Financial Express, Published: January 16, 2017
With over 12,000 fintech startups attracting over $19 billion in investment globally, the financial services technology sector is witnessing a wave of ‘new age innovators’ who are redefining the contours of business operations. Not only are they bringing a paradigm shift by introducing new innovation oriented models, but are also creating economic wealth and have emerged as the new engines of growth.
Global fintech sector is expected to grow at 7.1 % pa, reaching $45 billion by 2020. In India, the fintech market is ~$8 billion and expected to grow 1.7x by 2020. To emerge as one of the leading financial innovation hub globally, India needs to build a conducive ecosystem by supporting disruptive innovation via appropriate regulatory framework.
Today, financial industry needs a cohesive framework to overcome barriers to innovation. This framework should also ensure that risks from testing cutting-edge new solutions are not transferred from enterprises to customers.
The introduction of a ‘regulatory sandbox’ at the global level is being hailed as a step in the right direction to drive innovation for fintechs. Regulatory sandbox is a ‘safe space’ in which businesses can test innovative products, services, business and operational models without immediately facing all the normal regulatory consequences.
In the UK, the Financial Conduct Authority (FCA) under ‘Project Innovate’ has introduced the world’s first sandbox for financial services regulators. This has been followed up by the launch of Australian Securities and Investment Commission’s (ASIC) sandbox, and further proposals by Singapore’s Monetary Authority (MAS) and Abu Dhabi’s Financial Services Regulatory Authority (FSRA). Recently, the US has introduced a Bill to develop an internal ‘Financial Services Innovation Office’ where companies can test new innovations. Hong Kong, amongst others, has also joined the race by introducing regulatory regime known as ‘sandbox’ for financial technology innovation in the banking sector.
In India, along the lines of regulatory sandbox there is an ardent need to create an enabling ecosystem to foster competition and innovation in financial services.
First, it will catalyse innovation by introducing a testing environment for novel solutions. Many early stage innovations are discarded and never tested due to regulatory apprehension. The new framework will help the firms to explore and overcome regulatory risks during the testing phases, resulting into more solutions coming into the market place. A case in point is today’s emerging technologies like Blockchain or Distributed Ledger Technology (DLT), which promises massive disruption to back office systems and ledgers. It is estimated that Blockchain can potentially eliminate as much as $20 billion of infrastructural costs in the financial sector from 2022.
Second, it will enable the existing institutions and banks to experiment and deliver rapid innovation with downside protection. This can be achieved without necessarily diverting bandwidth and capital, and instead help the institutions to focus resources on their core businesses and innovate at the same time.
Third, it would reinforce our Prime Minister’s vision towards financial inclusion and less-cash India by fostering futuristic FinTech start-ups using ingenious technology. Recent fintech initiatives, like UPI, eWallets, USSD transfer, eKYC, P2P lending, are changing the landscape for financial inclusion by leveraging technology. With over 233 million unbanked population still to be brought under the financial inclusion umbrella, a regulatory sandbox can help accentuate the efforts of private sector to complement the government efforts like JAM trinity and DBT.
Fourth, it will pave the way for easy financing of financial innovation. Fintech enterprises are mostly dependent on equity funding to kick-start innovative ideas at an early stage. Regulatory uncertainties and ambiguity often hinders the growth of these enterprises as they find it more difficult to raise funds. Further, investors evaluate them at lower valuations in order to factor in the potential future regulatory risks that cannot be empirically assessed. As observed in life-sciences and other industries, valuations can be reduced by about 15% due to regulatory precariousness.
In addition to the setting up a regulatory sandbox, the private sector can play its role to come up with solutions that offer further flexibility. One such initiative could be virtual sandbox—that can be industry-wide collaborative cloud-based solution, which can be used to run integration tests on public data sets and to invite customers to try their new services.
The next wave of growth, and more important, equitable growth would come from the emergence of avant-garde fintech enterprises based on the principles of DICE (Design Innovation Creativity and Entrepreneurship). The inception of regulatory sandbox can go a long way in ensuring that India’s new-age fintech ideas metamorphose into reality, with a potential to fuel not only national, but also global aspirations of the 21st century.
-By Rana Kapoor founder, managing director and CEO, Yes Bank