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WORKING PAPER

Regulatory Sandboxes
and Financial Inclusion
Ivo Jenik and Kate Lauer

October 2017
Regulatory Sandboxes and Financial Inclusion

ACKNOWLEDGMENTS
This paper was prepared by Ivo Jenik, financial sector specialist (CGAP), and Kate
Lauer, senior policy consultant (CGAP), with contributions from Lisa Kristina Stahl,
financial sector analyst (CGAP), under the leadership of Gregory Chen, lead financial
sector specialist (CGAP) and Timothy Lyman, lead financial sector specialist (CGAP).
Peer review comments were provided by Schan Duff, a senior fellow in the Aspen
Institute’s Financial Security Program, Philip Rowan, international lead at Financial
Conduct Authority’s Innovation Hub, and Marianna Nunan, senior publishing officer
(CGAP).

The authors would like to thank the Bank of England, the Financial Service Authority
of Indonesia, the Bank of Indonesia, the Hong Kong Monetary Authority, the Hong
Kong Securities and Futures Commission, the Capital Markets Authority of Kenya,
Bank Negara Malaysia, Bangko Sentral ng Pilipinas, the Securities Commission
Malaysia, the Monetary Authority of Singapore, the Financial Conduct Authority of
the United Kingdom, the Financial Sector Deepening Trust Africa, the United Nations
Capital Development Fund, and many other stakeholders—including numerous
FinTech firms—for invaluable insights.

1818 H Street NW, MSN IS7-700


Washington DC 20433
Internet: www.cgap.org
Email: cgap@worldbank.org
Telephone: 11 202 473 9594

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Suggested citation: Jenik, Ivo, and Kate Lauer. 2017. “Regulatory Sandboxes and Financial Inclusion.” Working Paper.
Washington, D.C.: CGAP.

All queries on rights and licenses should be addressed to CGAP Publications, 1818 H Street, NW, MSN IS7-700, Washington,
DC 20433 USA; e-mail: cgap@world bank.org.

ii
Regulatory Sandboxes and Financial Inclusion

I. INTRODUCTION
A regulatory sandbox is a framework Concepts like regulatory sandboxes have
set up by a financial sector regulator1 been applied in nonfinancial sectors
to allow small scale, live testing of inno- (e.g., coding sandboxes for software de-
vations by private firms in a controlled velopment and clinical trials) (Innovate
environment (operating under a special Finance 2016b; GOS 2015). Financial sec-
exemption, allowance, or other limited, tor regulators have often been involved
time-bound exception) under the regu- in a reactive “catch-up game” and have
lator’s supervision. The concept, which occasionally opted for an ad hoc solution,
was developed in a time of rapid techno- such as in case of M-Pesa in Kenya.
logical innovation in financial markets,
is an attempt to address the frictions The first sandbox-like framework was
between regulators’ desire to encourage set up by the U.S. Consumer Financial
and enable innovation and the empha- Protection Bureau (CFPB) in 2012 under
sis on regulation following the financial the name Project Catalyst (CFPB 2016).
crisis of 2007–2008. In 2015, the U.K. Financial Conduct Au-
thority (FCA) coined the term “regulato-
A regulatory sandbox introduces the ry sandbox” (FCA 2015). Since then, the
potential to change the nature of the concept has spread across more than
relationship between regulators and fi- 20 countries from Abu Dhabi to Sierra
nancial services providers (regulated or Leone.
aspiring) toward a more open and active
dialogue. It may also enable the regula- In addition to regulatory sandboxes,
tor to revise and shape the regulatory or in the absence of one, several coun-
and supervisory framework with agility. tries have adopted other mechanisms
However, establishing a sandbox should that support financial innovation (“in-
not distract policy makers who are fac- novation facilitators”).2 These include
ing elementary regulatory challenges “(FinTech) innovation hubs,” “(FinTech)
nor should it be expected to affect the incubators,” “(FinTech) accelerators,”
mindset change in that many view as and “industry sandboxes.” Innovation
necessary for regulators to keep up with facilitators are part of a broader eco-
the FinTech revolution. system for innovation and may comple-
ment a sandbox because they have the
Regulators establish sandboxes for var- landscaping potential to inform broader
ious reasons, but the most common FinTech policy development (and the
reason is to promote competition and selection of companies to participate in
efficiencies in financial services markets the sandbox).
through innovation. Whether a sandbox
succeeds in its objectives will depend The importance of innovation for fi-
on how it is framed and, fundamentally, nancial inclusion is well-established.
on market conditions (providers, com- Whether regulatory sandboxes may play
petition, quality of innovations, level a role in harnessing innovation to sup-
of development of the financial mar- port financial inclusion remains to be
ket infrastructure, customer trust and seen. While low levels of financial in-
engagement). clusion remain prevalent in emerging

