Critics of direct regulation argue that imposing heavy-handed oversight on tech companies could stifle the very innovation that makes modern banking efficient. By forcing global tech firms to navigate a patchwork of national financial regulations, there is a risk that these companies might limit their services in certain markets or slow down the deployment of new, beneficial technologies. This could ultimately harm the financial institutions that rely on these tools to provide faster and more secure services to their customers.
In the Indian context, the preference for indirect oversight is seen as a way to maintain flexibility. By holding banks accountable for their vendor choices, regulators encourage financial institutions to perform rigorous due diligence. This keeps the responsibility within the financial sector, where experts understand the specific needs and risks of banking operations. It prevents the regulatory creep that occurs when financial watchdogs attempt to oversee companies whose primary business is not finance.
There is also the concern that direct regulation could create a false sense of security. If regulators focus too much on the tech providers, they might overlook the internal failures or poor management practices within the banks themselves. Maintaining the focus on the financial institutions ensures that banks remain the primary owners of their operational risk, which is essential for a healthy and competitive financial market that can adapt quickly to changing digital threats.