Startups see RBI’s fintech sandbox as a positive but wary of some clauses

According to Reserve Bank of India’s (RBI) draft consultation paper released last week, testing will, however, be for a limited set of customers, and only 10-12 companies. Industry experts and fintech startups said sandboxes help startups beta-test new products with less capital than usually required.

“Sandboxing has been happening across the globe. In the last couple of years, regulators in Asian countries like Singapore, Hong Kong, Thailand, and Indonesia, apart from the US and European Union, all have their own fintech sandbox," said Anurag Jain, chairperson, Digital Lending Association of India (DLAI).

The RBI proposal comes just months after regulators from the UK, US, Hong Kong, and several other countries announced a global alliance to test fintech products. Pilots developed under this alliance are allowed to scale up.

The RBI draft paper made it mandatory for companies to share the “results of proof of concept (PoC) testing of use cases" before entering the fintech sandbox. The regulator has also made it mandatory for companies to mention “an acceptable exit and transition strategy" in case the pilot service has to be discontinued.

However, founders of fintech startups point out that companies usually try sandboxes for business ideas that don’t really have a conclusive exit plan.

“Sometimes, there are learnings from pilots, and sometimes, it may lead to a pivot, but there is no way of telling this beforehand without going through the testing process. And also, there is money being spent," said the co-founder of a peer-to-peer (P2P) lending startup, who spoke on condition of anonymity. “I think it (RBI’s proposal) will be more beneficial to somebody starting off newly, rather than an existing incumbent," this person added.

In the first five years, products go through multiple tweaks and checks with customer feedback, and a pilot period itself may not be enough to build a competitive product, OboPay CEO Shailendra Naidu said. “It is difficult to evaluate whether a pilot is successful or not in real time. That’s a very tricky thing, although RBI’s decision to introduce sandboxing is in the right direction."

OboPay, founded in 2005, allows enterprises and customers to generate their own co-branded debit card facility with Mastercard and ATM withdrawal support.

“It is difficult to evaluate whether a pilot is successful or not in real time. That’s a very tricky thing, although RBI’s decision to introduce sandboxing is in the right direction," Naidu added.

“One of the critical legs in the lending process is setting up the repayment mechanism as per loan contract. We shall be seeing a new repayment mechanism emerging, which will operate independent of bank dependent authorization and settlements. Thereby, fintech will become more and more mainstream and independent of banking eco-system," said Satyam Kumar, executive director, Loantap.

The central bank had set up an inter-regulatory working group in July 2016 to look into the “granular aspects of fintech and its implications". The report of the working group was released in February last year for public comments.