Regulatory Sandbox for Fintech / Digital Lending

Soniya Khanna

06 Jul, 2023

The Reserve Bank of India (RBI) came up with a framework for a regulatory sandbox for Fintech that allows it to test their products without any regulatory requirements. It is set to help more than 5000 fintech startups and upcoming startups to build robust products. 

What is Regulatory Sandbox?

Regulatory sandbox means the live testing of new products or services in a controlled regulatory environment to which the regulators may or may not allow certain regulatory relaxations for a limited purpose of testing.

It allows banks and fintech players to experiment with new financial products or services within a well-defined duration and space. The consequences in case of failure can be contained by the presence of appropriate safeguards. The sandbox helps in the pilot testing of newly formed technologies.

Countries like Hong Kong, Singapore, Thailand, Taiwan and Bahrain have launched this regulatory sandbox to empower the Fintech in their countries.

What is the need for Regulatory Sandbox for Fintech?

In this era of digitalization where we see different forms of digital innovations, Fintechs are innovating with new products in digital payments and lending, e-KYC (Know Your Customer), credit rating etc.

These innovations are necessary, but the main challenge for the regulator is to strike a balance between innovation and regulation. The regulator cannot impose strict rules as it may defeat the innovation spirit and enterprise; at the same time, it cannot be so ignorant if it wants to protect the interest of consumers.

The basic idea is to promote innovations that provide solutions to challenges arising in the industry. In the draft regulations framework published by the RBI, it said that the proposed financial service under the regulatory sandbox should involve new technologies or use of an existing technology innovatively and it should address the problem or benefit the customers.

 The regulatory framework from the RBI aims to fill the gaps and related risks while focussing on the advancement of the fintech.

What is in the Sandbox?

RBI’s framework for a regulatory sandbox for fintech outlines an approach of “learning by doing”. The regulator, with appropriate safeguards, permits the startups, fintechs, technology companies or banks to innovate their products. The regulatory sandbox permits a few associates with a specified number of entrants to test their products. It can function in different time periods but must be finished in six months.

The Reserve Bank of India has divided innovation into two parts:

• Innovative products and services; and
• Innovative technology.

However, it is critical to note that regulatory sandbox does not provide complete relaxation for regulations, the RBI may relax some of the regulatory requirements for sandbox applicants only if warranted depending on case to case.

RBI has provided an exclusion list in which it will not accept any innovation. The regulatory sandbox doesn’t permit any fintechs to innovate with cryptocurrencies.

Following are the lists that are excluded from RBI’s Sandbox testing:

What are the features and benefits of a regulatory sandbox for Fintech?

The setting up of regulatory sandbox can be beneficial in many ways. Some of them are discussed below:

• Regulatory sandbox promotes the approach of “learning by doing”. The regulators can get first-hand evidence of the benefits and risks associated with emerging technologies, thereby allowing them to take a considered view on the regulatory changes that may be required to support innovations. Banks also can improve their understanding through it.
• The users of regulatory sandbox can test the viability of a product without a large and expensive roll out if the product consists of the potential to be successful.
• Fintech provides solutions that can further financial inclusion in a considerable manner. The regulatory sandbox can improve the pace of innovation and improve the financial reach.
• The regulatory sandbox can provide better outcomes for consumers through an increased number of products and services, reduced costs and access to financial services in a significant way.
• The regulatory sandbox shall help in providing a space for increased efficiency, better management of risks and providing new and better scope of opportunities for customers.
• The sandbox intends to improve access to supervisory authorities by forming one point of contact.

Regulatory Sandbox for fintech: A Global Perspective

The regulatory sandbox was implemented by the United Kingdom in 2015, and after that, a lot of countries have followed suit and implemented regulatory sandbox.

Singapore started the process of building a framework around sandbox in 2016. In 2017 the Australian Securities and Investment Commission allowed fintechs to test services under the guidelines for 12 months. In the same year, Bahrain also came up with a Fintech sandbox permitting its fintechs to test their innovations under specific categories without any necessary regulations for nine months. 

Hong Kong’s first regulatory sandbox for fintech was launched in 2016, but following feedback from its community, another version of it was launched in the following year. Many other countries are also working on the idea of fintech sandboxes.

Conclusion