Policy Directions for a Modularised and Well-Functioning Financial System

By Deepti George, Dvara Research

In our concluding blog post in the series on the conference we recently hosted, we attempt a synthesis of the big pertinent questions that emerged from the discussions.

The Conference noted that in financial regulation, there are certain non-negotiable principles from a regulator’s point of view namely: financial stability, AML (Anti-Money Laundering) requirements, customer fair practices, depositor protection, and institutional neutrality. However, flexibility is afforded for aspects such as micro-prudential regulations, activities undertaken, product types, ownership rules and customer interfaces. These would apply to the modular world just as it did for the non-modular world even while there was acknowledgement that the former is exposed to a whole new set of risks as elucidated in the previous posts. Currently, in context of financial products, Indian regulations employ a range of tools designed to protect consumers ex-ante, such as product design regulations, disclosure and incentives regulations and codes of conduct. However, with respect to consumer data, limited and ineffective regulations exist, driven by the Information Technology Act 2000[1] and with additional limited data protection regulations prescribed by each financial sector regulator.

We discuss below the broad themes that emerged from the Conference and which would benefit from further exploration both in terms of research and policy priorities:

1. How do we design strong data protection regulations in financial services?

The protection of individuals’ privacy is a policy goal as important as financial inclusion. It was noted that privacy harms tend to be of a permanent nature and cannot be undone, therefore deferring them to later may not be the best policy response.

The sessions discussed regulatory mechanisms to protect consumers from data harm. While India’s data protection legislation is still in the making, most of the principles of existing data protection regulation are founded on the “notice” and “choice” model. They were created for the use case where the data subject was physically handing her data over to the processor, with complete awareness of the content of data and the purpose of its collection, and she could exercise control over how much information she shared with the processor. However, there is growing consensus this model has become ineffective due to various reasons. In order to improve the data protection regime, there needs to be more research conducted to understand how individuals’ valuation of privacy needs to inform policy discourse. Unfortunately quite often this involves presenting dire trade-offs to consumers.

Therefore, more nuanced ways of framing questions around the value of personal information need to be designed.

  • How should the regulator design incentives for markets to adopt privacy enhancing techniques like privacy-by-design or privacy-by-default?
  • How does the financial regulator create greater standards for transparency and accountability in a modular financial system?
  • What are categories of data that firms engaging in financial services should not be allowed to collect or use for the design and delivery of products?

The Conference discussion predates the Supreme Court of India’s judgment[2] recognising a fundamental right to privacy guaranteed to all Indians[3], as well as the Report of the RBI Committee on Household Finance and the White Paper of the Committee of Experts of Data Protection, both of which underscore the importance of a robust framework for data protection.

2. How do we strengthen market conduct regulations in a modular financial system?

Conduct regulations have focussed on training, and adequate disclosures at the point of sale. There was broad recognition that current mechanisms have minimal efforts directed towards systematic detection of conduct violations. The use of disclosure was very important as a regulatory tool to achieve a “Do No Harm” outcome for the customer. However, it is perhaps a mediocre or even too low a bar to set for ourselves in terms of what financial services can achieve for the end customer. Even if customers may on average ‘learn’ to choose good products for themselves, those who cannot fend for themselves, ie, the ones at the ‘tails’ in the distribution are important from the point of requiring regulations to be protected. At the other end is ensuring that customers get provided with products that are ‘optimal’ for their financial lives. Aiming for a middle ground between these two extremes would be a good target to work towards for the financial sector. With the proliferation of different mediums and channels to engage and provide financial services, and the emergence of multiple players seated within each product delivery channel, there was a strong sense that the relevance of existing conduct regulations needed to be strengthened significantly.

