A Guide to Legal Compliance for Fintech Startups in India

Financial technology, or fintech, is a rapidly growing field that uses technology to improve and automate financial services. It encompasses a wide range of activities, including online investing and trading, mobile banking, and the use of digital currencies. Fintech companies are businesses that use digital platforms to offer financial services, financial management, and financial planning to individuals and entities. These companies typically use data analysis and machine learning to improve the efficiency and accessibility of financial services, making them more convenient and cost-effective for customers. The fintech industry is constantly evolving, with new innovations and technologies being developed all the time, making it an exciting and dynamic sector to be a part of.

According to a report by Blinc Invest, India’s fintech market is one of the largest in the world, with a valuation of USD 31 billion, making it the third-largest fintech market globally. The growth of the fintech sector in India is attributed to several factors, including government support for digitalization, an increase in tech-savvy citizens, a growing number of mobile users, the development of digital networks, and the streamlining of financial processes. These factors have all contributed to the rapid growth of the fintech industry in India.

Types of Services Provided by Fintech Startups
Different Business Structure of a Fintech Startup
One Person Company (OPC)
Limited Liability Partnership (LLP)
Private Limited Company (PLC)
Legal Compliances for a Fintech Startup
Payment Gateways
Data Protection
Fintech Insurance Aggregators
Digital Wallets
Lending Platforms
Why Strong Compliances are Necessary?

Types of Services Provided by Fintech Startups

The favourable ecosystem in India provides a great opportunity for the fintech sector to continue growing. Fintech companies in India mainly provide services in four main categories:

  1. Payment and remittances services such as e-wallets and mobile payments
  2. Peer to Peer Lending (P2P Lending)
  3. Retail Banking Services – including both consumer-to-business (C2B) and business-to-consumer (B2C) services
  4. Personal consultation services for savings and finance

These categories are not mutually exclusive and overlap with each other as well as with other verticals. The fintech companies can leverage technology to provide solutions to several other areas including banking, financial inclusion, credit scoring, digital identity, and more. Payments and remittances, P2P lending, retail banking and personal consultation services are the key areas of growth in the Indian fintech market.

Segment wise FinTechs in India

Different Business Structure of a Fintech Startup

A fintech startup typically operates as a limited liability company (LLC) or a corporation. This business structure limits the personal liability of the company’s founders and investors. As the company grows and raises capital, it may convert to a C corporation or a public benefit corporation. The choice of business structure will depend on the specific needs of the company and the goals of the founders. A fintech startup can be any one of the following –

One Person Company (OPC)

The Indian Companies Act, 2013, Section 3(1)(c) allows for a single individual to register and form a company for a lawful purpose. This structure, known as a One Person Company (OPC), is a suitable option for a single entity looking to operate a business. It offers the benefits of a separate legal entity, such as limited liability, and the ability to raise capital, while providing complete control to the individual owner. This structure is becoming increasingly popular in India as it allows for ease of setting up, management, and compliance with a single person being responsible for all aspects of the company.

Limited Liability Partnership (LLP)

A Limited Liability Partnership (LLP) is a type of business structure in which the liability of the partners is limited to their respective shares in the partnership. This means that the personal assets of the partners are not at risk in case of any legal action or financial liability faced by the partnership. LLPs are popular among professional firms such as law firms, accounting firms, and consulting firms where multiple partners want to share the profits and management of the business but also want to limit their personal liability.

Private Limited Company (PLC)

In this type of setup, the company is treated as a separate entity from the owners with its own rights and liabilities.  The owners, directors and shareholders have no personal responsibility towards the creditors.  For fintech startups in India, this is the most preferred framework of formation.

Indian FinTech Market Size in 2022

The nature of business for a fintech company makes it high-risk and very tightly bound within a legal framework.  Hence the list of legal requirements and compliances to operate a fintech startup in India is long and detailed.  This gets further complicated as most fintech companies offer a variety of services to their customers.  A few important legal compliances are

Payment Gateways

All payment gateways and payment aggregators are intermediaries that facilitate payment online in accordance with the Circular on Guidelines on Regulation of Payment Aggregators and Payment Gateways, 2020.  Interactions pertaining to payment aggregators and payment gateways must be made through a bank between the payment gateway and the Reserve Bank of India (RBI).  This is because payment gateways generally maintain certain requirements for protecting and securing digital transactions like Payment Card Industry Data Protection Standard (PCI DSS).  This is a necessary step to safeguard digital transactions.