1 Unless noted otherwise, “regulators” is used in the paper as a generic term that refers to regulators and supervisors.
2 See, e.g., FSB (2016).

1
Regulatory Sandboxes and Financial Inclusion

markets and developing economies selected regulators, sandbox firms,


(EMDEs), innovations are present and supervisors, and other stakeholders. It
hold the promise of positive change. is for financial sector regulators in EM-
Financial sector regulators need to be DEs, development agencies, and finan-
responsive to this opportunity, but they cial inclusion professionals who want to
face challenges due to several factors: better understand regulatory sandboxes
and their (potential) impact on digital
■■ Lack of regulatory capacity in terms financial inclusion. The paper is orga-
of adequate resources, staff, exper- nized as follows:
tise, and tools.3
■■ Section II provides an overview of
■■ Underdeveloped financial market in-
the current landscape for regulatory
frastructure and limited market with
sandboxes. It then analyzes potential
retail financial services.
benefits and risks of the sandbox
■■ Complexities of balancing key regu- concept in the context of financial
latory objectives of financial inclu- inclusion.
sion, stability, integrity, consumer ■■ Section III outlines key issues that
protection, and competition.
every policy maker who is consider-
Our working hypothesis is that regula- ing establishing of a regulatory sand-
tory sandboxes can enable innovations box should be aware of.
that are likely to benefit excluded and un- ■■ Section IV offers concluding remarks
derserved customers. Practical examples
and speculative points about future
of such innovations range from mobile
developments.
money to remote customer identification
enabled by a biometric technology. In ■■ Annex 1 includes a list of countries
some instances, for those innovations to that use a regulatory sandbox and
be realized, a sandbox would be helpful; a simplified comparative analysis
in other instances, a sandbox may play a of regulatory sandboxes organized
marginal role, if any. Indeed, a regulatory around specific design components.
sandbox is not a one-size-fits-all solution,
and there may be other approaches that ■■ Annex 2 includes a snapshot of sand-
are more efficient, nimble, and respon- box firms.
sive to the market.
■■ Annex 3 provides illustrative exam-
This paper is based on a combination ples of alternative approaches to the
of desk research and interviews with regulatory sandbox.

