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Regulatory Sandboxes: The Road to Fintech Redemption?

A race is under way. Spurred by the initiatives of the UK’s Financial Conduct Authority, countries are embarking on missions to establish themselves as the preeminent jurisdiction for all things fintech.

The source of their motivation isn’t difficult to identify. Financial institutions, traditional bellwethers of economic growth, have faced headwinds spanning from tepid markets to greater regulatory oversight. Revenue streams have been affected, hiring reduced and wages frozen.

Despite these challenges, fintech startups have enjoyed notoriety and success. Whether by addressing pain points in the typical banking relationship or delivering services in a faster or more cost efficient manner, the growth of these companies has been remarkable. So much so that regulators have sought to become nurturing partners through a laissez-faire regulatory model and other initiatives.

Chief among these has been the regulatory sandbox. In recent months, countries such Abu Dhabi, Australia, Hong Kong and Singapore have all announced intentions to launch one. Though specifics vary, the programs share a common theme in promoting the growth of fintech within their borders. This is accomplished by allowing applicants, which may include startups and financial institutions alike, to test their products in a controlled environment where compliance obligations are “relaxed”. At the end of the term, the product is expected to exit the program and be deployed to the public in full compliance with all regulations.

The allure of the sandbox is clear. From a global perspective, program adopters demonstrate their commitment to innovation and developing a local fintech ecosystem. Similarly, participants have the opportunity to test and fine tune their ideas in forgiving environments. This may also encourage them to push the boundaries of innovation. Consumers ultimately benefit through new financial products offering greater choice and competition between incumbents and startups.

The proliferation of these programs presents challenges and opportunities. Firstly, a degree of cooperation among regulators is advisable in order to avoid jurisdictional arbitrage. For instance, a startup refused entry into one sandbox may attempt to participate in another by taking advantage of differing admission requirements. Additionally, regulators must ensure that their staff are well versed not only in legal and regulatory requirements, but technical ones as well. This ensures that the vetting process for admission is sufficiently thorough. What’s more, advising potential candidates of the types of products that the regulator would like to see deployed may lead to a more focused applicant pool as well as an opportunity for the jurisdiction to distinguish itself by developing a technological expertise.

The race is on. Though countries may present themselves as the potential winners, it is clear that the consumer will be the greatest beneficiary of these efforts.

This article was first published on Finance Magnates here.

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