However, market conduct does not have separate treatment by regulators, with the focus being on supervision of micro-prudential requirements, besides the extensive and wrongful prescription of such requirements to fix consumer protection problems. Existing market conduct regulations are most likely observed in institution-specific or product-specific or distribution channel-specific Fair Practice Codes rather than them being function-specific (such as for credit, insurance, savings and deposits, payments, investments, pensions), leading to regulatory arbitrage opportunities for market participants to tend towards setting up businesses under licenses that afford laxer regulatory treatment. This can be both between regulators as well as between different licensing arrangements or product-level regulations put forward by the same regulator. Therefore, the overarching question would be

  • What are conduct regulation tools that can be used in addition to the disclosure and consent model to ensure protection against unsuitable sale for the consumer?

The emergence of a modular financial system further exacerbates misconduct risk, as described in previous sections, and raises questions on assignment and enforcement of liability in the case of misconduct.

  • Are liability regimes feasible regulatory responses to the Modularisation in financial services? If so, how can we change the legal infrastructure to support the creation of a meaningful liability regime?

3. How do we design necessary and sufficient micro-prudential regulations for new entrants?

The application of the micro-prudential regulations has to be designed in a way that it minimises regulatory arbitrage between institutions providing similar functions such that it promotes competition between institutions. For example, it is worth questioning whether the micro-prudential tool of licensing in itself is required for all the different types of modular institutions described in the previous section. More efforts need to identify the principles that will further decide the regulatory requirements that will serve as ‘entry barriers’ to ensure viability and orderly development of firms and their ability to keep promises to their customers regarding the levels of business proposed by them when beginning operations.

Most modular entities can be summarised to fall into either of two buckets: Distributors and Manufacturers. Market conduct regulations would have to be applied in the case of any firm in the business of distribution in order to ensure to protect the consumer from the harms defined. Differential application of prudential regulatory tools would have to be applied based on the level and types of risks that are being housed by the firm. Micro-prudential regulations should be designed to maintain a pre-defined target probability of failure of regulated institutions. The smooth functioning of the resolution infrastructure of the country and the success of the IBC and the FRDI Act would be key to achieving this. The introduction of risk-based pricing of deposit insurance, which is yet to become a reality in India, would continue to be a bottleneck to achieving efficient resolution of banking institutions.

4. How do we improve ex-post consumer grievance resolution in a modular financial system?

Current architectures in financial services entail enforcement of customer protection primarily through ex-post grievance redressal mechanisms for each regulator and regulated institution type (case in point being there being no Ombudsman for complaints against NBFCs), and consumer protection forums/ courts. To the extent that systematic mis-selling or unfair contractual treatment of consumers goes undetected by consumers themselves, there are limited[4] supervisory efforts towards information gathering and analysis of conduct of financial services providers that is sufficient to serve as deterrent to institutional conduct malpractices. Depending on whom the duties to take enforcement measures exist, such powers are either not strong enough to have adequate teeth or have not been exercised in a strong manner (as is currently being exercised for prudential regulations).

The unified consumer redress of the Financial Redress Agency (FRA)[5], by design, provides a good solution to these problems above and needs implementation focus. Taking the redress function out of the regulator’s day-to-day focus can help the regulator focus and strengthen core functions using feedback from the FRA. Further,

  • How can technology be leveraged effectively to capture, channel and resolve consumer complaints, and be put to use by individual institutions and as supervisors?

The major challenges in order to collect consumer grievances were identified such as limited accessibility provided to grievance collection points, lack of transparency on the actions taken on the grievance and its eventual resolution. Some cases of using technology to resolve these issues were highlighted.

The firm that interfaces with the consumer would play the most important role in ensuring the resolution of the complaint. It would be the responsibility of the platform, for instance such as BankBazaar, to notify the relevant third party firm or manufacturer responsible for the processing of the payment or settlement of the insurance claim. However, there needs to be a lucid framework to assign liability across all the entities involved in the transaction.

5. How do we accurately measure systemic risk in a modular world?

The Conference saw a debate around whether or not Modularisation of financial services would indeed contribute to existing levels of systemic risk. There was broad consensus that, many of the functions that the new entrants are fulfilling do not particularly change the location of risks. Modularisation has enabled multiple access points for access to financial products. Given the increase in the number of firms providing more customised products, especially credit, there was a discussion around whether the increased number of originators would increase or decrease the concentration risk to particular customer segments. The larger question is on how the supervisory authority would effectively identify the sources of contagion risk and be able to measure systemic risk in a modular world.

