Will Retail Payments Get Digital Boost As First Cohort For RBI’s Regulatory Sandbox?

Retail payments will be the first cohort for experimentation under the Reserve Bank of India’s regulatory sandbox (RS), according to an announcement made by the central bank on Monday (November 4). The testing is likely to start in the first half of 2020.

Startups working on products and services for retail payments systems can apply to be part of the sandbox cohort — the window for application submission is November 15 to December 15, 2019.

“The adoption of ‘Retail Payments’ as the theme is expected to spur innovation in digital payments space and help in offering payment services to the unserved and underserved segment of the population,” RBI said in a press release.

The regulatory sandbox is a testing environment for fintech products which can be tailored to go to market sooner than traditional channels of approval. In August, RBI announced that startups, banks and financial institutions could participate in the sandbox for live testing of innovative fintech products in areas such as digital payments, digital KYC and wealth management.

“Migration to digital modes of making a payment can obviate some of the costs associated with a cash economy and can give customers a friction-free experience.”

How Startups Can Leverage The Regulatory Sandbox

RBI’s regulatory sandbox refers to live testing of new products or services in a controlled/test regulatory environment for which regulators may (or may not) permit certain regulatory relaxations for the limited purpose of the testing. The RS allows the regulator, innovators, financial service providers and customers to conduct field tests to collect evidence on the benefits and risks of new financial innovations, while carefully monitoring and containing their risks. It can provide a structured avenue for the regulator to engage with the ecosystem and to develop innovation-enabling or innovation-responsive regulations that facilitate delivery of relevant, low-cost financial products.

According to the central bank, the objective of the RS is to foster responsible innovation in financial services, promote efficiency and bring benefits to consumers. 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.

Innovators and fintech startups can improve their understanding of regulations that govern fintech offerings and shape their products accordingly. Finally, feedback from customers, as end users, educates both the regulator and the innovator as to what costs and benefits might accrue to customers from these innovations.

However, no legal waivers would be given to the sandbox companies and they would be held liable for any consumer losses that might be incurred during the testing period. It also added that companies should have insurance cover and a minimum net worth of INR 25 Lakh, among other criteria, to be accepted for testing under the RS.

Many fintech startups, financial service providers including banks and non-banking financial companies (NBFC) are expected to send in their applications as the RS offers an opportunity to test with a live audience with API stacks of major financial institutions. Most importantly, it would be a proxy ecosystem with timely feedback from experts and regulators.

Fintech startups that Inc42 spoke to in August told us the RS is likely to improve the industry’s understanding of new financial technologies. It would help them appropriately integrate such new technologies with their business plans.

The idea behind the sandbox is to encourage innovations intended for use in the Indian market in areas where there is scope for technology to bring in efficiencies and root out loss of revenue.

Retail payments fit the bill as more than 70% retail expenditure at present is through cash payments, thereby offering startups a huge untapped market. With increased penetration of digital payments in Tier 2,3 cities, fintech startups under RS can help small retailers and kirana stores embrace innovations in technology. According to NITI Aayog’s Digital Payments 2018 edition, India’s digital payments industry is estimated to grow to $1 Tn by 2023 and the value of digital payments will jump from the current 10% to over 25% by 2023.

The sandbox experience will help startups come up with customised easy solutions to drive growth and achieve RBI’s financial inclusion goals. According to RBI’s payment and settlement systems in India Vision 2019-2021, there will be an accelerated growth in individual retail electronic payment systems, both in terms of number of transactions and increased availability.

Payment systems such as UPI/IMPS are likely to register average annualised growth of more than 100% and NEFT at 40% over the vision period. The RBI also expects the number of digital transactions to quadruple from 2069Cr in December 2018 to 8707Cr in December 2021. Keeping customer-centricity as the focus, innovative business models and startups under the regulatory sandbox can drive growth in the underserved retail payments industry, particularly in Tier 2, 3 and 4 cities.