Data Protection

Financial companies, by the very nature of their business, collect and have access to personal and sensitive information on their customers.  This automatically makes it mandatory for them to comply with the Information Technology Act, 2000 and its relevant regulations like the IT (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 (‘SPDI Rules’).  This protects the data, manages and reports security breaches and avoids legal complications.  Legal procedures prohibit corporate entities from revealing any confidential data they have received from the information provider, subject to certain exceptions.

Fintech Insurance Aggregators

Insurance aggregators are governed and regulated by the Insurance Regulatory and Development Authority of India (IRDAI) Insurance Web Aggregators Regulations, 2017.  These insurance aggregators provide information about various insurance products in compliance with IRDAI regulations.

Digital Wallets

A fintech startup providing e-wallet or mobile wallet services must comply with KYC (Know Your Customer) requirements.  The KYC specifications are outlined by the RBI in its “Master Direction – Know Your Customer (KYC) Direction 2016” and  “Guidelines for Prepaid Payment Instruments.”

Lending Platforms

Lending Platforms are governed by the Master Directions – NBFC – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017.  It says that P2P NBFC license-holding lending platforms have to mandatorily post the platform’s default rates on their website.  They must also provide lenders and borrowers with adequate information to enable them to make clear and informed decisions.

Apart from the above-mentioned Legal Compliances for Fintech startups in India, other regulations and compliances includes

  1. Goods and Services Tax Registration
  2. Legal Contract Formation and Management
  3. Intellectual Property Rights (IPR) Protection
  4. Information Technology Act & Rules Compliance
  5. Securities and Exchange Board of India (SEBI) Regulations
  6. RBI Regulations
  7. National Payments Corporation of India (NCPI) Guidelines

Why Strong Compliances are Necessary?

The Indian fintech startup sector is on an upward trajectory, driven by the incorporation of new and emerging technologies like artificial intelligence, machine learning, and blockchain. These technologies are enabling fintech companies to offer faster and more efficient financial services to customers. However, with access to sensitive data, compliance has become a critical aspect for fintech companies.

Compliance is needed to ensure that data is protected from misuse and that fintech companies are operating within legal boundaries. It is imperative for fintech startups to take compliance seriously and invest in robust systems to protect customer data and comply with regulations. This will also help them to establish trust with customers and build a strong reputation in the market. Additionally, compliance will also help fintech startups to navigate the complex regulatory environment and avoid any legal issues in the future.


The process of launching a new fintech company can be complex process, but it is crucial to comply with the legalities and regulations of India’s fintech policies. Compliance is essential to avoid any future legal issues and to take advantage of any government incentives or benefits that are available for the fintech sector. This includes obtaining the necessary licenses and permits, following regulations related to data protection and privacy, and adhering to anti-money laundering and counter-terrorist financing laws. It is advisable for fintech startups to consult with legal and compliance experts to ensure that they are following all necessary regulations and laws.


What laws are applicable to fintech companies in India?

Different Laws regulating the FinTech Sector in India are

  • The Payment and Settlement Systems Act, 2007
  • The Companies Act, 2013
  • The Consumer Protection Act, 2019
  • The Prevention of Money Laundering Act, 2002
  • The Information Technology Act, 2000
  • The Reserve Bank of India Rules
  • The Insurance Act, 1938

Do fintech companies operate without licenses?

Fintech companies in India are allowed by the RBI to obtain an NBFC license.

Are fintech companies regulated by RBI?

The Reserve Bank of India, also known as the RBI, is the country’s apex financial body in charge of regulating fintech companies and other financial institutions.

Is fintech is NBFC?

Fintech companies may not have succeeded in obtaining non-bank lender licenses from the Reserve Bank of India after three months of engagement and discussions.

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button