3 See, e.g., GPFI (2016).

2
Regulatory Sandboxes and Financial Inclusion

II. REGULATORY SANDBOX AND FINANCIAL INCLUSION


2.1. Overview Objectives. The key objective(s) of a reg-
ulatory sandbox are determined by the
Regulatory sandboxes prevail in high- regulator’s mandate and are typically set
and middle-income countries—a ma- forth in the founding document. A com-
jority of which do not struggle with mon objective of a regulatory sandbox is
significant financial inclusion problems to promote competition and efficiencies
(see Annex 1). This may explain why through innovation. However, the role
most regulatory sandboxes were not of regulatory sandboxes in promoting
designed to primarily promote financial innovation may be limited in instanc-
inclusion. In addition, in most of these es where a regulatory reform would be
countries, the regulator’s mandate does a more sensitive approach to deal with
not explicitly include financial inclusion. new entrants and technologies.5
The Central Bank of Malaysia’s and Bah-
rain’s regulatory sandboxes are the only Eligibility. Eligibility depends first on the
ones that explicitly list financial inclu- regulator’s authority and the legal frame-
sion among key objectives.4 work. Only those institutions that may fall
under the authority of the regulator(s)
As the concept and the implementa- (there may be a sandbox formed by more
tion of regulatory sandboxes evolve, we than one regulator) and that are not under
are seeing distinct models. Despite the exclusive authority of another regulator
diversity, many regulatory sandboxes can apply to the sandbox. Some sandboxes
follow the FCA’s blueprint, and there- permit only incumbents, others permit
fore, they have the following design only start-ups, and a few permit both.
components: Only products or services, whose innova-
■■ Objectives of the sandbox. tive nature deserves a special treatment
instead of outright regulatory approval
■■ Eligibility to apply to the sandbox. or rejection, may enter the sandbox.
■■ Criteria (specified in the application) Criteria for sandbox entities. Sand-
regarding risks, safeguards, and other box entities are subject to restrictions,
restrictions. such as maximum number of customers
served, and they may be required to put
■■ Timing for applicants and sandbox in place safeguards that reflect the risks
entities tests. and benefits of the proposed innovation,
■■ Costs to the regulator and the sand- including strengthened disclosure and
box entities. a compensation fund, to limit potential
impact of test failure on market par-
■■ Regulator’s actions following sand- ticipants. They also must comply with
box test(s). mandatory rules because regulators

4 As of 25 September 2017, the central banks of Bahrain, India, and Sierra Leone refer to financial inclusion as one of the
motives for establishing a regulatory sandbox.
5 Regulatory sandboxes have been criticized for being merely a process used to answer the question of whether an innovation
or innovator should be allowed to launch instead of solving the broad underlying problems presented by legacy regulatory
and supervisory approaches (Mueller 2017). Philippon (2017) argues that for FinTech to disrupt the financial system for
the better, substantial regulatory reform is needed. Zetzsche et al. (2017, 10) further suggest that implementation of a
regulatory sandbox may provide useful signals in this regard—too many applications for a regulatory sandbox indicate
deficiencies in rules and the need for a reform.

3
Regulatory Sandboxes and Financial Inclusion

cannot waive criteria set forth by law that promote open and transparent
unless the law permits such action by communication between regulator
the regulator. and the sandbox entity(ies) to facil-
itate learning from each other.
Timing. Applicants must demonstrate
readiness to test the innovation. Any ■■ A clear signal to the market and
testing must be time-bound to prevent among the regulatory and supervi-
protracted probing of innovations that sory staff that innovation is on the
are either underdeveloped or simply not regulator’s agenda.
viable.
■■ A safe space where live experiments
Costs. While most jurisdictions offer a can be conducted in a controlled
sandbox free of charge, there are costs manner and with safeguards in place
associated with running tests. However, to contain (and compensate for) any
for some sandbox entities (and some ap- potential harm to customers and the
plicants that are not admitted into the financial system as a whole.
sandbox), the feedback from the regu-
lator on applicable regulations reduces ■■ Potential for reduced time-to-market
legal fees, which can be as high as or cycle by streamlining the authoriza-
even higher than the costs associated tion process and reducing uncertainty
with sandbox testing. The regulator may for market players.
have costs associated with the sandbox,
including new staff who may be hired. Risks
Regulator’s actions following a sand- ■■ Potential competition issues that stem
box test. A successful test may result from advantages sandbox entities may
in several outcomes. To date, the most have both in regulator advice and in
commonly sought outcome is either being first to the market. The latter
full-fledged or tailored authorization of may be especially unfair if the selec-
the innovator/innovation. Exceptionally, tion criteria are defined vaguely or
regulators would initiate changes in the there is a lack of transparency leading
legal and regulatory framework to en- to selection bias or the appearance of
able legal implementation of the inno- selection bias.
vation. Sometimes, a sandbox firm may
be allowed to continue its operations ■■ Poor selection of sandbox firms
outside the regulatory perimeter. If test- because of the limited capacity of the
ing fails, the sandbox firm is required to regulator to assess the technology
cease running its innovation. underlying the innovation.
Regulatory sandboxes share design com- ■■ Liability issues in case of failed testing
ponents, but their details vary. Regardless that resulted in harm to customers or
of this variability, several reports point to other market participants, which may
certain benefits and risks common to the threaten the reputation of the regu-
existing operational sandboxes.6 lator and trust of customers in the fi-
nancial system.
Benefits
■■ In jurisdictions where regulators
■■ A standardized and publicized frame­ are held liable (under civil, admin-
work for dealing with innovations istrative, and/or criminal law) for

