RBI Boosts Fintech Innovation: Unveils Updated Regulatory Sandbox Framework with Extended Timelines

In a significant move to bolster innovation in the fintech sector, the Reserve Bank of India (RBI) has announced an updated framework for its regulatory sandbox (RS) on Wednesday, extending the cohort timelines and introducing key changes to enhance the testing environment for fintech startups.

The regulatory sandbox provides a controlled and secure space for entities to test their products or services without full compliance with standard regulatory norms, fostering responsible innovation in the financial services sector.

“The framework has been revised based on the experience gained over the last four and a half years in running four cohorts and feedback received from fintechs, banking partners, and other stakeholders,” the RBI stated in a release.

Under the updated rules, the central bank has increased the duration of the various stages of the sandbox process to nine months, up from the previous seven months. This extension aims to provide participants with a more comprehensive testing period, excluding the preliminary screening phase.

A notable addition to the regulatory sandbox process is the introduction of the “formulation of test design and integration” phase. The RBI’s fintech department will now finalize the test design and identify metrics for evaluating benefits and risks within a stipulated timeline of 45 days.

To enhance data protection, the new rules mandate compliance with the provisions of the Digital Personal Data Protection Act, 2023. Applicants are required to implement appropriate technical and organizational measures to ensure effective compliance with data protection rules, preventing any personal data breaches.

On the consumer protection front, the RBI has refined the rules to explicitly require RS participants to seek user consent in a language understood by the customer. This adjustment aims to ensure clarity and transparency in obtaining user consent.

Entities participating in the regulatory sandbox are now permitted to enter in-principle partnership arrangements with various stakeholders during the application process. The updated framework also allows for theme-neutral cohorts, encouraging a diverse range of innovative products, services, and technologies across RBI’s regulatory domain.

The regulatory sandbox initiative, launched in 2019 after extensive consultations with stakeholders, has played a pivotal role in incubating innovative products, including Paytm Postpaid, ToneTag’s audio-based digital payment solutions, and Fincare Small Finance Bank’s biometric-based authentication system.

This announcement closely follows the RBI’s recent actions in the fintech sector, including regulatory measures on Paytm Payments Bank and card networks such as Visa and Mastercard. The fintech community expressed concerns, leading to a meeting between Finance Minister Nirmala Sitharaman, RBI Deputy Governor T Rabi Sankar, and fintech founders on February 26, aiming to address and allay industry apprehensions.

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