RBI announces opening of first cohort under Regulatory Sandbox (RS)

  Jul 16, 2020

RBI announces opening of first cohort under Regulatory Sandbox (RS)

What is need of regulatory sandbox of RBI?

Indian regulatory environment often considered reactionary that prohibits innovations. This is particularly problematic in era of rapid changes in technology and corresponding applications, particularly in FinTech. Example Bitcoin and peer to peer lending are facing crippling norms. RBI’s RS is prime example of proactive regulation. It can provide a structured avenue for the regulator to engage with the ecosystem and to develop innovation-enabling or innovation-responsive regulations that facilitate delivery of relevant, low-cost financial products. The RS is an important tool which enables more dynamic, evidence-based regulatory environments which learn from, and evolve with, emerging technologies.

What is The Regulatory Sandbox?

RS usually refers to live testing of new products or services in a controlled/test regulatory environment for which regulators may permit certain regulatory relaxations for the limited purpose of the testing. The RS allows the regulator, the innovators, the financial service providers (as potential deployers of the technology like BANKS) and the customers to conduct field tests to collect evidence on the benefits and risks of new financial innovations, while carefully monitoring and containing their risks.

What are benefits of RS?

  1. Regulators obtain first-hand empirical evidence on the benefits and risks of emerging technologies and their implications, enabling them to take a considered view on the regulatory changes or new regulations that may be needed to support useful innovation, while containing the attendant risks. 
  2. Financial service providers, including banks, also improve their understanding of how new financial technologies might work, which helps them to appropriately integrate such new technologies with their business plans. 
  3. Innovators and FinTech companies can improve their understanding of regulations that govern their offerings and shape their products accordingly. 
  4. Finally, feedback from customers, as end users, educates both the regulator and the innovator as to what costs and benefits might accrue to customers from these innovations.
  5. Innovators can test the product’s viability without the need for a larger and more expensive roll-out, after sandbox period successful products can be launched in broader market with necessary modifications.
  6. FinTech’s provide solutions that can further financial inclusion in a significant way. RS can benefit microfinance, innovative small savings, remittances, mobile banking and other digital payments.
  7. IT provides a structured and institutionalized environment for evidence-based regulatory decision-making i.e. PROACTIVE REGULATION.
  8. For consumers it means increased range of products and services, reduced costs and improved access to financial services.

What are drawbacks of RS?

Crypto currency, Credit registry, credit information, Initial Coin Offering (ICO) and chain marketing have been kept out of the sandbox. These are important areas for innovations that can transform Financial sector. Like Credit registry and information applications will be crucial for Banks to identify potential customers in increasingly risky credit market.

What is way forward?

Such RS can be designed for E-commerce, drones, online pharmacy, online taxi aggregators, and other new emerging technological innovations to promote innovation, entrepreneurship and usher Digital and innovation led economy. 

What is cohort within RS?

Cohort is one unit within RS. Cohort is end-to-end sandbox process focusing on a particular theme. Cohort consists of a limited number of entities testing their products during a stipulated period. The RS shall be based on thematic cohorts focusing on financial inclusion, payments and lending, digital KYC, etc. The cohorts may run for varying time periods but should ordinarily be completed within six months.

For the first cohort, the theme of retail payments will be adopted to spur innovation in digital payments.  RBI has called for applications for the following products/services under the above theme:

  1. Offline payment solutions, 
  2. Contactless payments,
  3. Feature phone-based payment services.