Testing Products and Services by FINTECH FIRMS

BE/RBINOTE/24/2019

A draft framework is in place, released by Reserve Bank of India, for setting up a Regulatory Sandbox (RS) or live testing of products or services rendered by FINTECH firms.

1. The framework suggests the areas which can potentially get a boost from RS are Microfinance, Innovative Small Savings and Micro Insurance products, Remittances, Mobile banking and other digital payments.
2. Technology products or services related to Credit Registry, Credit information, Crypto Currency/Assets, Trading/investing settling in Crypto Assets, Initial Coin offering or any other products which are under the ban list of the regulators or Government are not part of the framework.
3. Also, the document details the need, objective, principles and risk and benefits, legal issues of having a RS.
4. The document adds that the Regulators, Innovators, Financial Service providers and end Users to conduct field tests in order to collect evidence on the benefits and risks of new financial innovations, during their process of monitoring the risks.
5. A structured avenue for the regulators will be available in order to engage with the general ecosystems and also to develop innovation enabling or innovation responsive regulations which could facilitate relevant delivery of low-cost financial products.
6. RS is an important tool enabling more dynamic evidence based regulatory environments with latest technologies.

Concept of RS:

• This concept of RS was suggested by a committee headed by RBI Executive Director Sudarshan Sen which submitted its report in November 2017.
• The report called for a regulatory sandbox in order to assist firms experiment with Fintech solutions.
• RBI also highlighted risks and limitations attached to RS and adds that innovators are likely to lose form flexibility and time in going through the RS process but running the sandbox in a stead timebound manner should avoid this risk.
• RS and regulators cannot provide any legal waivers and companies and innovators may need further regulatory approvals even after successful testing of sandbox.
• Regulator is likely to face some legal issues from outsiders. Examples are:
• Losses from Consumer ends
• From failed experimentation,
• From Competitors
• Hence it is necessary the RS framework and processes should be transparent and have clear entry and exit criteria.
• Testing process with 10-12 select entities through a comprehensive selection process detailed under framework FIT AND PROPER CRITERIA for selection of participants, shall be started by RS.

Note:

1. Fintech is used to describe new tech that seeks to improve and automate the delivery and use of financial services.
2. ​​​At its core, fintech is utilized to help companies, business owners and consumers better manage their financial operations, processes and lives by utilizing specialized software and algorithms that are used on computers and, increasingly, smartphones.
3. Fintech, the word, is a combination of “Financial Technology”.