The full Conference Proceeds can be accessed here.

[1] For a discussion on the efficacy of the Information Technology Act in the context of financial data, please see Electronic Financial Data and Privacy in India, IFMR Blog, December 23, 2016 (http://www.ifmr.co.in/blog/2016/12/23/electronic-financial-data-and-privacy-in-india/)

[2]  Justice Puttaswamy & Anr v. Union of India & Ors, ALL WP(C) No.494 of 2012 (http://supremecourtofindia.nic.in/pdf/LU/ALL%20WP(C)%20No.494%20of%202012%20Right%20to%20Privacy.pdf)

[3] A summary of the judgement and its relevance can be found at The Right to Privacy Judgment: Initial Reflections on Implications for Digital Financial Services, IFMR Blog, August 25, 2017 (http://www.ifmr.co.in/blog/2017/08/25/the-right-to-privacy-judgment-initial-reflections-on-implications-for-digital-financial-services/)

[4] A Brief Comparison of Ombudsman Frameworks, IFMR Blog, April 10, 2017 (

[5] Report of the Task Force on Financial Redress Agency, Government of India (http://dea.gov.in/sites/default/files/Report_TaskForce_FRA_26122016.pdf)


Concerns for Prudential Regulation in a Modular Financial System

By Nishanth K, Dvara Research

This post is part of our blog series on the Conference on Designing Regulations for a Rapidly Evolving Financial System hosted by Dvara Research.

In the previous blog post, we discussed about existing and new kinds of harms to consumers in a modular world, and consequently the need for consumer protection regulations to be strengthened in tandem with the trend of “Modularisation” in the financial system. This post deals with the concerns for prudential regulation in a similar environment.

Prudential regulation is commonly understood as capital regulation – regulation that requires firms to maintain adequate capital resources to ensure that there is no significant risk that its liabilities cannot be met. The primary function of a prudential regulatory framework, however, is to impose well-defined conditions for entry and propagation of activity by firms in the financial system. This should be done in such a way that there is a stable relationship between promoting competition and preserving consumer welfare and systemic stability. From the regulatory perspective, it is important that regulations are applied in a manner that is function-specific and institution-neutral in order to make sure competition in the market is sustained. Taking the example of credit intermediaries, several institution-types come to mind, that provide the function of credit intermediation, such as banks, NBFCs, and even Telecom companies through Direct Carrier Billing, and yet the manner in which some of the micro-prudential rules have been designed so far are inadvertently skewed against smaller institutions and certain institution-types.

Existing micro-prudential regulation design may provide an uneven playing field between incumbents and newer market players

Micro-prudential regulations typically concern with achieving a pre-defined target probability of default of regulated firms. The ‘probability of failure’ of firms is to be regulated, and the role of regulation is not to bring down the failure probability to zero but to make sure that the market is protected from unstable institutions while at the same time remaining competitive. Given that NBFCs are an early example of dis-intermediated institutions, it is important for us to consider the current regulatory landscape of NBFCs and understand anomalies if any. For example, Non deposit taking NBFCs (NBFCs-ND) provide credit intermediation functions similar to that of a bank without the acceptance of deposits. However, it has been the case that NBFCs have been prescribed capital requirements higher than those of banks. The design of these high capital requirements for NBFCs has been rationalised, for the most part, by the following:

  1. To protect the depositors of banks and the other creditors of the NBFC from the usually high levels of concentration risk.
  2. To compensate for the “lower touch”[1] regulations with regard to market conduct and consumer protection

In this case, the regulator should instead consider strengthening banks’ ability to assess the risk of lending to NBFCs and encourage risk-based pricing of funds as required. Stronger consumer protection and conduct regulations have to be developed and sufficient regulatory capacity should be created to enforce them instead of the ostensible use of micro-prudential regulations to solve a consumer protection problem. These high capital requirements have resulted in negative implications for the sector such as restricting credit growth and higher interest costs for consumers. It has also created an anti-competitive environment for NBFCs.

