THE FUTURE OF FINTECH IN INDIA
with special reference to regulatory sandboxes.
What is FinTech? It is a Financial Technology that aims to compete with traditional financial methods and delivery of financial services, using tech to improve the activities in finance.
In August 2019, the Reserve Bank of India released its final guidelines for a regulatory sandbox for FinTech firms. This is because technological inventions are disrupting the financial sector and through a regulatory sandbox as they say it is an attempt to be more agile against disruption.
A regulatory sandbox is basically a framework that allows live, time-bound strings of innovations under a regulator’s oversight. This is important because it strikes a balance between innovation and regulation ensuring a system of checks and balances. “The proposed financial service to be launched under the RS (regulatory sandbox) should include new or emerging technology, or use of existing technology in an innovative way and should address a problem, or bring benefits to consumers,” RBI in the draft regulations framework published on 18th April 2019.
This sandbox ensures that there are limited numbers of entrants entering into the market, without it becoming too clustered. The sandbox also ensures the things that FinTech companies are allowed and not allowed to do. For example, the RBI stated that no FinTech company or startup is allowed to innovate or work with cryptocurrency. Due to a lot of FinTech companies rising in the country boosting innovation, there comes a risk with it and hence, the RBI wants to regulate and guard the space so as to ensure fair play and fair share in the market.
The RBI has segregated the innovation into two parts:
-Innovative products and services.
Regulatory sandboxes allow financial regulators to mitigate future risks by working with FinTech companies to have another view of the potential problems. The expectation from the sandbox is to facilitate constructive dialogue between the regulator and the regulated. In India, besides the RBI, even the SEBI and the Insurance Regulatory Development Authority of India (IRDAI) have announced plans for regulatory sandboxes. A sandbox could facilitate more partnerships between companies.
The RBI has stated that it will accept innovative products or services in the domains of money transfer, marketplace lending, digital KYC, financial advisory services, smart contract, etc on similar lines, and also applications under blockchain tech, Artificial Intelligence (AI), or machine learning. The time for testing allowed under RBI’S sandbox is 6 months.
The eligibility criteria for the regulatory sandbox is that the entity must have a minimum net worth of Rs 25 Lakhs and be incorporated and registered in India which is considered a great relaxation from the draft guidelines of RBI in April 2018, being 50 Lakhs and also broadened the definition of which companies are allowed and not. Further, the companies that meet the criteria of a startup as per the government of India would be allowed into the regulatory sandbox.
The RBI has adopted a thematic sandbox approach, an iteration of the regulatory sandbox regime that is used to pursue a specific policy objective instead of promoting a broad scope of innovation. The RBI regulatory framework provides for a regulatory sandbox where live testing of FinTech innovative products and services are allowed with a limited number of customers and regulatory relaxations provided on a case-by-case basis. The selected ones will be allowed to test the innovation by being eligible by the above-mentioned criteria. This will help them understand the market, if it works for them, what their shortcomings are, if there is a possibility for them to thrive in the market or not, so on and so forth. The companies will also be able to manage their regulatory risk during the testing period itself and The RBI will be giving a few relaxations under the sandbox but the requirements like customer privacy, data protection, and KYC will be mandatory for any of these FinTech companies as per the guidelines.
The RBI framework does not provide safeguards for intellectual property rights and it is imperative for the RBI to help protect the companies from the risks they have taken. Inspiration can be drawn from the FinTech Fast Track Initiative; which was introduced by the Singapore authorities in 2019 that helped FinTech companies Fastrack their patent process within 6 months or less.
The RBI is also offering several relaxations to FinTech companies entering into the regulatory sandbox, such as requirements related to liquidity, board composition, management experience, financial soundness, and company performance. The guidelines also stipulate that any FinTech firm entering the sandbox must adhere to securing customer privacy and data protection of the customers, securing storage and access of payment data and KYC details, as well as anti-money laundering and features to ensure that they are combating all such issues properly.
As per the SEBI’s guidelines, all entities registered under the SEBI Act of 1992 are eligible for testing in their sandbox, even if they use the services of a FinTech firm. The framework of SEBI grants flexibility to these financial institutions to experiment with FinTech solutions on real customers in a live and real environment.
The regulations stated that initially, only entities regulated by the SEBI will be eligible for testing within the sandbox and also requires its participants to have a clearly defined grievance redressal mechanism for consumers, so as to ensure a fair level process.
The regulatory sandbox approach is a very good approach, it allows FinTech companies to test the waters before spending considerable amounts of money into the operations, further, it gives a chance to test their product and see how commercially viable it is or is not in the environment.
The role of the regulators under RBI should be such as that of a facilitator and not a restrictor so that they continue to ensure that the new technologies that keep coming in are regulated well with the space to go about their innovation however they like.
These moves by the RBI and SEBI are in the right way but it would only be fruitful or successful if it is implemented properly and successfully this will all in turn benefit the consumers to have a wide range of products to choose from at a reduced cost due to the competition.
- Since, the RBI and SEBI have been working on regulatory sandboxes for FinTech firms, they should come together and ensure no lapses or conflict of interest arises between both the regulatory authorities, leading to a delay in reach of FinTech to the consumer base. There should be no friction or ego between both the bodies but instead a collaborative effort for a fruitful result of such guidelines.
- A formal office must be established so that it can be dedicated to reaching out to new innovators and actively look for promising developments in the fintech space and this office could also serve as a redressal mechanism for such companies in the future.
- The internal capacity for regulators should be increased and boosted.
The regulatory sandbox concept to Indian FinTech companies is very new and hence, it would be difficult to assess the capabilities and effectiveness. It is true that the RBI and SEBI have made a move in the right way, it is important to ensure proper implementation and that the regulators do not have too much authority that could undermine and discourage innovation and its innovator and also highly important for them to ensure a formal mechanism of engagement between regulators and the industry must be developed.