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Abstract Over the past decade, innovation in Fintech, such as Digital Banking, Embedded Finance, Cybersecurity, Neo Banking, and various other services, has massive impact on financial inclusion and economic development in emerging economies. It focuses on the significant growth in global financial account ownership, rising from 51% to 79% in recent years, illustrating how digital technologies have bridged gaps for households and MSMEs. The study investigates the influence of UPI transaction data in income tax enforcement using the example of Bangalore’s GST notices that unintentionally reverted MSMEs back towards cash transactions, thereby weakening the digital payment ecosystem. Moreover, it focuses on the challenges arising from the previously uncontrolled digital lending environment, which allowed exploitative lending practices and data misuse, damaging borrower trust and increasing financial risks. Through a mixed-method analysis based on secondary data sources such as the World Bank’s Global Findex and regulatory documents, the study reveals a major impact of Fintech: while few digital tools have enhanced tax compliance and expanded credit access, they have similarly introduced administrative burdens and risks of exclusion for unprotected groups. The research concludes with policy recommendations that are aimed at balancing innovation with consumer protection. These include raising the GST threshold to ease burdens on small MSMEs, enhancing the credit support mechanism along with the government-backed guarantees and digital platforms for invoice financing, and implementing the RBI’s Digital Lending Guidelines that promote transparency and fairness in digital lending. Thoroughly, the research emphasises Fintech’s dual role as an enabler of economic growth and a sector requiring careful regulatory oversight to foster sustainable development in India’s emerging digital economy.