A regulatory sandbox is a framework that allows for live-testing of new products or services in a controlled environment. If implemented properly, this could usher in innovations in the industry
Nilanjana Chakraborty asks four experts what this will mean for banks and fintechs
The Reserve Bank of India (RBI) recently finalized the setting up of a regulatory sandbox for banks, lending institutions and fintechs by releasing the final “enabling framework for regulatory sandbox". A regulatory sandbox is a framework that allows for live-testing of new products or services in a controlled environment. If implemented properly, this could usher in innovations in the industry. However, there has been no official communication that fintechs have received and lack of clarity could slow things down. Nilanjana Chakraborty asks four experts what this will mean for banks and fintechs
Banks may not be willing to share their APIs with fintechs
For the sandbox framework to work, banks will have to come on board first; fintechs and startups usually consume the API (application programming interface) provided by the National Payments Corp. of India (NPCI) and banks.
But I don’t see a strong enough incentive for banks to come on board. It will be a slow process, with NPCI joining first, followed by banks, and then fintechs. If a startup wants to test out how to integrate with a payment gateway, or use AI, at some point a bank will have to get involved. The aim of a sandbox is to get different parties to work together. However, as many banks already have small sandboxes internally, it might be difficult to convince them to come on a common platform and open up their API for other parties.
RBI is also mandating insurance for everybody, which seems to imply unlimited liability. This defeats the objective of a sandbox, which is to have limited liability. If that’s the case, I will be better off testing live. So it’s a welcome development, but will be a slow process.
Anand Natarajan, chief operating officer, DBS Bank India
True value will be derived when sectoral regulators align
RBI’s regulations are nuanced, informed by market feedback, and provide a good balance of regulatory flex and control.
Two call-outs can be made in this context. One, this is a departure from the traditional consultation-led regulatory changes, which tended to crowd out smaller participants. Two, the platform is offered to fintechs and banks, a move that offers banks opportunity to challenge new entrants and the ability to test partnerships with fintechs.
It will develop over time, with experience, but there are a few areas to look out for. One, multi-regulator coordination. True value will be derived when all sectoral regulators align and offer a common sandbox environment. Two, integration with other markets. A globally integrated sandbox will enable collaborative cases and quicker integration of learning. Three, clarity on exit. How firms migrate business models outside the sandbox remains somewhat nebulous in other jurisdictions. A more adaptative approach will perhaps be necessary.
Parag Mathur, general counsel and head of compliance, BankBazaar
Fintechs should be allowed to develop credit rating system
The regulatory sandbox framework is the step in the right direction to address key problems that we are tackling in risk and promoting financial inclusion. However, one of the notable exclusions from the framework is “credit information".
A significant number of the urban mass is deprived of formal credit due to lack of credit history. While young individuals prefer small-ticket loans for the short term, traditional lending platforms such as banks and non-banking finance companies (NBFCs) find it unviable to serve the segment.
It is in this area that latest innovations of fintechs may play a pivotal role. Fintechs must be allowed to develop new credit information systems which can provide services to this marginalized population and contribute towards digital financial inclusion in the country. Large fintechs with pan-India digital footprint should be included in the sandbox program in developing and testing alternate credit score and formal banks should consume this for inclusion.
Rajan Bajaj, founder and chief executive officer, SlicePay
Regulatory sandbox will boost small payment space
This is a great move for entrepreneurs working on innovative financial products. The core value is “learning by doing" not just for the entrepreneurs, who can use this platform to run tests quickly and economically, but also for the regulator who is open to change policies if it’s beneficial for the customers.
There’s some ambiguity on digital KYC. While under innovations, the document says the policies on KYC can be relaxed, but it also mentions at a later point that KYC policies should be as per the regulatory requirement.
One of the consistent concerns of the fintech community is that there is no platform to address questions to regulators from companies that do not fall under regulatory supervision directly. This creates one such platform and will be of immense help for startups in this space.
I see use cases around small-ticket transactions like micro payments, micro lending, short-term loans and micro investments as some of the areas which will get a big boost by regulatory sandbox.