Regulatory sandbox should use the voice of the consumers as an input into policy making
The recently announced framework for regulatory sandbox by the Reserve Bank of India (RBI) is a progressive and much-needed step. Consider yourself as a founder of a fintech startup that has developed a mobile app for farmers that allows him to track local weather updates, purchase seeds, crop insurance, commodity put options and manage his cash flows from sales. This app could be a one-stop solution for many needs of a farmer and with technology innovation it’s feasible. However, before it can be launched, the fintech startup would need to get regulatory approvals and comply with necessary conditions. Often the challenge for fintech startups is that regulation does not explicitly cover what they plan to do since it’s a completely new product or service. Ambiguity around governing regulations hampers innovation and the ability to scale.
A regulatory sandbox is a useful tool for the regulator and fintech innovators for such situations where there is absence of governing regulations or where there may be a need to modify existing regulations because the proposed innovation shows the promise of ease to customers in a significant way. A regulatory sandbox is a safe space which allows regulators to facilitate small-scale tests by temporarily relaxing certain regulations to collect empirical evidence while containing risks. In the example above, under the regulatory sandbox framework, RBI can allow the app to be launched with farmers within certain limits and for a specific period. At the end of the period, RBI will have the feedback on the utility of this innovation and the risks arising from it. Technology and business models are evolving rapidly and regulators may not have the opportunity or capacity to assess the true implications of many innovations unless they are tested. Such small-scale tests can provide the objective and time-bound evidence to the process of regulatory decision-making.
This RBI framework is significant for the following reasons. First, it recognizes the widespread impact of fintech innovation and acknowledges the need for “learning by doing" by the regulator and other stakeholders in a collaborative manner. Second, it reduces the primary dependence on industry consultations as an input to policy making. Industry consultations are usually dominated by the larger incumbent players and this process provides an equal platform to early-stage startups to engage with the regulator. Third, it provides a structured and time-bound framework which should reduce regulatory uncertainty around new products and improve time to market for new innovations.
The concept of regulatory sandbox has found strong resonance with regulators internationally and over the past few years many countries, including the UK, Singapore and Australia, have launched it. However, the Indian context is unique because the market is highly under-served; there are varying degrees of financial and digital literacy, and there are multiple regulators overseeing consumer financial products and services. Regulatory sandbox in India needs to be tailored to the unique realities of the Indian financial ecosystem. Here are a few suggestions that can make it successful in India and help achieve its objective of better outcomes for consumers.
First, regulatory sandbox should priortize businesses that innovate to address the needs of under-served customers such as rural households, women, blue-collared workers, self-employed and senior citizens. This would help achieve one of its stated benefits of improving financial inclusion.
Second, it should enable better co-ordination between RBI, the Insurance Regulatory and Development Authority of India (Irdai) and the Securities and Exchange Board of India (Sebi) to avoid duplication of processes for bundled solutions that combine savings, insurance and credit into a package. Many new products in the financial services domain straddle multiple financial regulators and may not be restricted by product silos. In the farmer example above, the app combines multiple products covered by different regulators under a single platform for the user. Common distribution regulations across different products based on distributor and not products would help in improving customer experience and compliance.
Third, it should use the voice of the consumers as an input into policy making. Regulatory sandbox provides an opportunity to the regulator to access the response and feedback of actual consumers to new products and services. This input could vastly enhance the quality of customer-centric regulations and help build appropriate consumer protection safeguards into new products and services.
India is recognised globally as an innovation hub with its deep talent pool and large consumer base. Regulatory sandbox provides an opportunity for India to be a role model for having innovation-friendly and inclusion-focused regulation. The new-age tech-driven financial services that are evolving can improve people’s lives and create opportunities, or can destabilize the system and create barriers. It is up to the regulators and providers to collaborate and build a financial system that works better for more people.