6 See, e.g., Zetzsche, et al. (2017); Mueller (2017); Lloyd and She (2017); Dostov (2016).

4
Regulatory Sandboxes and Financial Inclusion

decisions made on authorization ■■ Ways to address compliance (e.g.,


of financial services providers, the customer due diligence) and risk-­
regulator could be held liable for management (e.g., credit scoring) bar-
decisions on admission of sand- riers to financial inclusion (iProov).7
boxed entities. This may make them
reluctant to open the sandbox to ■■ Increased competition that may
disruptors. prompt incumbents to focus more
attention on unserved and under-
2.2. Financial Inclusion Benefits served segments to keep their reve-
nues steady.
Using a regulatory sandbox may affect
financial inclusion—and specifically, dig-
2.3. Financial Inclusion Risks
ital financial inclusion—in several ways.
Some effects stem from general bene- Operating a regulatory sandbox re-
fits listed in the previous section, such quires adequate resources (staff and
as improving capacity of regulators to funding). However, many regulators
deal with innovations and promoting put sandbox responsibilities at the top
competition—including between inno- of their staff’s existing work program,
vators and incumbents—with positive instead of hiring dedicated staff. Where
impact on pricing of financial products capacity is stretched, stretching it fur-
and services. Other effects are specific ther with regulatory sandboxes may
to financial inclusion, such as promoting have a negative impact on other areas
innovation that improves financial inclu- of regulator’s responsibilities (e.g., reg-
sion and improving capacity of regulators ulation, monitoring, supervision, and
to balance financial inclusion with other enforcement).
regulatory objectives.
In low-capacity environments characte­
There are several ways in which innova-
ristic for EMDEs, resources may be
tions may improve financial inclusion:
scarce and may be needed for areas with
■■ New, affordable products or services higher priority, such as creating a legal
that address the needs of the excluded and regulatory framework for basic en-
and underserved customer segments ablers of digital financial inclusion or
(M-Pesa, BitPesa). building basic market infrastructure.8
Some argue that a sandbox is a distrac-
■■ Distribution channels that reach out tion in countries in which such basic en-
to dispersed populations in remote ablers are not yet in place. The regulators
and rural areas (AliPay). may, in fact, be facing pressure to focus
■■ Operational efficiencies that allow on the newest technology and demon-
financial services providers to serve strate a progressive and open-minded
low-margin clients profitably (Yu’e viewpoint even if they should prioritize
Bao). more substantial (but less prominent)
work.
■■ Business models that allow financial
services providers to serve marginal- Successful implementation of a regu-
ized clients to achieve scale (PayGo). latory sandbox may be jeopardized by

7 The use of technology in risk management and compliance is referred to as RegTech—a newer element of the FinTech
revolution. RegTech is also used by regulators and supervisors and may become an essential means for regulators and
supervisors to address the opportunities and risks presented by FinTechs.
8 See, e.g., CGAP (forthcoming).

