This update sets out the details of the Reserve Bank of India‟s (RBI) press release dated 4 November 2019 with respect to the regulatory sandbox for retail payment solutions (Sandbox Press Release).
The RBI had released a report titled “Enabling Framework for Regulatory Sandbox” dated 13 August 2019 (Sandbox Report) where it had set out a proposal for a regulatory sandbox i.e. formal regulatory programme for market participants to test new products, services or business models with customers in a live environment, subject to certain safeguards and oversight. The Sandbox Report had indicated that the objective of the RBI to provide the sandbox would be for innovations where there is absence of governing regulations, there is a need to temporarily ease regulations for enabling the proposed innovation, and the proposed innovation shows promise of easing/effecting delivery of financial services in a significant way.
Based on the above objectives, the Sandbox Report had suggested that the RBI would run a few cohorts (end-to-end sandbox process) with a limited number of entities in each cohort testing their products over a stipulated period.
The Sandbox Report clarified that the sandbox would not be available for any financial service which is similar to those that are already being offered in India or for products and services such as credit registries, credit information, crypto currencies, trading platforms for crypto currencies, chain marketing services etc.
Terms of the cohort
The Sandbox Press Release states that the first cohort for the sandbox would be for retail payments for promoting innovation in digital payments space for increasing availability of payment services to the unserved and underserved segment of the population.
Towards this, the Sandbox Press Release provides that the following products /innovations would qualify for the initial regulatory sandbox:
– Mobile payments including feature phone based payment services: The sandbox would be for encouraging development of products for providing digital payment services on feature phones i.e. mobile phones not being smart phone.
– Offline payment solutions: Keeping in mind limited mobile connectivity, the sandbox would be for developing products that enable off-line payments through mobile devices for furthering the adoption of digital payments.
– Contactless payments: The sandbox would be for developing technologies for contactless payments such as tokenisation technologies which facilitate seamless e-commerce experiences.
Application to the RBI
Entities which propose to participate in the regulatory sandbox are required to submit an application to the RBI between 15 November 2019 and 15 December 2019. The application must provide details of the applicant, details of proposed products, details of the underlying technology, data protection and privacy measures etc.
Note that the application is also required to be supported with a net worth certificate from the statutory auditor of the entity. The Sandbox Report had provided that the entity must have a minimum net worth of INR 25,00,000 (Rupees twenty five lakhs).
Additionally, the Sandbox Press Release provides that the promoters and the directors of the applicant will have to satisfy the “fit and proper‟ criteria of the RBI. The Sandbox Report had indicated that this evaluation would include inter alia the bank accounts of the promoters, director and the entity being satisfactory, credit history of the promoters and directors being satisfactory, compliance with applicable laws on data protection and privacy etc. As a part of the application, the promoters and directors are required to provide a declaration and undertaking on their professional achievements, prosecutions, details of credit facilities etc.
The Sandbox Report has indicated that the preliminary screening of the applications would be carried out by the FinTech Unit of the RBI within 4 weeks from the closure of the application window. This would be followed by a test design period of 4 weeks, an application assessment period of 3 weeks, a testing phase of 12 weeks and a final evaluation of 4 weeks. After completion of the above steps, the FinTech Unit shall assess the products which would be accepted for the regulatory sandbox.
The Sandbox Report states that products and applicants who are accepted into the regulatory sandbox would be granted relaxations from liquidity requirements, board composition requirements, management experience requirements, financial soundness, track record etc.
The regulatory sandbox for retail payments setup by the Sandbox Press Release is a significant step towards encouraging innovation is financial technology products. In line with the Sandbox Report, it can be expected that the subsequent cohorts would extend to money transfer services, marketplace lending, digital KYC, financial advisory services etc.