms to implement an interoperable payment system for net banking.

The interoperable net banking system processes transactions across multiple payment aggregators, eliminating the need for separate integrations for each online merchant.

This system is expected to be operational as early as next month. The initiative follows the RBI approval for launching an interoperable payment system for net banking.

The goal is to enhance digital payment transactions and reduce reliance on cheque-based payments. The RBI aims to increase digital payment transactions by over 3X by 2025 and minimise cheque-based payments to less than 0.25% of total retail payments. Currently, cheque-based payments account for 8.59% of retail payments.

Fintech News

Enhancing Privacy in Central Bank Digital Currencies (CBDCs)
through Project Aurum 2.0

The BIS Innovation Hub Hong Kong centre, in collaboration with the Hong Kong Monetary Authority, has launched the second phase of Project Aurum.

In its initial phase, it focused on testing the viability of a technological framework that integrates a wholesale interbank system and a retail e-wallet. In the second phase, the focus will be on enhancing privacy measures for retail CBDCs.

 

The main aim of this project is to:

Utilise expertise from diverse disciplines by partnering with universities and privacy specialists.

Enhance central banks’ practical knowledge of privacy in CBDC system design.

Demonstrate to the public sector how technology safeguards personal data in the CBDC space.

Examine various privacy-enhancing technologies, such as pseudonymization and zero-knowledge proofs.

Test the effects of enhanced privacy on system performance and compliance.

EU Announces Digital Identity Wallet for All Europeans

The European Council (EU) adopted a new framework for a European digital identity (eID), which will enable citizens with a secure and personalised European digital wallet while retaining complete control over their personal data.

This new framework will assist people and businesses across Europe in achieving universal access to secure and reliable electronic identification and authentication, simplifying access to online public services.

It will make it easier for individuals to prove their identity and share electronic documents from their digital wallets using their phones (e.g., driving licence, qualifications, bank accounts).

This framework will be fully implemented across Europe by 2026.

The European Parliament Adopts Landmark : Artificial Intelligence Act

The European Parliament approved the Artificial Intelligence Act that ensures safety and compliance with fundamental rights while also fostering AI innovation.

The key measures of the Act include:

Obligations for high-risk AI systems

The Act outlines obligations for high-risk AI systems in critical areas like infrastructure, education, healthcare, banking, law enforcement, and democratic processes. These systems must assess and mitigate risks, maintain use logs,and ensure transparency, accuracy, and human oversight, allowing citizens to submit complaints and receive explanations about decisions affecting their rights.

Transparency requirements for General-Purpose AI (GPAI) systems

GPAI systems and their models must adhere to transparency requirements, including compliance with EU copyright law and providing detailed summaries of training content.

Labelling deep fakes

The Act mandates clear labelling of deep fakes and manipulated multimedia content to enhance accountability and trust in the digital ecosystem.

Support for innovation and SMEs

To support innovation and SMEs, national regulatory sandboxes and real-world testing will be established to develop and train innovative AI before its placement on the market.

The new rules ban certain AI applications, including biometric categorization and facial image scraping for recognition databases. Additionally, emotion recognition in workplaces and schools, social scoring, predictive policing solely based on profiling, and AI manipulation of human behaviour are forbidden.

Tech in Focus

How AI Is Transforming InsurTech

Artificial Intelligence (AI) is revolutionising the insurance industry by enhancing various aspects of operations, from underwriting to claims processing and customer service. AI algorithms play a crucial role in the insurance sector by enabling insurers to analyze vast amounts of data efficiently, leading to more precise risk assessment, personalized policies, and streamlined processes. These algorithms are designed to learn patterns from data, allowing for faster and more automated decision-making processes.

In the insurance industry, AI algorithms help in several ways:

Underwriting: AI uses data from remote sensors, satellite images, and digital records for better risk assessment and customer insights, allowing insurers to provide customised coverage and pricing.

Claims Processing: AI streamlines back-end processes, enhances customer service, and enables the development of new products. For example, AI models can predict flight delays, leading to instant payouts for customers without the need for filing claims.

Fraud Detection: AI technologies like computer vision can be used to reduce fraud in areas like car accidents by analysing visual data to detect driving styles and certify accidents.

For example, machine learning models analyse historical data and images to assess vehicle damage and property risks for insurers, expediting claim approval. AI reduces biases in pricing by excluding factors like credit score or income level, ensuring fairer pricing for customers.

Overall, AI in the insurance industry is transforming traditional processes, offering flexible insurance options, and improving customer service. By leveraging AI technologies like machine learning, natural language processing, and computer vision, insurers can enhance efficiency, accuracy, and customer satisfaction, ushering in a new era of innovation and customisation in the insurance sector.

RBIH Updates

The launch of Nari Dhan Sanchay

Nari Dhan Sanchay is a unique savings scheme designed for women dairy farmers in Gujarat by RBIH in collaboration with Federal Bank.

With this product, female dairy farmer can easily and conveniently make goal-based savings at their place of employment.

The goal of this initiative is to support the overall growth, self-sufficiency, and sustainability of these communities by advancing gender-inclusive financial services and products.

Fintech in North East and Karnataka (FiNEST)

RBIH, along with the Ministry of Development of the North Eastern Region, launched the ‘Fintech in North East’ (FiNEST) initiative.

With an emphasis on financial inclusion, the Fintech Futurepreneurs Bootcamp, organised by RBIH, was held at IIT Guwahati and provided hands-on fintech training. Its goals are to foster innovation and provide Northeastern entrepreneurs more influence.

Similarly, RBIH, in partnership with the Higher Education Department of Karnataka, introduced ‘Fintech for Karnataka.’ This initiative aims to build a fintech ecosystem in tier-2 and tier-3 cities by organising bootcamps, creating online fintech courses in Kannada and English, and hosting hackathons with universities.

Finteraction – Fostering Fintech Innovation

The Reserve Bank of India (RBI) and RBIH recently held the first session of ‘Finteraction,’ a platform for open dialogue with the fintech community. Mr. Suvendu Pati, CGM, Fintech Department, RBI andMr. Rajesh Bansal, CEO, RBIH interacted with about 200 fintechs and shared their insights.

The discussion emphasized three main points: responsible innovation and compliance for trust in fintechs; pushing for interoperable systems from the start for long-term scalability; and highlighting RBIH’s fintech repository that will enable comprehensive sector visibility for RBI to provide better industry support.