RBI sets norms to build regulatory sandbox for innovation in fintech

The Reserve Bank of India (RBI) has released the final framework for setting up a regulatory sandbox to enable innovations in financial technology. This will allow fintechs to test their applications in a flexible regulatory environment before introducing them to consumers.

RBI will join the league of other central banks in the world that have set up regulatory sandbox to encourage the development of new technological applications in banking.

Fintech companies can explore areas like retail payments, money transfer, digital Know Your Customer (KYC), smart contracts, financial inclusion and cybersecurity among others.

The Indian banking regulator, however, left cryptocurrency out of the list. Credit registry, credit information, Initial Coin Offering (ICO) and chain marketing have also been kept out of the sandbox.

“The proposed FinTech solution should highlight an existing gap in the financial ecosystem and the proposal should demonstrate how it would address the problem, and bring benefits to consumers or the industry and/or perform the same work more efficiently,” the RBI said.

Fintechs can use mobile technology, data analytics, Application Program Interface (API), blockchain, artificial intelligence and machine learning. The applicants can also point out to any regulatory barrier or absence of a regulation that prevents deployment of a product or service.

RBI said it may relax liquidity requirement, board composition, management experience, financial soundness and track record to enable higher participation. However, meeting norms on customer privacy, data protection, security and access to payment data, the security of transactions, KYC, anti-money laundering will be mandatory.

According to the framework, a successful application may still require regulatory approvals before it is introduced for wider deployment. “The RBI or its regulatory sandbox cannot provide any legal waivers,” the regulator said.

RBI said it will launch the sandbox with a few numbers of selected entities that meet the ‘fit & proper’ criteria. These include having a minimum net worth of Rs 25 lakh. Bank accounts and credit history of the entities and their promoters or directors will also be under the scanner to qualify for admission.

The banking regulator is yet to announce the dates for submission to enter the sandbox. The RBI had placed a draft framework in April for feedback and suggestions from stakeholders.