We know it—no founder ever woke up excited about compliance.
In fintech circles, I often hear a familiar chorus:
"Regulation is stifling innovation,"
"The sandbox is too small,"
"Why can’t we just move fast?"
I get it. Regulatory frameworks can be slow, opaque, and—let’s face it—frequently written in a dialect of English that even lawyers read twice.
But if you’re building in BFSI, regulation isn’t just part of the game—it is the game.
Rather than push back, what if we took a beat to decode the regulator's logic?
Regulation Isn’t the Villain—It’s the Operating System
Let’s start with a core truth: regulation in BFSI isn’t optional, and asking for less of it is barking up the wrong tree.
Instead, we should be asking for three things:
- Better commercial models
- Free(r) markets
- Lower barriers to entry (this is where light-touch or scale-based regulation matters)
But even with these, regulation isn’t going away—nor should it.
Having seen the machinery from the inside, I can tell you: the number of ways things can go wrong in BFSI is staggering.
Systems, processes, people, incentives—each comes with a potential failure point.
Regulation is the buffer that keeps these from becoming systemic crises.
There Is a Method to Regulatory Thinking
Here’s the thing: regulators may not always speak in product roadmaps or GTM strategies, but their thinking is surprisingly interpretable once you look closely.
With enough background, and context, and eye-squinting, you will notice most regulatory moves are rooted in a clear priority stack:
Customer protection > Market integrity > Firm-level innovation
In fact, look at some of last decade’s big regulatory moments:
| Regulator | Regulatory Move | Objective | Why It Mattered |
|---|---|---|---|
| RBI | Mandatory Two-Factor Authentication (2FA) for digital payments | Secure digital transactions | Helped India achieve among the lowest global rates of fraud from unauthorized transactions |
| RBI | Digital Lending Guidelines (2022) | Regulate new-age lenders and DLSPs | Curtailed predatory lending by requiring transparency, borrower consent, and direct disbursals from RBI-licensed lenders |
| SEBI | Segregation of client and broker funds | Safeguard investor assets | Prevented brokers from misusing client funds for proprietary trades or leverage |
| SEBI | Separation of advisory and distribution functions | Ensure clarity of role | Reduced conflict of interest between acting as an investor’s fiduciary vs. selling AMC products |
| SEBI | Online bond platform regulations | Protect retail bond investors | Ensured disclosures, risk classification, and platform registration to reduce mis-selling |
Source: Firsthand newsletter @ akhilhanda.com
In each case, the intent was consistent: prevent harm before it becomes a headline.
The Fine Print Is the Real Policy
Why do experienced executives respond to regulatory questions with “We await further clarity”?
Because that’s how the system is designed.
Circulars are written to be prescriptive—and to allow interpretation (within reason).
Often, real clarity comes from the FAQs, implementation guidance, or even informal industry consultation over time.
If you’ve ever read a circular, paused, and said, “Wait, what exactly does this apply to?”, you’re not alone. That’s the job.
Understanding regulatory logic is an interpretive art—and frankly, one of the most underrated skills in fintech today.
And that’s where seasoned executives have an edge.
They can close their eyes and imagine the regulatory response to a certain proposition faster than a founder can say ‘let’s just launch and see’.
From Adolescence to Maturity: Fintech’s Coming of Age
The 2015–2025 decade was BFSI innovation’s adolescence.
We saw a flurry of firsts—UPI, Aadhaar-based KYC, neobanks, digital lending, embedded finance.
Many of these pushed boundaries. Some crossed them.
But now, we’re entering a more seasoned phase.
More experienced professionals are entering the ring—people who know the playbook, understand the grey zones, and can navigate both ambition and accountability.
This generation of builders gets that:
“Because it’s always been done this way” is not a satisfying answer—
—but also that “Let’s break it and see what happens” isn’t viable in BFSI.
AI: The New Frontier (and the New Regulatory Puzzle)
Now add AI to the mix.
AI decision-making doesn’t fit into scorecards, audit trails, or fixed workflows.
In spite of how consultants might brand it as Explainable AI and other fanciable terms—it evolves, learns, and—most problematically—doesn’t always explain itself.
This shifts the regulatory paradigm from:
“Why did you approve this loan?”
to
“Why did your model decide this was a good loan?”
And that’s tricky.
Regulators want traceability, auditability, and ideally, a human in the loop.
That’s hard to deliver when even your dev team can’t fully unpack how a transformer model arrived at a decision.
So what’s the path forward?
Guardrails, not gates.
Rather than blocking AI outright, we’ll likely see:
- Systemic threshold-based flags
- Explainability at the meta level (patterns, not specific decisions)
- Human override or audit-after-the-fact processes
Regulation as Design Constraint, Not Roadblock
The most interesting product discussions I’ve been part of often begin with:
“Why do we need this process?”
And the answer is:
“Because it’s the extant practice.”
Push harder, and sometimes the room falls silent.
That’s your opportunity—not to break the system, but to improve it. Rethink it.
Design with regulatory logic in mind.
It’s like building a race car for the roads.
You can’t take the speed bumps away—but you can design the suspension better.
One Last Thing: Use the Sandbox (Seriously)
One area where we can all do better—is sandbox participation.
India was early to launch innovation sandboxes, with the RBI championing it,
but uptake could be better across the cross-sectoral regulatory sandbox. That’s a miss.
With Southeast Asia, the Middle East, and Latin America catching up fast, sandbox-led collaboration is where India can continue to lead.
The frameworks are there. What’s needed is greater participation and mutual trust.
To Wrap: Regulation Isn’t a Bug. It’s a Feature.
So here’s my humble suggestion to founders, product leaders, and VCs alike:
- Learn to interpret regulation—it’s not as cryptic as it seems.
- And when in doubt, read the FAQs/Discussion Papers/Minutes of Meeting (twice) – to understand the intent.
Because in the world of BFSI, regulation isn’t the wall—it’s the architecture.
