Fintech sandbox to drive new innovation

With an aim towards boosting innovation in India’s financial technology (fintech) industry, the Securities and Exchange Board of India (SEBI) has proposed to set up an “Innovation Sandbox” that will provide improved support to developers. In India, digitisation of financial services has steadily expanded to cover credit, banking, and insurance services, among others. The capital market having been an early adopter of technology, SEBI believes that fintech will empower the securities market as well. Technology provides finance firms with real-time market data and other critical information that help fasten decision making. The Sandbox will help fintech firms as well as financial organizations not regulated by SEBI, including individuals, to assess their new solutions in isolation from the live market.

The Indian fintech ecosystem is the third largest in the world. India is one of the fastest growing fintech markets globally and industry research has projected that US$1 trillion or 60 per cent of retail and SME credit will be digitally disbursed by 2029. In March 2019, the NITI Aayog had organised a fintech conclave in New Delhi to drive activity in a market that has seen steady growth in innovation. It was attended by more than 300 stakeholders from across the government, banking and investment sectors, as well as from the startup space, who discussed the future of fintech innovation and investment in India. The state-backed Digital India mission’s target to ensure greater financial inclusion has, meanwhile, given the fintech sector its biggest push, leading to new innovations and investments.

The entire Sandbox participation lifecycle (applying, tracking, onboarding, monitoring, reporting, among others) shall be completely digital to ensure transparency and efficiency

The “Innovation Sandbox” platform will include design, legal and administrative components. Typically, regulatory norms are relaxed during this time.

• Design Components
  1. Data Sets
     1. The Innovation Sandbox is will provide securities market-related data, which will enable participants to test and improve their solutions.
     2. The available datasets will be clearly defined and known to market participants. Herein, indicative data sets in the Sandbox may include:
        1. Depositories data: Holding data, KYC data
        2. Stock exchange data: Transactions data like order log, trade log
        3. RTA data: Mutual fund transactions data
     3. The data sets shall be historical and anonymized data, including data related to episodic market events. Live data will not be made available.
     4. Access to datasets shall be provided in a phased manner starting with a limited amount of data and based on validations to more exhaustive data.
     5. The datasets shall be governed by a confidentiality agreement, specifying that the datasets cannot be shared in any manner with any other entities.
  2. Infrastructure
     1. The datasets for testing solutions in the Sandbox shall be shared via application program interfaces (APIs) made available to all eligible participants.
     2. Virtual machines may be made available with configurations similar to the live environment for testing an innovative solution on the datasets.

• Legal components
  1. Flexibility – The Innovation Sandbox shall be flexible to adapt and incorporate changes, once it evolves and matures.
  2. Not-for-profit – The Sandbox can be set up as a separate not-for-profit entity that boosts its operational integrity.
  3. Compliance – The Sandbox must ensure that applicants perform testing without breaking any regulatory or legal barriers.
  4. Legally robust – The Sandbox must define the rights and obligations of the stakeholders under binding terms of participation.
  5. Intellectual Property Rights – The Sandbox should have the relevant provisions to protect and implement the applicants’ IPR.
  6. Prevention of Data misuse – The Sandbox should have provision to restrict misuse of data from the stated purposes.
  7. Restriction from Fraud – The Sandbox should have provision for restricting the development of any solution for fraudulent purposes.
  8. Secured – The Sandbox should be secured from cyber threats or unauthorized access.

• Administrative Components
  1. Application Assessment – Applications for participating in the Innovation Sandbox will be assessed and going forward, rule-based self-assessment process shall be formalized, to allow the applicants’ automatic entry into the Innovation Sandbox.
  2. Governance body – A body of representatives from the stock exchanges, depositories, and qualified registrar and share transfer agents will supervise the operations of the Sandbox to ensure that the Sandbox fulfills its stated objectives.
  3. Operational team – An operational team shall be constituted to carry out the day-to-day activities of the Sandbox including the processing of applications, applicants communication, supervising the infrastructure and the activity of the Sandbox.
  4. Rules of participation – Rules shall be framed to regulate the rights and responsibilities of the participant with respect to the Sandbox and other participants. These rules may include the entry and exit criteria and operating guidelines.
  5. Grievance redressal – A grievance redressal mechanism shall be formulated to deal with the grievances of any applicant in the Sandbox. This mechanism will detail the point of contact for grievance redressal along with the escalation matrix.

The eligibility criteria for inclusion into the Innovation Sandbox are as follows:

1. Applicability – Conceptually, the Innovation Sandbox framework is applicable to any entity, who intends to innovate on the products, services, and/or solutions for securities and commodities market in India.
2. Need to test – The applicant should have a genuine need for testing the solution using resources available in the Sandbox. The applicant should be able to postulate that the solution needs testing in the Sandbox.
3. Solution readiness – The applicant should have the necessary resources to support testing in the Sandbox. The applicant must show testing plans with clear objectives, parameters and success criteria for the solution.
4. Post-testing strategy – The applicant should be able to postulate their post-testing plan.
5. Customer benefits – The solution should offer identifiable benefits to consumers and to the capital market and the Indian economy at large.
6. Secure – The solution shall be validated for cybersecurity parameters. The applicant is required to submit a cyber-security compliance certificate as per SEBI’s Cyber Security guidelines.

SEBI envisages the Innovation Sandbox to have the following benefits:

1. Product showcase – A platform for showcasing the working prototype of the solution which may help fintech firms secure more funding.
2. Product regulation – Assessing compliance and readiness with SEBI’s regulations that will offer improved readiness during launch.
3. Industry interoperability – Providing a platform where developers could use technologies linked to interoperability of new solutions.

The entire Sandbox participation lifecycle (applying, tracking, onboarding, monitoring, reporting, among others) shall be completely digital to ensure transparency and efficiency, SEBI said. Recently, Shaktikanta Das, RBI Governor, had said that fintech can reshape India’s financial services landscape “in fundamental ways.” Herein, by enabling technologies, India can create a financial system which is more cost-effective, inclusive and resilient. This has become more vital at a time when India’s nearly 450 million millennials are looking to access institutional credit, apart from the steady growth in India’s capital market. This has also called for the usage of new-gen technologies in fintech such as artificial intelligence (AI) and blockchain.