Regulatory sandbox and fintech innovation

What is a regulatory sandbox?

It is a regulatory approach that allows time-bound testing of innovations under a regulator’s oversight. The regulatory sandbox allows the testing of new financial products, technologies, and business models under a set of rules and supervisory requirements, with appropriate safeguards. It creates a conducive and contained space where new players experiment with innovations at the edge or even outside of the existing regulatory framework. In an emerging economy like India, such approaches also help financial inclusion.



How would such an approach help financial inclusion?

These sandboxes may help usher in improvements in financial inclusion through innovations. Examples include biometric ID, alternative credit scoring, e-KYC, blockchain-based remittances, and new business models serving marginalised clients, according to a note prepared for United Nations Secretary-General’s Special Advocate for Inclusive Finance for Development.

What do the RBI’s recent draft guidelines say?

As per the draft guidelines, any Indian startup worth more than Rs 50 lakh is eligible to apply for the regulatory sandbox, provided that it is offering a fresh solution for an “existing gap” in the financial ecosystem. The RBI in its first phase of testing will select 10-12 startups working in spaces such as digital payments, lending, remittance services, KYC testing, cyber security etc. However, startups with crypto-currency or credit registry solutions will not be considered by the regulators. The RBI will accept stakeholder comments on these guidelines received until May 8, 2019.

When was this approach first implemented?

The first regulatory sandbox was launched in 2015 in the UK. At the beginning of 2018, there were more than 20 regulators implementing or exploring the concept in countries such as Australia, Malaysia, Singapore and the UK.

How does the approach work?

The concept of the regulatory sandbox keeps evolving into distinct models determined by several factors, the note by the UN body says. A significant common feature is that it facilitates the necessary dialogue between market participants and regulators to inform regulatory actions that strike the right balance between facilitating innovation and mitigating risks.

Are there any examples?

In May 2017, a London-based remittance service provider WorldRemit and three other fintech firms were permitted to test their product for remote customer identification in the Malaysian regulator’s sandbox. WorldRemit’s technology allowed customers to submit identification via mobile phone through photos posing along with their official IDs. The Malaysian regulatory authority, which had not permitted this method for customer identification prior to the testing, allowed WorldRemit to implement the innovative product. Subsequently, the authority drafted e-KYC guidelines that allow other providers to implement similar technology and compete with WorldRemit.