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EPA Asia “Growing Up In A Sandbox” Webinar Follow-Up
Edited by Zennon Kapron November 27th, 2019
The financial industry today is going through rapid changes. Around the world, technology start-ups and traditional financial institutions are redefining business models and completely changing the way that billions of individuals handle their daily finances. From payments to wealth management to lending, there are few segments of the financial markets that have not been impacted by the growth of ‘fintech.’
Although fintech offers significant opportunities to provide new and unique financial products and services for both the banked and many underserved segments of the population, it does face challenges. As many of the solutions are new and untested from both a technology and business model perspective, they present significant potential risks if not properly tested and implemented. To address these concerns, the industry has turned to sandboxes.
At a very simple level, a sandbox is a testing environment that is isolated from the production environment. Traditionally seen as a tool for testing technology, sandboxes are increasingly being used to test for regulatory compliance and can typically be found in-house at fintechs themselves, within financial institutions, or increasingly with financial regulators. Sandboxes provide a unique solution as they allow both providers and regulators to test and manage risk in the launch of new platforms and services often with real customers. Sandboxes are not completely risk-free, but they are ‘risk-reduced.’
Sandboxes are important for early-stage start-ups who may be more cash strapped and need to quickly ensure that they are creating products that the market needs: “fail fast and fail cheaply.” They also often provide a way for newer platforms to segue into a conversation with regulators as well as potentially raise awareness of their solution within the industry.
Although sandboxes can be valuable for start-ups, they also do play a role for more established companies. Regulations, especially in Asia, are very disparate and often very principles-based, which can make it difficult for a more established fintech to quickly enter the market. Sandboxes can streamline the market entry process and give even established firms an opportunity to test and develop their solutions while still maintaining a level playing field for other players. It is important, however, that sandboxes are not seen as ‘regulatory arbitrage’ opportunities by operating platforms that would not be regulatory compliant outside the sandbox environment.
As the fintech industry has continued to mature, so have sandboxes. In the early days of fintech sandboxes, many of the projects may have been projects of technology fancy without much practical application. Today, participants have ‘gotten serious’ about sandboxes, and many of the solutions being tested have a very clear business use case and often supported by companies with a solid client list.
There is also a focus on ‘integration,’ which is becoming more important for the industry, especially in Asia where Open/API banking is starting to grow in popularity. In a sandbox environment, fintechs are able to engage with other fintechs or service providers to test integrations across the stack. Often, multiple solutions need to come together to provide a more substantial industry solution.
That is not to say that sandboxes are not without their own challenges. During the webinar, we discussed how sandboxes sometimes have high barriers to entry in terms of application requirements, company standing, and technology maturity. Once in the sandbox, durations of testing are also typically limited to a year or less, which for many companies is potentially too short. For these reasons, sandboxes are often not clearly ‘no-brainers’ for fintech start-ups. The decision to enter a sandbox is not so clear-cut and requires some consideration.
There was also a feeling that sandboxes could be more open to the challenges of the market as regulators may have preconceived notions of the solutions they are looking to host. In Asia, where many are under or unbanked, it is incumbent on the industry to drive solutions to market that will help address these challenges. If there are significant barriers in place for entering a sandbox, it becomes more challenging to accomplish this.
The maturation of sandboxes will continue into the future as the industry continues to develop along with sandboxes. In addition to the model of sandboxes, gradually adapting to the needs of the market, we could see them expand beyond financial services to include solutions from other markets. An example would be a smart grid power industry solution that works with a fintech payment provider.
Clearly, sandboxes play a critical role in the development of the financial industry in Asia. As illustrated throughout the webinar, we may be only at the start of their journey in Asia.