5
Regulatory Sandboxes and Financial Inclusion

institutional arrangements for regula- their sandbox function. This can be done
tion and supervision. Increasingly, the in several ways, including the following:
line between financial products and ser-
vices is becoming blurry and so is the ■■ Eligibility criteria can include a re-
line between competencies of public au- quirement that the tested innova-
thorities responsible for regulation and tion target financially excluded and
oversight of the financial market. Es- underserved customers. For exam-
tablishment of a regulatory sandbox by ple, the sandbox entity may be re-
one authority (as opposed to multiple) quired to serve a minimum number
may disadvantage innovators in other of those customers within a certain
areas (e.g., insurance, if the sandbox is period.
established by the banking regulator)
unless a coordination mechanism is put
■■ The innovator may be required to in-
in place. clude excluded and/or underserved
customers in testing samples to
New products and services that are test- collect data on their needs and pro-
ed in a sandbox may present additional files, provided that the customers
risks that may be hard to assess before are well-informed about the exper-
the service/product is fully launched imental nature of the service and
in the market. These risks may include safeguards are in place to ensure any
those stemming from features of the in- harm can be compensated for 100
novation and/or limited regulatory and percent.
supervisory capacity (e.g., poorly de-
signed regulatory requirements, whether ■■ There may be a preferential regime
too light or too burdensome, inadequate for the innovators deemed to be
supervisory tools necessary for collect- particularly relevant to financial
ing and analyzing the data generated or inclusion. Such a regime may take
used by new technologies). Risks may various forms, including a more
also result from the lack of consumers’ streamlined application and testing
understanding of a new product. process, fee waivers, and the like.
However, any such privilege should
Unless they are designed to promote fi- be subject to measurable commit-
nancial inclusion, regulatory sandboxes ments, ongoing monitoring, and
may attract innovators that are inter- claw back rights should the inno-
ested in competing with incumbents for vator fail to deliver on its financial
affluent clients rather than in venturing inclusion promise.
into excluded and underserved seg-
ments. (See Annex 2 for the overview of By making financial inclusion an ex-
sandbox firms many of which seem to fit plicit component of the regulatory
this description.) Thus, innovation may sandbox’s mission, regulators would
bring more convenience to those who be able to leverage testing as an oppor-
are already included, while further per- tunity to measure potential impact of
petuating the disadvantaged status of the innovation on financial inclusion.
excluded customers. Regulators could use that information
for their policy work, regulation, and
2.4. Choosing a Framework supervision.
to Harness Innovation for
Financial Inclusion A regulatory sandbox is only one option
among a handful of other tools available
Some regulators may want to make fi- to regulators that are dealing with in-
nancial inclusion an integral part of novation (inside or outside a financial

6
Regulatory Sandboxes and Financial Inclusion

inclusion context).9 In countries where about the sandbox and feel encour-
innovation has improved financial inclu- aged to pursue innovative ideas) and
sion, two other approaches are partic- improved access to venture capital (ad-
ularly relevant (see Annex 3). The first mission to a sandbox serves as a signal-
approach is test-and-learn: a regulator, ing mechanism for investors interested
in close cooperation with an innovator, in the sandboxed company) and (ii) en-
crafts a framework to test a new idea in hanced opportunities for the regulator
a live environment and adopt safeguards to understand the innovation before
(pursuant to, for example, a memoran- any intervention is made and for the
dum of understanding, no enforcement innovator to understand the applicable
action letter, or letter of no objection) regulatory and supervisory framework.
to minimize the impact of potential The latter is an inherent feature of test-
failure and to set criteria against which and-learn, too.
they measure success. Based on testing,
the regulator decides whether to grant In addition, test-and-learn allows for
the innovator permission to launch the more flexibility given its rather ad hoc
innovation market-wide, which may and tailor-made nature. Wait-and-see
involve a licensing process and may is a better fit than both test-and-learn
require regulatory changes. Test-and- and sandboxes where innovation is not
learn is sometimes mistaken for wait- mature or needs to evolve (e.g., scale
and-see, an approach applied when an up) to be meaningfully assessed by a
innovation is not yet fully understood regulator.
and the regulator chooses to let it devel-
op before deciding whether (and how) Some jurisdictions have been exper-
to intervene. imenting with alternatives that com-
bine multiple approaches and that
Compared to ad hoc test-and-learn often respond to various restrictions in
and wait-and-see approaches, the reg- the legal and regulatory framework. An
ulatory sandbox creates a proactive, example is the proposal by the U.S. Of-
standardized approach to innovation fice of the Comptroller of the Currency
that offers the potential for any eligible to adopt a national FinTech charter.
firm (licensed or not) to partake and BaFin in Germany, Commission de
involves more structured, transparent Surveillance du Secteur Financier in
communication between a regulator Luxembourg, and regulators APRI and
and innovators. The benefits of these AMF in France have decided to pursue
two features are (i) more transparen- an alternative approach to regulatory
cy with the claimed positive outcomes sandboxes by granting leniency for
of higher awareness (innovators know testing and piloting.

