Unboxing The “Regulatory Sandbox”
FinTech InsurTech

Unboxing The “Regulatory Sandbox”

By Syed Zainul Haque July 04, 2019 - 2,062 views

The alarming worldwide increase in Sandboxing usage has been the consequence of the mushrooming of FinTech companies. This has led to the establishment of regulatory sandboxing by financial regulatory body establishing a medium where FinTechs can experiment and test innovative products, services, business models and delivery mechanisms in a live market with real consumers. This has been with the major objective of instilling an optimal balance between ensuring financial stability and consumer protection while also enabling beneficial innovation.

A Global Overview

The launch of ‘Project Innovate’ in 2014, the UK’s Financial Conduct Authority has won recognition for the success of its sandbox. It has paved the way for major compliances in different nations and building trust across regulatory institutes of why they should consider having a sandbox.
Since then a number of nations have introduced and improved the framework.

  • Fintech Supervisory Sandbox, launched by the Hong Kong Monetary Authority in 2016 allowed banks and their partnering technology firms to conduct pilot trials of their fintech initiatives involving a limited number of participating customers without the need to achieve full compliance with the HKMA’s supervisory requirements.
  • The Singapore Personal Data Protection Commission (PDPC) in 2018 established a Regulatory Sandbox in order to test possible changes to Singapore’s Personal Data Protection Act (PDPA).
  • In Malta, specific legislation has paved the way for a Regulatory Sandbox for testing Artificial Intelligence against pre-determined functional outputs in 2018.
  • There are some parallels with the Sandbox principle in the United States as like in UK and Asia, wherein FinTechs can ‘run it by’ the Federal Trade Commission or other regulators for approval of new methods of parental consent on an informal basis prior to rollout.
  • Switzerland’s government in 2016 called for regulatory framework changes for Fintech services including online payment solutions. The changes would enable FinTechs to offer services without a license and without agency monitoring.

Financial Conduct Authority’s report, Lessons Learned provides a firsthand experience of the first 6 month cohorts of 50 firms of which 41 FinTechs successfully tested their products in a regulatory framework.  Some successful sandboxing examples-

  • A Distributed Ledger Technology platform that enables consumers to pay, log in and verify their identity using biometrics.
  • Facial recognition technology to feed into the risk-profiling assessment used by a financial adviser.
  • A data-sharing experiment between a large firm and a Fintech company successfully provided a product which increased customers’ savings through analysis of current account transactional data.
  • A number of firms have used the Sandbox to test Robo-Advisory models.

Sandboxing: Need For The Indian Ecosystem

According to KPMG, the Fintech market is set to reach USD 2.4 billion by 2020 which is double its worth of 2016 that stood at USD 1.2 billion. The innovative breakthrough by FinTechs has given rise to major data security challenges which leapfrogged with the prevalent use of Open Banking system that provides a user with a network of financial institutions’ data. Open Banking has been a boon for FinTechs like PayTm, PayU who have already successfully incorporated APIs to share information, but has definitely raised eyebrows.

Source: Pwc

As APIs are gaining traction it is only recently that firms have begun to step up to secure their online spaces as consumers are getting aware of threats such as phishing –which not only threaten a customer’s main bank account but also all their other chosen financial providers. Drawing examples from the worldwide success of regulatory sandboxing, RBI has proposed a Regulatory Sandbox where businesses can test innovative products under relaxed conditions.

Salient Features of RBI’s Regulatory Sandboxing

The focus of Regulatory Sandboxing is being on thematic cohorts such as financial inclusion, payments and lending, digital KYC; any product/services which have been banned by the regulators or the government, including cryptocurrency/crypto assets services, have strictly been discouraged.

Source: EMA

    • The idea has been to foster ‘learning by doing’ for both regulators and service providers as it enables them to obtain first-hand empirical evidence on the benefits and risks of emerging technologies.
    • Acceleration of initiatives around financial inclusion in areas such as microfinance, innovative small savings and micro-insurance products, remittances, mobile banking and other digital payments with improved process and technologies is in core focus.
    • It is expected to provide organisations with reduced time-to-market for new products and services, combined with the assurance that they have built-in appropriate safeguards.

What Can Organizations Expect?

  • FinTech companies can now test the viability of the product without a wider and expensive rollout.
  • It allows faster growth of the ecosystem as the consequences of failure can be contained and reasons for failure analysed.
  • As far as SMEs are concerned, the access to APIs (application programming interface) of banks has turned out to be a big problem. A regulatory sandbox will effectively create a level playing field even for smaller FinTech companies.
  • Without a sandbox like an environment, new entrants and innovators would be uncertain which could hinder financial innovations and that would be cataclysmic for our economy.

Currently, more than 400 FinTechs are operating in the country and their investments are expected to grow by 170% by 2020. Regulatory Sandboxing comes as an encouragement for digital disruptors like us to develop and explore innovative products and services. FinTechs need to streamline decision-making processes to improve agility and partnering with digital solution providers will enable your company to deploy sandboxing methodologies to fastrack your processes.

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