Regulatory Sandbox for Fintech: Experiences in India
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Introduction
Fintech is a term that refers to the use of technology to provide
innovative and efficient financial services. Fintech has the potential to
transform the financial sector by offering better products, lower costs, and
greater inclusion for customers. However, fintech also poses new challenges and
risks for regulators, who need to balance the objectives of promoting
innovation, protecting consumers, and ensuring financial stability.
One of the tools that regulators can use to foster fintech
innovation is the regulatory sandbox, which is a controlled and supervised
environment where fintech firms can test their products or services with real
customers, subject to certain relaxations or waivers of regulatory
requirements. The regulatory sandbox allows regulators to learn from the
experiments, provide feedback and guidance, and adjust the regulatory framework
as needed.
Regulatory Sandbox in India
India has emerged as one of the fastest growing and largest
fintech markets in the world, with more than 2,000 fintech startups operating
in various segments such as payments, lending, insurance, wealth management,
and Regtech. To support the growth and development of the fintech ecosystem in
India, the Reserve Bank of India (RBI) introduced the regulatory sandbox
framework in August 2019, based on the recommendations of the Working Group on
FinTech and Digital Banking.[1]
The RBI’s regulatory sandbox framework has the following features:
·
It is based on a cohort approach, where each
cohort focuses on a specific theme or domain of fintech innovation. The themes
are announced by the RBI in advance, and applications are invited from eligible
fintech firms that meet the selection criteria.
·
The sandbox has four stages: preliminary
screening, test design, application assessment, and testing. The testing stage
lasts for a maximum of six months, during which the fintech firms are required
to report the progress and outcomes of the experiments to the RBI and comply
with the terms and conditions of the sandbox.
·
The sandbox provides certain regulatory
relaxations or waivers to the fintech firms, depending on the nature and scope
of the experiments. However, the sandbox does not compromise on the core
principles of customer protection, data security, financial inclusion, and
compliance with the existing laws.
·
The sandbox also provides a platform for
collaboration and learning among the fintech firms, the RBI, and other
stakeholders such as banks, non-bank financial institutions, customers, and
industry associations.
Experiences and Outcomes
The RBI has completed the first cohort of the regulatory sandbox,
which had the theme of retail payments. Out of the 32 applications received,
six fintech firms were selected for testing their solutions, which included
offline payment systems, voice-based payments, contactless payments, and
cross-border remittances. The testing phase was conducted from November 2020 to
May 2021, and the results were published by the RBI in July 2021.[2]
The RBI reported that the first cohort of the sandbox was
successful in achieving the objectives of fostering innovation, enhancing
customer experience, and improving financial inclusion. The sandbox also
generated valuable insights and learnings for the RBI and the fintech firms,
such as:
·
The need to ensure interoperability,
scalability, and sustainability of the fintech solutions, especially in the
context of the rapidly evolving digital payments ecosystem in India.
·
The importance of addressing the challenges and
risks related to data privacy, data security, fraud prevention, customer
awareness, and customer grievance redressal, while leveraging the benefits of
new technologies such as biometrics, artificial intelligence, and blockchain.
·
The scope for further collaboration and
coordination among the regulators, the fintech firms, and the other
stakeholders, to create a conducive and supportive environment for fintech
innovation and adoption.
The RBI has also announced the second cohort of the regulatory
sandbox, which has the theme of cross-border payments. The applications for the
second cohort were invited from December 2020 to February 2021, and the testing
phase is expected to commence soon. The RBI has also indicated that the theme for the third
cohort will be MSME lending.[3]
Conclusion
The regulatory sandbox is a useful and effective tool for
regulators to facilitate and regulate fintech innovation, while balancing the
interests of the customers, the industry, and the society. The RBI’s regulatory
sandbox framework has demonstrated its potential and benefits in the first cohort
and is expected to generate more positive outcomes and learnings in the
subsequent cohorts. The regulatory sandbox can also serve as a model and
inspiration for other regulators and jurisdictions, who are keen to promote and
harness the power of fintech for the development and transformation of the
financial sector.