The Reserve Bank of India presented its proposal to commence a regulatory sandbox (RS) for FinTech companies on 18 April 2019. The draft named, “Enabling Framework for Regulatory Sandbox,” is meant to facilitate for FinTech firms a platform to test their products and services (gauging the efficacy and practical use cases) with ease in the market–with no attraction of the (otherwise mandatory) regulatory compliances. The RS will bring together the regulator, the innovators, the financial service providers (deploying the technology) and the customers (as intended beneficiaries) to do practice tests for amassing evidence on the advantages and risks of new financial innovations–simultaneously monitoring and managing the arising risks.
Benefits of FinTech Regulatory Sandbox
The foundational benefit of the RBI’s Regulatory Sandbox for the financial technology companies is the possibility of incorporating “learning by doing,” for all the stakeholders (viz. the regulators—availing empirical data on the market implications of products and services proposed to be delivered, and accordingly shaping the regulatory evolution; financial services offering firms and banks—testing new technology and likewise incorporating it optimally within their lines of businesses; Market Innovators and FinTech companies honing their comprehension of the regulations and aligning their products and services accordingly; lastly, the end-using recipients of the offerings—the customers—generating valuable feedback data for the innovating firms and the regulator pertaining to the costs and advantages of the concerned innovations.
Having the RS ecosystem available, an apparent benefit for the FinTech firms arrives in the form of receiving speedy approvals for their Sandbox participation, with nothing left expressed or implied over and above the details mentioned on the digital portal. Since the offerings of the FinTech firms will be tested beforehand, a proof-of-concept will be available to augment the probability of receiving funding in the future and also the development of an enabling regulatory evolution. Then there is also the benefit of gauging the viability of the product in advance—without expanding the operations. A considerable benefit of RS for the FinTech sector is the advancement of the promising financial inclusion drive by expanding the reach owing to enhanced technological reach—in the form of remittances, mobile banking, microfinance, insurance solutions, etc. Finally, since competition leads to greater market efficiencies and wider choice availabilities, consumers can exercise their options to assess various alternatives and choose the most efficient and optimally priced—supported with robust financial services access mechanisms.
Limitations of FinTech Regulatory Sandbox
With their participation in the RS mechanism, it is possible that the innovators might have to sacrifice with the extent of available flexibility and could end up losing time in the process of the RS—so, conducting the sandbox program within a confined timeline is a must to mitigate any such risks. Customised approvals given on the basis of each case presented along with the regulatory easing could lead to suboptimal (discretionary) judgements (decisions)—so, treating the applications in a transparent manner is vital. Also, legal waivers of any kind cannot be offered by RBI (even via a RS). Seeking regulatory approvals does not end at the RS-stage itself, as even after that process, regulatory permissions concerning the product or services or technology prior to accessing the actual (mass) marketplace.
The regulators also need to be cautious in regards to not letting the outcomes of their decisions translate into consumer losses due to futile experimentation. Also, it is crucial for the regulators to avoid getting their RS ecosystem conduct to get affected by those rival firms who have not participated in the RS programs, maybe because they got rejected upfront—to avoid this, transparency in entry and exit criteria is a must, coupled with clearly defining liabilities pertaining to customer or business risks.