Existing regulatory frameworks may not completely capture new modular firms

Powerful tools such as licensing would need to be carefully applied as it can serve as the most critical barrier to entry. Regulatory framework should avoid taking a central planning approach while designing regulations for these newer entities with non-traditional business models. Regulatory design should consider whether the exact function of the modular firm justifies a need for regulatory oversight and if so, what the optimal channel to apply regulations is. Policy makers should not be considering details of or interfering with the kinds of business models as well as product-designs that should exist for the customers.

An instance of this is the regulation for Small Finance Banks (SFB) requiring them to originate 75% of their assets as Priority Sector Loans (PSL), a case of the regulator deciding the business models of regulated entities. The Revised Regulatory Framework for NBFCs[2] released by the RBI discusses the pre-conditions for the application of Prudential and Conduct Regulations. It is noted that prudential regulation, more specifically capital regulation, would apply to any NBFC that has access to public funds[3]. Conduct regulations would apply to any NBFC that has a consumer interface. This framework could be used as a base to identify the newer types of firms that would require prudential regulations. In many cases, the modularised entity providing an essential function while working with a bank or NBFC is covered by third party guidelines[4].

Measuring systemic risk becomes harder in the case of Modularisation

With the increasing number of participants in the financial services sector, and the increasing ease of manufacturing and delivering customised credit products for customer segments, it is likely that this could lead to a rapid expansion of credit in the economy. The increase in the availability of cost-effective delivery channels and better data-driven credit assessments might encourage lenders to concentrate on certain segments. It is likely that there is high concentration risk in particular customer segments such as urban salaried class who are currently experiencing the benefits of increased access to credit.

It could also be argued that the effects of Modularisation could bring down systemic risk as it would encourage lenders to diversify to segments that were traditionally neglected due to the lack of under-writable information. For example, better data driven credit assessments may be available on SMEs which may encourage banks and NBFCs to lend more to these segments. Hence, Modularisation could have an indirect positive or negative impact on systemic risk. It is important to now place special emphasis on employing tools to measure and understand systemic risks in the modular world.

It is thus evident that modularisation is going to have a significant impact on both micro and macro prudential risk in the financial system. Regulators would need to proactively anticipate these risks and design regulations accordingly.

In the concluding post of this series, we outline and briefly discuss the academic and policy research questions that emerged from the deliberations of the conference.

[1] Review of NBFC Regulatory Framework – Recommendations of the Working Group on Issues and Concerns in the NBFC Sector (https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2619)

[2] Revised Regulatory Framework for NBFCs, 2014, Notification, Reserve Bank of India (https://rbi.org.in/scripts/NotificationUser.aspx?Id=9327)

[3] ibid


Harms to Consumers in a Modular Financial System

By Beni Chugh & Nishanth K, Dvara Research

This post is part of our blog series on the Conference on Designing Regulations for a Rapidly Evolving Financial System hosted by Dvara Research (formerly known as IFMR Finance Foundation).

In the previous blog posts, we discussed what we mean by Modularisation of financial services, and we looked at the strategic evolution of business models in order to efficiently deliver financial services to benefit consumers in a modular world. However, it is necessary to balance this promise of efficiency in a modular financial system with the potential risks that could manifest. In this blog post, we explore the potential concerns for consumer protection regulation that have emerged directly or indirectly as a result of Modularisation. The unbundling of the processes associated with the manufacturing and distribution of financial products may amplify existing consumer risks as well as create new risks and harms to the consumer. In India, the typology of consumer harms in financial sector is informed by the Financial Sector Legislative Reforms Commission[1]. The understanding of harms is founded on the premise that a consumer has some rights and that the infringement of these rights has a negative consequence for the consumer, which we understand as ‘harm’. FSLRC identifies the following consumer harms:

  • Unfair conduct
  • Unfair contracting terms
  • Inadequate disclosure
  • Inadequate redress
  • Unsuitable advice

The challenge facing regulators and policy makers today is to anticipate and guard against new kinds of consumer harms that could be caused by Modularisation, while also ensuring that existing harms from traditional models are not amplified and are brought under control. In particular, the use of digital technology for delivery of financial services which catalyses the trends of disintermediation in financial services, creates new harms for the consumer. Below, we elucidate these specific harms:.

