Regulatory Sandbox refers to live testing of new financial products or services in an environment wherein certain regulatory requirements are relaxed for the limited purposes of testing for a stipulated time. Vide a press release, the Reserve Bank of India, on April 18, 2019 released the draft of ‘Enabling Framework for Regulatory Sandbox’. At its core, it is a formal regulatory programme for fintechs to test new products, services and business models with customers in an alive environment subject to certain restrictions and oversight. RBI expects areas such as microfinance, innovative small savings and micro-finance insurance products, remittances, mobile banking and other digital payments to gain significant push through the sandbox project. Among the main focuses for the Central bank is financial inclusion, payments and lending, digital KYC etc.
Various other countries have regulatory sandboxes in place and its introduction in India is expected to catalyze the fintech industry. The proposed framework aims to provide a structured avenue for the regulator to engage with the ecosystem and to develop innovation-enabling and innovation-responsive regulations which would learn from and evolve with the emerging technology. This would facilitate the delivery of relevant and low-cost financial products.
The proposed financial service to be launched under the sandboxes must include new/emerging technology, or the use existing technology in an innovative way and should address a problem, or it must bring benefit to customers.
The sandbox would run a few cohorts of the end-to-end process with a limited number of entities (10-12) in each such cohorts. These entities would test their products during a specified period. The final framework is expected to provide a well-defined space and duration for the proposed financial services. It will also place appropriate boundary conditions and include a start date, end date, target customer type, limit on a number of customers involved, transaction ceilings or cash holding limits and cap on customer losses.
Other than the necessity to meet the conditions prescribed by the DPIIT for startup recognition, the entity will be required to ensure that its focus is on innovations where there is absence of governing regulations, need to ease regulations temporarily for enabling the proposed innovation and where the proposed innovations show promise of easing/effecting delivery of financial services in a significant way. The entity must also have a minimum net worth of INR 50 Lakh per its latest audited balance sheet.
The Draft explicitly excludes from availing this facility for products/ services or technology pertaining to Credit registry, credit information, cryptocurrency/ crypto assets services, trading/ investing/ selling in crypto assets and Initial Coin offerings etc.
However, the Indicative list of eligible innovative products/services/technology includes financial inclusion products and services such as retail payments, money transfer service, marketplace lending, Digital KYC, financial advisory services, wealth management, digital identification and smart contracts. Indicative eligible technology includes mobile technology applications, data analytics, Application Program Interface (APIs) services, applications under blockchain technologies, Artificial Intelligence and Machine learning.
The potential applicant would have to highlight an existing gap in the financial ecosystem and the proposal should demonstrate how it would address the problem or bring in efficiency or benefit. Thereafter, the potential applicant would have to demonstrate the relevant regulatory barrier that prevents deployment of this product/ service at scale, or genuinely innovative and where regulation is necessary but absent.
The rest scenarios and expected outcomes of the sandbox experimentation would be required to be predefined and the entity would be required to report to the RBI on its progress based on the agreed schedule.
Extension or exit opportunities
Typical sandbox period has been proposed to be around 10 to 12 weeks at the end of which the entity must exit the sandbox. The Draft framework provides for extension facility. It also empowers RBI to at its discretion, discontinue sandbox testing for an entity should such entity fail to achieve the intended purposes, based on the latest test scenarios, expected outcomes and mutually agreed upon schedule. Exit option would also be provided to the entity at its own discretion after fully addressing any existing obligation to its customers of financial service under experimentation.
Restrictions on relaxations
While the RBI may consider from case to case basis, applications for relaxations in regulations during the duration of the sandbox, applicants would be required to mandatorily maintain requirements under KYC/AML/CFT requirements and statutory restrictions. They would also not be provided relaxations on customer privacy and data protection as well as secure storage of and access to payment data of stakeholders.