How Regulatory Sandboxes Foster Fintech Innovation

It is not an easy task for regulators to safeguard consumer protection as disruptive financial technologies continue to evolve. Nonetheless, it is important that consumers be able to take advantage of the innovative solutions being introduced.

Regulatory sandboxes offer market players the opportunity to experiment and trial their ideas in a controlled environment and under a regulator’s supervision.

This approach is gaining traction among global regulators because it gives them more time to assess new technologies and identify their impact on consumers and the market.

This article will explore how regulatory sandboxes work and how they can support fintech innovation while safeguarding the market.

What is a regulatory sandbox?

Regulatory sandboxes are a type of innovation facilitator commonly used by regulatory bodies that want to promote fintech innovation in their countries. Technically speaking, they are isolated testing environments where the market can trial their innovative products, services, and business models without incurring all the normal regulatory consequences of real life.

Often, fintech start-ups have technologies and/or business models that are not covered by existing regulations. Regulatory sandboxes make use of experimentation clauses and other such tools to give fintech companies regulatory leeway and flexibility.

Innovators are allowed to test their apps under supervision. This prevents innovations from being stifled by high regulatory requirements and allows regulators to monitor startups and test API standards before implementing them.

Which countries have adopted a regulatory sandbox?

Over 70 countries – including Trinidad, Jordan and Zambia – have launched regulatory sandboxes, and many more – such as Jamaica, Qatar, and Vietnam – are considering launching one.

For some examples, read about regulatory sandboxes in Africa and how regulators are using them to achieve their innovation objectives.

Key benefits of a regulatory sandbox

It offers mutual education: FinTechs learn about the regulatory environment while regulators learn about new financial technologies
Regulators can test modified/new regulatory approaches to innovative services and business models
It helps regulators safeguard consumers while avoiding premature regulation that could stifle innovation
Launching a sandbox shows the market that you are open to and supportive of fintech innovation
Sandboxes require fewer human resources than innovation hubs
Some authorities are often resource-constrained and sandboxes are a cost-efficient option

Ultimately, the goal is to encourage experimentation but also to gain clear regulatory knowledge. The sandbox framework helps regulators ask questions such as:

Do we need to adjust certain rules to be able to introduce these fintech services? And how?
How do we facilitate the creation of startups and innovative companies?
How can we promote competition between incumbents and new players in line with current standards?
Which developments can we allow and which ones should we forbid?

This helps policymakers shape regulations that enable growth while maintaining security.

What is the difference between a Sandbox and an Innovation hub?

A sandbox enables technical experimentation while an innovation hub is focused on sharing knowledge and clarifying doubts related to regulation.

An innovation hub is a portal through which the industry can engage with, and get guidance from, regulators. Here they can raise questions and seek clarifications on certain aspects of the regulation, such as the licensing requirements. Innovation hubs require more human resources to function.

A regulatory sandbox is a technical environment where companies can test new technologies and business models with real customers under regulatory supervision and with some regulatory leeway. It is a test-bed for new business models, products or services.

What is the impact on stakeholders?

Regulators

Regulators can keep up with rapid market developments while also monitoring the activities of Fintech startups and ensuring that they innovate within the bounds of the law.

At the same time, regulators will learn more about new technologies and gain a better understanding of how they can fit into the financial ecosystem.

By supporting the growth of these innovation-focused companies, regulators are raising the bar to promote competition and create better services than those of traditional banking.

Overall a regulatory sandbox ensures that rule-abiding innovation is encouraged.

Corporates

For corporates, the Regulatory Sandbox offers a clear understanding of regulations and a streamlined process for obtaining licenses to help them reach new markets and customers.

Investors

A well-regulated landscape benefits investors by affording them the ability to make informed investment decisions. It provides a platform for authorities to stay current on innovation trends but also for investors to gain insights from regulators.

Fintechs

Fintechs are typically composed of individuals with a tech foundation, not necessarily financial. Navigating the complexities of financial regulation can be an arduous task – but sandboxes help provide clarity and direction.

Regulatory sandboxes come with benefits for the entire ecosystem. They put control back in the hands of regulators in a rapidly evolving landscape and ensure that innovation does not compromise market integrity and consumer security.

The OBP Regulatory Sandbox

The OBP Regulatory Sandbox is one of the most feature-rich solutions on the market.

Regulators around the globe have used the OBP Sandbox to onboard fintechs, run pilot projects, test API standards, and ultimately kick off their Open Finance programmes. It allows for fine-grained access control and enables regulators to go beyond basic Open Banking requirements with over 550 standard APIs.

Want to know more? Send us a message to see how the OBP sandbox can help you boost fintech innovation in your country.