9 Zetzsche, et al. (2017) present four main approaches that regulators use to balance innovation and core regulatory ob-
jectives: (i) doing nothing (laissez-faire or permissive regime), (ii) using a “cautiously permissive” case-by-case approach
based on forbearance, (iii) providing “a structured context for experimentation” via a regulatory sandbox or other frame-
works for structured piloting exercises, and (iv) using “a formal approach” that accommodates innovations through legisla-
tive and regulatory changes.

7
Regulatory Sandboxes and Financial Inclusion

III. ISSUES TO CONSIDER


Regulators around the world are ask- committee should be put in place. The
ing: “Should I set up a sandbox?” A reg- borderless nature of digital technology
ulatory sandbox should respond to real adds further complexity. There are sev-
demand instead of becoming a solu- eral regulatory barriers that artificially
tion looking for a problem. The answer, limit cross-border application of inno-
therefore, depends on several key fac- vations. National regulatory sandboxes
tors: (i) legal and regulatory framework, are unlikely to solve that issue. Perhaps
(ii) stakeholder ecosystem, (iii) capacity to the contrary, unless coordinated, they
and available resources, (iv) market con- may allow for exceptions from rules har-
ditions, and (v) policy priorities. monized across countries (as a result of
international standards), thus making
Legal and regulatory framework. The the innovation less compatible with
legal and regulatory framework deter- the legal and regulatory framework of
mines several things: other countries. This challenge may be
■■ The ability of a regulator to set up a overcome with international coopera-
sandbox—the statutory mandate to tion among sandboxes10 or even estab-
lishment of an international sandbox
set up a sandbox.
as discussed in Europe11 and Asia,12 for
■■ The flexibility of a sandbox—i.e., the instance.
discretion the regulator can exercise
Capacity and resources. As noted, op-
regarding the issuance of waivers
erating a regulatory sandbox requires
and temporary exemptions to sand-
adequate resources (staff and funding)—
box firms. Any regulatory sandbox is
resources that may not be available to
a sum of discretions available to the
regulators in low-capacity/low-resource
regulator.
environments. These regulators may
■■ The utility of a sandbox—a regulatory need to consider less costly alternatives.
sandbox tends to be more useful for For example, a regulator can establish a
jurisdictions that have complex reg- mechanism for enabling better and eas-
ulatory frameworks or highly pre- ier communication between the regula-
scriptive rules, each of which can tor and innovators without setting up a
present obstacles to innovation. sandbox.13

Stakeholder ecosystem. All except a Market conditions. Factors that are


few of the sandboxes have been estab- important in assessing market condi-
lished by one regulator (as opposed to tions include the quality and quantity of
multiple regulators working in collabo- innovation in the market, the number
ration). Where multiple sandboxes exist and types of financial services providers
within a single jurisdiction, a coordina- and their offerings, the level of competi-
tion mechanism such as joint selection tion, state of market growth, the quality