  • Harms due to technology failures: Given the amount of data collected, stored and transmitted digitally in the payments process, there is an increasing threat of security failures which may result in financial or data loss. The absence of hardware checks for mobile phone handsets or universal regulations limiting pre-installed applications on mobile phones opens up the possibility for phones manufactured in other countries becoming hotspots for data theft and spyware.
  • Harms due to inadequate redressal: Modularisation increases the number of firms involved in a financial transaction. A modular financial system with several players working together to provide financial products and services would mean that there exists a variety of different consumer touch points for the delivery of the product. It would also be the case that several institutions would play a role in the design and delivery of the product. This would create an ambiguous environment for the consumer to identify which institution he or she must approach for redressal[2].
  • Harms due to Obsolescence: With this rapid pace of innovation comes the threat of obsolescence—both of hardware and software technologies—that users require to access services. Obsolescence may create a barrier to service delivery by excluding certain consumers from access. It could also disrupt service delivery to existing customers from incompatibilities that arise following technology upgrades. This creates additional costs for the consumer.

By harvesting data where traditional data is absent, the new ‘modular’ businesses are being able to tap market segments that were previously untapped or underserved. In order to fully understand the implications of data driven models for consumers, it is important to understand the working of these data-based businesses. One particular case indicates how data driven models could harm consumers. In 2015, a study pointed out that the price of The Princeton Review’s Online SAT programs differed according to the ethnicity of the consumer[3]. Asians were being systematically charged twice that of the American consumers, and the customer profiling was based on zip-codes. This presents a new harm of discrimination, raising important public policy concerns. While discrimination is a consequence of the algorithmic ability of businesses to efficiently segment populations, the sheer handling of large sizes of personally identifiable information itself, could be a source of harm. We classify these harms as follows:

  • Harms from Market Exclusion: Though alternative data today is enabling financial inclusion where traditional data does not exist, the unanticipated aggregation of person’s data from multiple sources to draw adverse conclusions about the individual poses a real harm. For instance the possibility of financial exclusion due to new data practices can lead to market “segmentation” or “customisation”. This could systematically prefer one segment and unfairly discriminate against the other.
  • Harm to individual liberty: Even when the access to big data is authorised, personal and sensitive information like geolocation or political affiliation could be used to the detriment of the individual. This is especially plausible in jurisdictions where data processing laws are not transparent enough or the rule of law is not strong enough.
  • Harms due to untested design of algorithms: Decisions based on untested algorithms could well be inaccurate or unfair. Algorithms typically work like black boxes and often result in unknowable conclusions which may lead to bad outcomes for consumers of businesses using such algorithms.
  • Privacy Harms: At the level of the individual, the interconnectedness of data sets increases the risk of unauthorised use of personal information like biometrics.
  • Harms due to the ability to differentiate: The extreme efficiency of big data to differentiate among individuals can jeopardise important social benefits. For instance the ability to distinguish between individuals based on their susceptibility to health issues and systematically excluding them from insurance products could attack the foundation of risk-pooling itself. This will leave the most vulnerable individuals out of insurance markets, an outcome that societies do not desire.
  • Harms due to constant surveillance: Constant surveillance is known to reduce the ability of humans to engage in independent, creative and innovative thoughts.
  • Harms due to permeable group privacy: Though some people in a group may seek to maintain their privacy, their privacy could still be breached because individuals similar to them have revealed their preferences. The ability of big data to analyse and infer can lead to weaker privacy for even those individuals who value it more than the rest.

