The announcement of the Regulatory Sandbox for fintech companies by the Reserve Bank of India has caused a flutter in the country’s fintech sector. While the regulatory guidelines are in place, the nature of the regulations per se are pretty much a work in progress as both the regulator and the regulated will learn as the sector gets further and more rapidly disrupted with technological advances. To discuss the finer aspects of the regulatory sandbox, how it can empower and enable the fintech ecosystem, what bottlenecks continue to remain and how some of the grey areas can be addressed, ORF organised its third edition of the Mumbai Tech Talk on 9 October 2019. The Mumbai Tech Talk was organised in a roundtable format that saw a range of stakeholders including representatives of government, start-ups, fintech companies and digital payments and banking community discuss the theme of ‘Regulation disruption and deepening digital payments in India’.
The first session, that saw a healthy discussion on the regulatory sandbox, started with lauding India as the leader in soft and digital payments infrastructure. Services by RBI like RTGS which provide real-time procedures have played a substantial role in the expansion of soft-infrastructure in payment market in India. While countries like the United States are leading in the growth of physical infrastructure, India is on the forefront in terms of the development of soft infrastructure. With decreasing transaction and technology cost, risk management has become the most important factor for regulators and therefore, the guidelines put forth by the RBI were welcomed as a laudable initiative. While the idea of a sandbox was first introduced in the United Kingdom in 2016, and followed by countries like the United States and Jordan, the RBI sandbox couldn’t have come at a better time, it was observed.
At the same time, stakeholders noted that at present, business models in India are shaped by “highly regulated” markets. In a scenario where technological advances are occurring at a faster rate than the regulations, the regulations are increasingly becoming “rule-based” as opposed to being “principle-focused”. In order to foster a healthy innovative environment for fintechs, it is necessary that the regulations must follow the business model and not vice versa. It is important that the financial service providers are allowed the space to experiment and be able to provide efficient and cost-effective services to their consumers. Smaller economies like Jordan, for example, have a sandbox which enables interoperability to create global fintech solutions that can be compatible with cross-country regulations. In India, the sandbox will allow the regulators such as RBI, SEBI and IRDA to look at regulations from a more broad-based perspective. However, if the regulations do not align with the business models, businesses are likely to fail.
There was a general concern regarding the themes of the sandbox and principles that RBI is planning to work with. Another issue brought up was about how innovators, who are mostly fresh out-of-college engineers, would not have the prescribed eligibility when creating a new product. Moreover, they would find it risky to enter a sandbox as an experiment that might not reach the execution stage. Hence, the RBI needs to set up a helpline or a similar platform through which such start-ups can approach it easily. Additionally, with various regulators in the financial industry, there is also a need for a guide who understands regulations across all of them in totality. With the introduction of new laws around data, relaxations in the sandbox as mentioned in the RBI guidelines, might not be possible. Therefore, it was felt that there is a need for some sort of “self-regulation” when designing a product.
It was also mentioned, however, that RBI has been known to give guidance over a number of products. RBI has been approachable to banks and thus banks have the knowledge on what rules to follow. If banks are open to sponsor fintechs or partner with start-ups, the process might speed up. However, each start-up should be ready to be regulated. They need to be properly represented in the industry so that the RBI can understand them better and support them accordingly.
The second session was on strengthening digital payments, with outlining questions on whether cards are better than cash and if the focus of digital adoption should be on merchants or users and lastly whether India can and should go cashless.
Data indicates that as of 2019, cash is still the preferred means for transactions, more so after demonetisation. There is still a huge shortage of POS (point of sale terminal) machines because of prohibitive cost. Cash in circulation surged to Rs 21.16 lakh crore in June 2019 – registering an increase of 24 percent over the cash present in the system just before demonetisation happened in October 2016. Thanks to financial inclusion initiatives such as the Jan Dhan Yojana, the number of debit cards in circulation exceeds more than 840 million, though the number of POS terminals still remains at around 4.4 million. Thus, building acceptance infrastructure needs to be increased by onboarding more merchants.
The participants mentioned that while digital payment offers convenience because of the perceived ease of use, users are not confident about the digital system. It was noted that while a cashless economy is the goal, the need of the hour is to focus on a less-cash economy. There is also an urgent need to spread awareness about digital services, looking at the large disconnect between the urban and rural population. Even within the urban areas the tier 3 and 4 cities do not compare with the tier 1 in terms of digital payments. The tier 3 and 4 cities are less aware and it is necessary to question what efforts are being made to reach out to this section of the society.
Discussing behavioural habits of the consumers, it was pointed out that people spend more when using cards than when they use cash. Digital modes of payment also come with additional benefits, which are absent in cash. Even if the consumer wants to be ahead of the curve and go digital, the merchants need to have the required infrastructure. Greater thrust towards going digital possible if people are made capable and not forced to change behaviour. For example, a member pointed out that a bank was incentivising Business Correspondents (BCs) to carry out digital transactions in remote places by giving them Rs. 10 for opening an account and encouraging people to download the banking application on their mobile phones. Almost 70 percent of the people went ahead to do the same. This proves that individuals are ready to adopt digitalisation. Another way mentioned was using local languages in apps, thus helping local players and entrepreneurs.
The behavior of both women and men too differs with regards to the use of digital payments. Fewer women in India have access to digital payment systems and therefore continue to use cash. Since most digital users in India are men, the consumer data is skewed towards them. Therefore, the government and regulators must refrain from generalising data. Challenges at the ground level like phones unable to scan QR codes due to low-res cameras or network issues was also pointed out by members. This needs to be rectified by telecom service providers and mobile phone makers. But the bigger problem that was agreed upon was the high levels of trust deficit in India. For example, the RBI came out with guidelines for Near-Field Communication (NFC) cards and said that transactions below ₹ 2,000 did not need an additional factor of authentication. However, in practice, users remained suspicious of NFC cards when they saw money getting deducted from their accounts without any PIN or OTP.
The enormous size of the country’s informal economy was also an impediment in the spread of digital payments. India has a sizeable labour and retail sector that operate informally, where all transactions are cash dominated. The scale of digital transactions cannot increase until India is able to create a network to absorb the cashless transactions. Those engaged in the informal sector are most often not able to save and hence might not have a bank account. This makes the process of digitalisation increasingly difficult. It was recommended that the digital payments medium must change from smartphones to feature phones as more informal workers have the latter.
The discussion concluded on the note that a substantial force of change is present in the financial ecosystem but there is a need to accelerate the pace of change and identify the catalysts. In order to do this, it is necessary to bear in mind the cultural differences and evolving patterns observed in India and plug the gaps such that the business moves to the next level. Evading systemic risk is a characteristic concern of the economy; therefore, a regulatory sandbox is essential to bridge the gap between the regulator and the service providers without disrupting innovation.
This report has been compiled by Poorvi Bose and Shruti Jain, interns at ORF Mumbai.
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