Without a doubt, FinTech will smash its previous high in overall global investment. In just two quarters, investors shelled out $59.7 billion to FinTech companies, just shy of the previous high for a full year — $62.5 million, in 2015. Since so many companies are breaking new ground, regulation remains one of the most controversial aspects of FinTech growth. Regulations are intended to establish balances between innovation, market stability, and customer protections. Unfortunately, they can also limit the development and implementation of the most daring innovations. Regulatory sandboxes allow companies “safe space” to develop cutting edge technology under less regulated conditions.
What is a FinTech Sandbox?
FinTech is evolving so rapidly that regulators have difficulty keeping ahead of the game. They can be unsure about the application and extent of regulations. FinTech sandboxes are designed to provide environments where regulations can be formed quickly, while allowing room for growth and innovation. Regulators loosen current restrictions while working closely with specific companies. Currently, sandboxes focus on:
- Payment systems
- Tracking physical and digital assets
- Customer databases
- Verification procedures
- Recording transactions
Why do we need FinTech Sandboxes?
How can regulators ensure customer protections without burying them in a bureaucratic tangle of rules? How do governments promote innovation while also attracting and securing investment from venture capital, private equity funds, and banks?
Investors desire certainty. They hesitate to invest in highly unregulated environments and desire stability. They don’t want steep changes to rules that might force major changes to companies they invest in. On the other hand, investors don’t want an overregulated market, either.
Regulatory sandboxes allow FinTech startups to convince previously hesitant investors that they are working on both their regulatory obligations and their innovative products and services. Sandboxes allow:
- Companies to work with regulators while assessing their products in the marketplace.
- Regulators to build more effective policies by better understanding the innovations they regulate.
- Customers to be more solidly protected because they are operating in a controlled market environment.
- Investors to be more confident that their investments both comply with regulatory policies and disrupt current marketplace products and services.
The U.S., Europe, Asia, and Australia are building sandboxes. Just this summer, the first US FinTech sandbox was established in Arizona. In 2016, Switzerland allowed FinTech companies with public funds under one million Swiss francs to offer services without a license or monitoring. At the same time, the European Banking Federation proposed the creation of European FinTech sandboxes allowing cross-border financial services. In addition, Thailand, Hong Kong, Singapore, and Malaysia have either proposed or created sandbox frameworks.
Some feel that any regulation is too much regulation, while others say that sandboxes make regulators and companies too cozy. Like any compromise, regulatory sandboxes leave most players somewhat dissatisfied. For now, though, they are a viable way to promote innovation and provide protection.