A better understanding of these harms is necessary for us to better inform policy and regulation for consumer protection. While the potential benefits of Modularisation in financial services to the consumer and emerging businesses are widely acknowledged, it is quintessential to balance them against the risks posed to the consumer. In the next post, we shall look at concerns that Modularisation raises for prudential regulation.

[1] MoF (2013), “Financial Sector Legislative Reforms Committee (FSLRC) Report”, Ministry of Finance
[2] Modularisation further bolsters the argument for the creation of a cross-sectoral Financial Redress Agency as an exponential growth in complaints is likely to be happen. This agency should be able to overcome inter-regulatory challenges and regulatory blind-spots in harmonising consumer protection rules and rights along with the legal capabilities to enforce punitive sanctions on market participants.
[3] Vafa K, Haigh C, Leung A, Yonack N. Price Discrimination in The Princeton Review’s Online SAT Tutoring Service. Technology Science. 2015090102. September 1, 2015. (https://techscience.org/a/2015090102)


Mapping Modularisation in the Financial Services Industry

By Nishanth K & Madhu Srinvas, Dvara Research 

This post is part of our blog series on the Conference on Designing Regulations for a Rapidly Evolving Financial System hosted by Dvara Research (formerly known as IFMR Finance Foundation).

In a previous post of this series, we introduced the recent trend of ‘Modularisation’ that formed the basis for the deliberations at the third Financial Systems Design Conference. Moving away from the traditional model of service delivery where financial institutions perform all the functions associated with the delivery of a product to a consumer, the trend of Modularisation has seen the emergence of specialist institutions that perform only a subset of the universe of functions that were traditionally performed by a single financial institution, and many such specialist institutions together combine to offer a financial service to the end-customer. It is to be noted that Modularisation goes beyond the use of specialised intermediaries for certain functions such as cash management or loan sourcing, which is common practice in traditional financial services delivery. For instance, the sale of a credit product may now involve online aggregator platforms that create and manage the relationship with the consumer. Borrower verification and risk assessment may involve multiple firms such as credit information companies and data analytics firms. Product design may involve a lending institution with specialised knowledge of the particular customer segment and an eventual financial institution that aggregates the risk and provides the balance sheet resources. This presents new opportunities for consumers and new entrants while introducing new challenges for incumbent institutions as well as for the regulators overseeing the functions under question.

Strategic Evolution of Business Model Archetypes

Modularisation has brought in its wake disruptions to traditional business models in financial services. This is due to:

  1. The decoupling of manufacturing and distribution functions and the creation of marketplaces that move away from one-to-one to many-to-many principal-agent relationships;
  2. The embedding of financial product delivery into both offline and online real sector businesses, resulting in the blurring of the lines between financial and non-financial service delivery.

One of the ways to understand Modularisation in financial services is to segregate the functions of a financial service provider into two broad categories: Product Creation and Product Distribution. We visualise this distinction by classifying the emergent business models into four categories, as described in the Report[1] by Oliver Wyman titled “Modular Financial Services: The New Shape of the Industry”.

Source: Oliver Wyman

  1. Vertical Integrator – This category represents a fully integrated institution which handles all functions from product creation to the delivery of product and its servicing. Universal banks are an example of a vertical integrator.
  2. Component Supplier – This category represents institutions that design the financial product but distribute through third party institutions. A typical example is a bank using business correspondents to originate loans.
  3. Demand Aggregator: A business correspondent is a typical example of a demand aggregator. It distributes products and services which are designed and manufactured by another institution.
  4. Platform Provider: In a fully modular environment, a platform provider links customers to multiple suppliers. The tasks involved in the manufacturing and distribution of financial products are performed by a variety of specialist firms. The platform provider links firms providing various functions such as product design, risk analytics, back-office operations, payments, balance sheet management and so on to cater to the end customer.

The Component Supplier and Demand Supplier models have enabled the embedding of financial products into the retail commerce sector. These modularised models of finance enable the sale of credit and insurance products along with the sale of goods on platforms such as e-commerce websites. A typical example of a platform provider in India would be an e-commerce platform such as Flipkart or Amazon that enables the sale of credit products along with the sale of retail merchandise. This integration allows the consumer to avail extremely customised products through a seamless delivery experience.

