Innovation Sandbox and Indian Banks – A close look at one of RBI’s most visionary initiatives of our time

Collaborating, brainstorming, improvising and iterating without boundaries. It’s every innovator’s dream. For the Indian banking industry, this dream has finally arrived – heralding an era of extraordinary change and progress

Dr.Jaya Vaidhyanathan
CEO, BCT Digital

Shankar Ravichandran
Senior Manager at BCT Digital

Innovation Sandbox and Indian Banks – A close look at one of RBI’s most visionary initiatives of our time

Collaborating, brainstorming, improvising and iterating without boundaries. It’s every innovator’s dream. For the Indian banking industry, this dream has finally arrived – heralding an era of extraordinary change and progress

Dr.Jaya Vaidhyanathan
CEO, BCT Digital

Shankar Ravichandran
Senior Manager at BCT Digital

Collaborating, brainstorming, improvising and iterating without boundaries. It’s every innovator’s dream. For the Indian banking industry, this dream has finally arrived – heralding an era of extraordinary change and progress

“Innovation sandbox” – the phrase itself is so liberating. A place where thinking out of the box is the norm; the only rule is that there are no rules (or maybe just the bare minimum) and where mistakes are not only pardoned; they are encouraged. But how applicable is it in an institutionalized and conformist set-up, like banking, where rules and regulations are hardwired into the system and straying far from the rulebook can have serious, often fatal, repercussions on the economy of a nation?

In 2019, the RBI formally announced a draft “Enabling Framework for Regulatory Sandbox”, or the innovation sandbox. The framework seeks to enable technology-led companies to build (subject to limitations) and test financial products or services that facilitate innovation and positive change within the Indian banking industry, in return for possible regulatory relaxations, prior to actual launch. In this manner, it will attempt to bridge the gap between innovation, technology and the banking sector.

The RBI framework and the “amazonification” of banks

It is easy to see why the innovation sandbox is extolled by the industry as a welcome initiative by RBI. For one, similar initiatives have seen widespread success in other countries, UK being the first1, and later in Singapore and Estonia, which are shining examples of innovation in the digital realm. However, will the sandbox meet with unequivocal success in the Indian banking context?

The topic is certainly debatable, but if previous instances have taught us anything, it is that change is good, but disruption, even better.

If we take UPIs as an example – there was a time when the technology was still in the nascent stage and adoption rates were low. Before we go into the triggers that launched UPI to the fore, there are two factors we need to consider, in the context of UPIs.

  • 1. Banks by nature are reluctant to share internal and user data, which they consider sacrosanct.
  • The back-end technology is not immune to risks, given that data changes hands several times – between the telecom service provider, the bank and a third-party gateway integrator.

The NPCI, who developed the system2, was quick to identify the need for a framework to manage the risks and bottlenecks associated with UPIs. They released an experimental set-up – a controlled interface for all parties to collaborate on, learn and improve. This was perhaps one of the early triggers to the launch of the innovation sandbox in India. As of today, with close to 800 million transactions in March’193, UPIs are a highly effective industry-specific innovation, and a game-changer for the Indian banking industry.

At a glance: multiple benefits

In effect, the innovation sandbox interfaces a “black hole”, which is constituted by previously inaccessible core banking data, with technology innovations. In the above manner, working within a controlled environment, it will drive across-the-board innovations that can simplify banking related processes – for example, speed-up payments, lower risks, reduce transactional costs and so on.

Another aspect working in favour of the sandbox is the current “amazonification” of the banking industry aimed to connect bankers to new-age customers. The millennial population in particular need banks to become more contextual in their understanding of user needs. So, we have simple algorithms tracking usage patterns and collecting data to dispatch relevant and targeted information (e.g., promotional offers) to users. There has also been an exponential increase in the number of channels by which banks can interact with customers. Beyond the regular kiosks and bank branches, there are the mobile devices, credit/cards, UPIs, doorstep banking, ATMs and so on.

With this explosion in touchpoints and technologies come more vulnerabilities and more risks.

The airline industry was one of the most recent victims; a reputed airline was defrauded of millions in a scam. These sorts of occurrences call for an ecosystem where innovations are not only nurtured, but risks are identified and averted in the nick of time. The controlled yet real-life environment hosted by the innovation sandbox not only places confidence on technology service providers, but also provides them access to customer feedback right from day-1. This in turn reduces iterations, fast-tracks time to market and lowers costs. A calibrated launch model helps to limit risks and control losses for stakeholders, which empowers them to think and act freely, and work cohesively with banks towards mutually beneficial goals.

The flip side: Manifold risks

The absence of a strict policy on customer data privacy is one of the primary hindrances to the guaranteed success of the innovation sandbox. All said and done, the success of the innovation sandbox is directly related to the extent at which private user data, transactional records and confidential information are made available for experimentation. And as with all experiments, things can seriously go wrong. To ensure this is not the case, beyond the present Information Technology Act, India needs a strong policy restriction, as in the case of Europe with its GDPR regulations.

Of lesser magnitude, yet a concern nonetheless, is the fact RBI regulations expressly prohibit testing on cryptocurrencies. Blocking progress in this domain, especially given how Blockchain technologies are gaining traction across the globe, can be very limiting.

Fighting fire with fire

As things stand, it is too early to comment on how and when the concept of the innovation sandbox will finally take flight, and up to what extent. But there is no doubt that the RBI initiative has vast transformative potential. Current risk management systems, which manage and predict credit, liquidity and operational risks, make use of statistical models to make accurate and timely forecasts. The innovation sandbox can open new avenues of assessing, measuring, monitoring, controlling and preventing risks, while improving access to vast repositories of user and banking related data by bypassing regulatory restrictions. Equally noteworthy is how this collaborative ecosystem will accelerate technology adoption, promote out-of-box thinking and increase competitive user offerings.

But perhaps most important is its role in building solutions to issues that have been long plaguing the Indian banking system, including money laundering and NPAs. The current state of the industry, which is in dire need of innovative fintech intervention, dwarfs any apprehensions of data privacy violation, provided the RBI heightens measures to protect the use of valuable and confidential information.

Authors

Dr.Jaya Vaidhyanathan

CEO, BCT Digital

Dr. Jaya Vaidhyanathan is an independent Director on several Boards and is focused on bringing in the best global corporate governance principles to India. Her work has found coverage in top news websites like The Hindu and The Times of India. Recently, she pioneered award-winning Early Warning Systems for Indian banks, which have found acclaim in the industry and among counterparts.

Shankar Ravichandran

Senior Manager at BCT Digital

His profound expertise in the field of corporate and retail banking spanning across Credit Risk, Transaction Banking, Service Delivery and Product Management is close to decade. He is an MBA graduate from Indian Institute of Management, Bangalore.

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