Fintech has been at the forefront of innovation in recent times, one that has disrupted the financial services industry. Yet, consolidation and strict regulatory norms often pose a hindrance to growth. Regulatory sandboxes, that act as a testing ground for new technologies with little to no regulations, have been poised as a solution to this hiccup.

India’s Reserve Bank governor Shaktikanta Das recently announced that the country would be getting its own regulatory sandbox to assist fintech innovation and growth. The initial draft, released for stakeholders to assess, outlined the possible guidelines.

The first to embrace a sandbox was the United Kingdom’s Financial Conduct Authority that launched in 2016, calling it a “safe space” to test innovative business products and services. Other nations followed suit, with the Monetary Authority of Singapore said to have enjoyed success. Similarly, APAC, the leader of fintech innovations in the past decade, has been quick to embrace this go-between remedy. Eight jurisdictions, namely Australia, mainland China, Hong Kong, Indonesia, Malaysia, Singapore, South Korea and Thailand, have already established sandboxes.

Yet, every country has its own objectives and mandates. The UK uses a cohort approach where each company is given customized authorization, individual guidance and possible regulatory waivers, depending on the proposal. Singapore’s is also similar to the UK’s, while Hong Kong’s model only allows banks regulated by the Hong Kong Monetary Authority to participate in the controlled environment, thereby excluding start-ups and non-bank institutions. In stark contrast, Australia’s sandbox is a license-exempt model.

Impact on Indian Stakeholders

A regulatory sandbox in India will allow the regulator, innovators, financial service providers, and customers, to participate in field tests that will let officials weigh the benefits against the risks of a fintech product in a controlled environment.

A protected setting will also help fintech companies test disruptive technology without causing systemic damage. Financial services companies involved in payments, virtual customer onboarding, KYC compliance, anti-money laundering services and AML compliance, and other similar trades, can capitalize on this opportunity to save costs while experimenting with innovative solutions.

Start-ups will particularly benefit from this move, as they will now be able to circumvent compliance issues while testing. Pilot durations will consequently be shorter and time to market will be reduced.

While this is a great opportunity, the central bank has stated that some requirements, including customer and data privacy, security of payment data, KYC and AML compliance as well as statutory restrictions cannot be compromised.

Out of the Sandbox and into the Regulatory Pit

The RBI has just made a case to fuel more fintech business, but it has made its stance clear on enabling these rollouts. Successfully tested innovations will still need regulatory clearance before they are approved for wider use.

Though many aspects of fintech have been touched upon in the RBI’s guidelines, credit registry, cryptocurrencies, initial coin offerings among others, will not be permitted for sandboxing.

A sandbox is a great technique to foster fintech innovation while maintaining market safety. However, it is essential to ensure that all stakeholders work together to ensure that trustworthy and ethical innovations that can survive beyond regulated environments make the cut for a larger scale-up.