To set the context for the Conference, Duncan Woods, Partner at Oliver Wyman, led the introductory session on mapping this recent trend of Modularisation (See video below). He also covered business models that are shaping the ‘modular’ financial system and elaborated on their potential in serving the un/under banked segment.

Benefits to the Consumer

There are several factors that have motivated the trend of Modularisation in the financial services industry. Most important among these, is that Modularisation of financial services will potentially benefit the consumer in multiple ways:

  • Providing convenient and efficient services:. The emergence of the digital medium as a powerful channel for the delivery of financial products has enabled the consumer to have access to financial products offered by a multitude of providers. Firms such as e-commerce websites and social networking sites are now leveraging their existing relationship with the consumer to provide financial products. Service providers are now able to access relevant and clean sources of data on consumers through APIs which are enabling the provision of easier and more targeted and customised services. This availability of on-demand and holistic financial services through digital channels is allowing these newer firms and channels to challenge the traditional brick-and-mortar banking model.
  • Enabling access to customised products at reduced costs: The unbundling of processes involved in completing the delivery of a financial product has provided financial institutions the choice of employing specialised institutions in a manner that significantly reduces operating expenses. This, coupled with existing cost-effective and scalable technologies in financial services, is bringing down the costs associated with the delivery of products. For instance, in the case of credit, online origination platforms are able to reduce loan processing and underwriting costs. This may enable financial services providers to offer smaller-value loans to households and small businesses in a more cost-effective manner. This may permit better alignment of products to the preferences of these consumers.

In subsequent posts, we explore challenges for regulation in a modularised world.

[1] Modular Financial Services: The New Shape of the Industry, Report by Oliver Wyman, 2016 (http://www.oliverwyman.com/content/dam/oliver-wyman/global/en/2016/jan/OliverWyman_ModularFS_final.pdf)


Designing Regulations for a Rapidly Evolving Financial System – Financial Systems Design Conference 2017

By Nishanth K & Madhu Srinivas, Dvara Research 

Dvara Research (formerly known as IFMR Finance Foundation) held its 3rd Financial Systems Design Conference on August 4th and 5th, 2017 in Chennai India. The two-day Conference brought together a carefully curated group of regulators, academics and thought leaders in financial services to examine the trend of Modularisation and its implications for regulation design for the Indian Financial System.

Modularisation is defined as the unbundling of the financial services value chain into different modules. Traditionally, financial services industry has been populated with institutions that perform all the functions associated with the delivery of a product to a consumer. From the on-boarding of the customer to the delivery and servicing of the product, a majority of, if not all, the functions associated with the sale are performed internally within an institution like in the case of full-service banks.

The recent trend of firms engaging in only a specific part of a financial transaction typifies the growth of Modularisation in the system. In a modular financial system, each module contains a set of functions which may now be performed by different institutions. This allows specialised firms to combine their offerings together and provide a financial product to the end customer.

This unbundling of services could potentially benefit the consumer in multiple ways. However, regulation would have to evolve to mitigate any amplification of existing consumer risks as well as new risks to the consumer because of modularisation. Additionally the regulators would also need to be aware of the implication of modularisation on systemic risk.

Given the above context, the Conference hosted a set of sessions that covered a discovery of potential impacts, benefits and harms to consumers from Modularisation, as well as implications for prudential and customer protection regulations for the modular world, led by experts from India, US and Australia.

Conference Participants

The conference was structured in a manner conducive to addressing the following questions at its core:

  1. How Modularisation has been shaping, and could potentially shape the financial services industry?
  2. How should regulation respond to the trend of Modularisation?

The Conference yielded rich discussions and the participants identified several interesting issues and priorities for the Indian financial system. The Conference website contains the agenda and the profiles of participants. We will be in the coming days releasing the conference proceeds, and through a series of posts detail the insights that came out of the discussions at the conference.