Law Around Fintech: Understanding the Legal Side of Digital Finance

Financial Technology, or Fintech, has reshaped the way we handle money. Today, you can transfer funds, apply for loans, buy insurance, or invest in stocks, all from your smartphone. India has become one of the world’s fastest-growing fintech markets, processing billions of transactions every month. But behind this convenience lies a complex legal foundation. Without laws and regulations, digital finance can quickly become unsafe, unregulated, and vulnerable to misuse. This is why understanding the law around fintech is not just important for professionals working in the field it is equally crucial for consumers, students, startups, and policymakers.

What Is Fintech and Why Does It Need Regulation?

Fintech refers to any technology that helps deliver financial services faster and more efficiently. This includes UPI apps like PhonePe and Google Pay, digital lending platforms, mobile wallets, neobanks, insurtech services, robo-advisors, investment apps, and even cryptocurrency exchanges. India alone recorded 118 billion digital payment transactions in 2023, making it the global leader in real-time digital payments.

However, with rapid technological growth comes equally significant risks. Data breaches, unauthorized apps, privacy threats, online frauds, and misleading digital lending practices are becoming increasingly common. Money moves faster than ever, and so do criminals. For this reason, stringent laws are necessary to ensure that fintech companies operate fairly, securely, and transparently. Regulation also boosts public trust, which is essential for any financial system to grow.

The Legal Framework That Governs Fintech in India

India does not have a single comprehensive “Fintech Law.” Instead, fintech activities fall under multiple existing laws and are regulated by different authorities such as the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), and the Ministry of Electronics and IT. Each institution oversees different aspects of the ecosystem.

1. RBI Regulations: The Heart of Fintech Governance

Since fintech deals directly with payments, lending, and banking systems, the Reserve Bank of India (RBI) plays the most critical role. RBI ensures that digital financial services operate safely and that users’ interests are protected.

One major step taken by RBI was the introduction of Digital Lending Guidelines in 2022, which were updated again in 2023. These guidelines were brought in after thousands of complaints about illegal loan apps charging extremely high interest rates and harassing borrowers. Under these rules, every digital lending app must clearly disclose the identity of the lender (bank or NBFC). Apps cannot increase your credit limit without your explicit consent. All loan-related money must directly move between the borrower’s and lender’s bank accounts, ensuring there is no diversion through third-party wallets. Most importantly, these apps are allowed to collect only that data which is absolutely necessary for providing the service.

2. Payment and Settlement Systems Act, 2007 (PSS Act)

The PSS Act, 2007 provides the legal foundation for digital payment systems in India. This law regulates UPI platforms, prepaid wallets, payment aggregators, and payment gateways. Companies dealing with money transfers must follow strict KYC rules, ensure encryption of user data, protect card details, and maintain secure transaction processes.

One notable recent development is the RBI card tokenization regulation, which prohibits apps and merchants from storing card numbers. Instead, a token, a randomly generated code replaces the card details during transactions. This significantly reduces the chances of card fraud. These rules have helped India maintain one of the lowest digital payment fraud rates globally despite handling enormous transaction volumes.

3. Data Protection and Cybersecurity Laws

Fintech companies store some of the most sensitive information bank account details, card numbers, investor records, contacts, and personal identity documents. This makes data protection laws extremely important.

The Digital Personal Data Protection Act, 2023 (DPDP Act) governs how personal data should be collected, stored, processed, and protected. Companies must take clear consent before collecting data, inform users how the data will be used, and report major breaches. This law ensures transparency and strengthens user control over personal information. Similarly, the Information Technology Act, 2000 and its amendments deal with cybercrime, hacking, and online fraud. With cyber fraud cases crossing 65,000 in 2023, these provisions help investigate and punish digital financial crimes. Fintech companies must follow stringent cybersecurity standards and regularly conduct audits to minimize risks.

4. SEBI Regulations for Investment and Trading Fintech

Fintech platforms that offer investment services, stock trading, mutual fund distribution, or financial advice fall under SEBI regulation. SEBI mandates that brokers and advisors must be registered and follow strict compliance and disclosure norms. Robo-advisory platforms, algorithmic trading systems, and online trading apps must operate transparently and provide clear risk warnings.

SEBI has also recently cracked down on unregistered finfluencers, who often mislead users with false investment advice. These rules ensure that fintech investment platforms maintain integrity and protect small investors.

5. Cryptocurrency and Virtual Digital Asset Framework

Cryptocurrency remains one of the most debated areas of fintech law. In India, crypto is not illegal, but it is unregulated. However, the government has imposed a 30% tax on profits and 1% TDS on every transaction involving digital assets. Crypto exchanges are also required to follow strict KYC and anti-money laundering standards. India is participating in global G20 discussions to create a unified framework for virtual digital assets, indicating that more structured rules may come soon.

Legal Challenges Facing the Fintech Sector

Even though laws are improving, several challenges continue to affect the ecosystem. One major issue is the misuse of customer data. Many apps request unnecessary permissions such as access to contacts or photos, violating the principle of data minimization. Another challenge is the presence of hundreds of illegal lending apps, many of which operate from outside India with no regulatory oversight. These apps charge extremely high interest rates and threaten borrowers.

Cybersecurity threats are growing every day, with phishing, fake UPI links, SIM-swapping, and account takeovers becoming increasingly sophisticated. Fintech laws need to regularly evolve to keep up with these threats. There is also confusion around advanced technologies like artificial intelligence, blockchain, and decentralized finance. For example, if an AI-based lending algorithm discriminates or makes incorrect decisions, who is responsible? These are questions that the current legal system is still trying to answer.

Looking Ahead: The Future of Fintech Law in India

India is expected to introduce more comprehensive fintech laws in the future, especially around artificial intelligence, cross-border payments, and crypto regulation. We may soon see a dedicated Fintech Regulation Act, mandatory cybersecurity certifications for fintech companies, and clearer rules for digital lending and financial influencers. As technology evolves, the law must evolve with it.

Fintech has transformed India’s financial landscape, making services faster, cheaper, and more accessible. But no digital system can function safely without strong legal protections. Laws around fintech create trust, reduce risks, and ensure that innovation does not come at the cost of user safety. By understanding these laws, every digital user whether a student, consumer, or entrepreneur, can make smarter and safer financial decisions. In today’s digital age, awareness is the first step towards financial security.