Fintech has exploded in India in the last couple of years but there is still room for massive growth. With several startups in the space of lending, payments, insurance, trading, India is currently emerging as a hub for fintech products.
Globally, regulators face the challenge of nurturing innovation without over-regulating, but at the same time protecting consumer interests. To overcome this challenge, many countries have adopted a ‘Regulatory Sandbox’ based approach where the regulator works closely with emerging Fintech firms. And India is no exception in this approach.
To facilitate these fintech start-ups, the apex Indian bank—Reserve Bank of India (RBI)–has come up with a draft to enable framework for regulatory sandbox.
Back in July 2016, RBI had set up an inter-regulatory working group to look into and report on the granular aspects of fintech and its implications, in order to review the regulatory framework and respond to the dynamics of the rapidly evolving fintech space.
The report of the working group was released on February 8, 2018 for public comments. One of the key recommendations of the group was to introduce an appropriate framework for a regulatory sandbox within a well-defined space and duration where the financial sector regulator will provide the requisite regulatory guidance, which will increase efficiency, manage risks and create new opportunities for consumers. The fintech companies have lapped up the proposal of a regulatory sandbox and exuded confidence of having a better innovation space with the sandbox around.
Harshil Mathur, Co-founder and CEO, Razorpay, said, historically, the regulators have not really looked at the fintech companies in a different light.
“I see this sandbox as a welcome move, which will open up opportunities for a lot more innovation that fintech companies have been pushing for. Given how fintech is changing, it is ought to take some time for RBI to make a move; the sandbox is a good way to test these changes and push limitations, see how it performs.” He further mentioned that, while there are certain limitations, overall, this will allow innovation to move faster and I see this as a progressive move.
A regulatory sandbox usually refers to live testing of new products or services in a controlled or test-regulated environment, for, which regulators may permit certain regulatory relaxations for the limited purpose of the testing. The regulatory sandbox allows regulators, innovators, the financial service providers and customers to conduct field tests, to collect evidence on the benefits and risks of new financial innovations, while carefully monitoring and containing their risks, the RBI stated.
The regulatory sandbox can provide a structured avenue for the regulator to engage with the ecosystem and to develop innovation-enabling or innovation-responsive regulations that facilitate delivery of relevant, low-cost financial products. It is potentially an important tool, which enables more dynamic, evidence-based regulatory environments, which learn from, and evolve with emerging technologies.
“Regulatory sandbox will help us lower the risk associated with any new innovation in product or process improvement. Particularly the ones that improve TAT (Turn-Around-Time). Those processes need to be tested and approved by the regulator. It will help build trust amongst investors as well as end users,” said Satyam Kumar, Co-founder and CEO, LoanTap.
He further stated that this step by the RBI is going to help fintech as well as traditional financial institutions improve their processes and interface of transactions. One of the key elements for improving turnaround time for loan sanctions to customers is the Know Your Customer (KYC) factor.
“How processes can be improved at that front? For processes like video KYC, there are no clear guidelines and everyone is experimenting through different methods. This needs validation from regulatory point of view while keeping customers’ confidentiality in mind. Hence, there is a need to approve or reject such innovative techniques. Similarly, in contracting, organisations are trying to use mobile’s phone’s IMEI number authentication in order to establish customer sign off. All these are at an experimental stage and will need regulator’s approval or up front rejection,” Kumar added.
The objective of the regulatory sandbox is to provide an environment to innovative technology-led entities for limited-scale testing of a new product or service that may or may not involve some relaxation in a regulatory requirement before a wider-scale launch.
The regulatory sandbox is, at its core, a formal governing programme for market participants, designed to test new products, services or business models with customers in a live environment, subject to certain safeguards and oversight.
The RBI stated, the proposed financial service to be launched under the regulatory sandbox, should include emerging technology, or use of existing technology in an innovative way and should address a problem or bring benefits to consumers.
“As a fintech company we do need to look at chances of fraudulence in KYC. Sandbox allows to rationally test live example. It will help us verify customers faster and say whether it is in sync with what RBI wants,” said Vipul Sharma, CEO and Co-founder, Chqbook.
The sandbox will provide a platform where fintech companies can experiment with multiple scenarios in a live test box without tampering with the actual scenario.
According to RBI, first and foremost, the regulatory sandbox fosters ‘learning by doing’ on all sides. Regulators obtain first-hand empirical evidence on the benefits and risks of emerging technologies and their implications, enabling them to take a considered view on the regulative changes or new regulations that may be needed to support useful innovation, while containing the attendant risks.
“Incumbent financial service providers, including banks, also improve their understanding of how new financial technologies might work, which helps them to appropriately integrate such new technologies with their business plans. Innovators and fintech companies can improve their understanding of regulations that govern their offerings and shape their products accordingly. Finally, feedback from customers, as end users, educates both the regulator and the innovator as to what costs and benefits might accrue to customers from these innovations,” the apex bank said.
Commenting on the apex bank’s draft regulation, Mathur said the RBI is trying to understand how fintech is shaping the economy, the opportunities, existing risks and challenges and how can regulation play a more synergistic and open role to embrace new changes and innovations in fintech, thereby benefiting the overall economy.
Fintech companies encounter lot of challenges and one of them happens to be a weak financial infrastructure that is unsuitable for the new generation. It fails a lot of times because they are built for relatively smaller scale. Secondly, regulations are not very conducive to newer innovations and new age of doing things.
“So, I think, on the regulation side, sandbox can solve this challenge by allowing for a limited closed group testing where fintech companies can test the product or solution within a limited geographical area, understand the performance and then gradually make it available to the larger audience,” Mathur said.
He further stated that, the inherent issues with infrastructure itself is something that will take some time to resolve, but with RBI’s push towards different entities will definitely help the ecosystem.
Sharma also felt that fintech companies can provide lot of beneficial products by using smarter technologies.
What are the eligibility criteria for participating in the sandbox? The target applicants for entry to the regulatory sandbox are fintech firms, which meet the eligibility conditions prescribed for start-ups by the government.
The RBI said the focus of the regulatory sandbox will be to encourage innovations where there is absence of governing regulations; there is a need to temporarily ease regulations for enabling the proposed innovation and the proposed innovation shows promise of easing or effecting delivery of financial services in a significant way.
At the end of the sandbox period, the regulatory relaxations provided to the entities will expire and the sandbox entity must exit the regulatory sandbox. In the event that the sandbox entity requires an extension of the sandbox period, it should apply to the RBI at least one month before the expiration of the sandbox period and with valid reasons to support the application for extension.
India is an incredibly young country with 50 per cent population under the age of 28, who are highly tilted towards fintech innovations.
No wonder a regulatory sandbox is going to boost the spirit of young entrepreneurs all across.
aparajita@outlookindia.com