What is a regulatory sandbox?

What is a regulatory sandbox?

Regulatory sandbox refers to live testing of new products or services in a controlled regulatory environment. It acts as a "safe space" for business as the regulators may or may not permit certain relaxations for the limited purpose of testing. 

The sandbox allows the regulator, the innovators, the financial service providers and the customers to conduct field tests to collect evidence on the benefits and risks of new financial innovations, while carefully monitoring and containing their risks. 

Entities are allowed to experiment with fintech solutions in a live environment and on a limited set of real users for a limited time frame.

Regulatory sandbox can potentially bring significant benefits.

Firstly, regulators obtain first-hand empirical evidence on the benefits and risks of emerging technologies and their implications, enabling them to take a considered view on the regulatory changes or new regulations that may be needed to support useful innovation, while containing the attendant risks. 

Incumbent financial service providers, including banks, also improve their understanding of how new financial technologies might work, which helps them to appropriately integrate such new technologies with their business plans.

Innovators and fintech companies can improve their understanding of regulations that govern their offerings and shape their products accordingly.

Second, users of a sandbox can test the product’s viability without the need for a larger and more expensive roll-out. If the product appears to have the potential to be successful, the product might then be authorised and brought to the broader market more quickly.

Third, fintechs provide solutions that can further financial inclusion in a significant way. Areas that can potentially get a thrust from the sandbox include microfinance, innovative small savings and micro-insurance products, remittances, mobile banking and other digital payments.

In India, financial regulators such as the Reserve Bank of India, Securities and Exchange Board of India, Insurance Regulatory and Development Authority and the International Financial Services Centres Authority run their own sandboxes.

The RBI sandbox scheme, introduced in 2019, is based on thematic cohorts. The first four cohorts were on retail payments, cross-border payments, MSME lending, and prevention of financial frauds, respectively.

In September, the RBI announced the fifth cohort and based on feedback received from various stakeholders, it has kept the theme neutral. Innovative products, services or technologies cutting across various functions in RBI’s regulatory domain would be eligible to apply.

The central bank has had a few successful cases under its sandbox initiative. Meanwhile, markets regulator SEBI’s regulatory sandbox framework has remained a slow starter. Since 2020 when the framework was introduced, SEBI has received 10 applications for its approval. Of this, three have been rejected, five withdrawn, one under process, and one approved.