Regulatory Sandbox for fintech testing

Mains Paper 3 : Indian Economy |

From UPSC perspective, the following things are important :

Prelims level : Regulatory Sandbox

Mains level : Read the attached story

The SEBI has released a discussion paper on a framework for a ‘regulatory sandbox,’ wherein companies dealing with financial technologies can test new technologies and products in a live market environment.

What is Regulatory Sandbox?

A sandbox approach provides a secure environment for fintech firms to experiment with products under supervision of a regulator.
The concept of a regulatory sandbox or innovation hub for fintech firms was mooted by a committee headed by then RBI executive director Sudarshan Sen.
The panel, which submitted its report in November 2017, had called for a regulatory sandbox to help firms experiment with fintech solutions, where the consequences of failure can be contained and reasons for failure analysed.
If the product appears to have the potential to be successful, it might be authorised and brought to the broader market more quickly.
The sandbox will enable fintech companies to conduct live or virtual testing of their new products and services.

Why such move?

Fintech or financial technology companies use technology to provide financial services such as payments, peer-to-peer lending and crowdfunding, among others.
According to NITI Aayog, India is one of the fastest growing fintech markets globally, and industry research has projected that $1 trillion, or 60% of retail and SME credit, will be digitally disbursed by 2029.
The Indian fintech ecosystem is the third largest in the world, attracting nearly $6 billion in investments since 2014, the think tank said.
A global survey ranked India, with 1,218 fintech firms, second in terms of fintech adoption, with an adoption rate of 52 per cent.

Issue of Data Privacy

The risks for fintech products may arise from cross-border legal and regulatory issues where confidentiality and customer protection are major areas that needed to be addressed.
The proposed Personal Data Protection Bill, 2018, had categorised all financial data as “sensitive personal data”, which is not the case for many European countries.

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