10 Several countries have adopted memoranda of understanding to foster international cooperation to promote FinTech.
Among the most active countries are Abu Dhabi, Australia, Kenya, Singapore, and the United Kingdom.
11 See, https://ec.europa.eu/info/finance-consultations-2017-fintech_en.
12 Monetary Authority of Singapore has partnered with IFC to develop the ASEAN Financial Innovation Network, part of which
should be a regional sandbox. The actual features of the sandbox remain unknown (as of 2 August 2017), but there are
indications that it will not be a regulatory sandbox, but rather an industry sandbox that is used to test and offer FinTech
solutions to incumbents in the region (see, e.g., http://www.mas.gov.sg/News-and-Publications/Media-Releases/2017/
IFC-and-Monetary-Authority-of-Singapore-Collaborate-to-Advance-FinTech-Innovation-in-Asia.aspx).
13 E.g., OCC Innovation Office Open Hours and others (Duff 2017, 4, 8).

8
Regulatory Sandboxes and Financial Inclusion

FIGURE 1.  Decision-Making Process for Establishing a Regulatory Sandbox

Policy Priorities

Legal & Regulatory Stakeholder Capacity & Market


Framework Ecosystem Resources Conditions

of innovation, and the level of develop- feed into the determination of whether
ment of financial market infrastructure. to establish a sandbox and how—i.e., its
Sandboxes may be less important for design (see Figure 1).
large banks and other incumbents than
for start-ups that may not know which There may be an overall framework,
regulator is relevant to it, how to ap- such as a national financial inclusion
proach the regulator, or what the regula- strategy and an individual strategic
tions provide (Mueller 2017, 11).14 In the plan reflective of agency priorities, that
financial inclusion context, market condi- affects priorities of an individual reg-
tions will also concern the number of ex- ulatory agency. If establishing a reg-
cluded and underserved customers and ulatory sandbox does not fall under a
the providers (informal and formal) that regulator’s priority framework, then
serve them. Ideally, policy priorities the regulator should carefully consider
should be reflected in these factors and whether moving toward a sandbox
should be subject to multi-stakeholder would dilute available resources and
discussions and consultations. These jeopardize implementation of the
discussions and consultations should actual priorities.

14 So far, this position has been supported by the data about sandbox firms (see Annex 2).

9
Regulatory Sandboxes and Financial Inclusion

IV. CONCLUSION
Regulatory sandboxes are quite new, and A regulatory sandbox should not be
the lack of data and diversity of sandbox thought of as an exclusive entry point to
approaches make any measurement the financial market for all innovations
of success or comparison of individual either. There will be other avenues for in-
sandboxes difficult. However, what is novation: some innovations will emerge
known so far indicates that sandboxes spontaneously from garages in Nairobi
are an important complement to a policy and grow in significance before they are
maker’s existing approaches to dealing regulated; some will be rolled out and
with innovation. Formal, transparent, will scale up in gray zones, yet under the
and open dialogue between a regulator (strict) scrutiny of supervisors; others
and innovators, where each side learns will represent incremental tweaks that
from the other, is perhaps a key element stretch the boundaries of existing rules.
of regulatory sandboxes and a means for
advancing to a regulatory mindset that The multitude of avenues for innova-
responds to and reflects the FinTech tion means that a regulatory sandbox is
revolution underway. not a one-size-fits-all solution. It is one
instrument among other options, in-
In the financial inclusion arena, a regula- cluding a test-and-learn approach. Pol-
tory sandbox can open space for positive icy makers need to carefully choose the
change through innovation. Indeed, an approach that best fits their priorities,
innovation relevant to financial inclusion capacities, and capabilities in line with
may come out of a sandbox. Moreover, the interests of their constituencies.
policy makers can design a sandbox that For instance, some incremental innova-
is specifically tailored to promote innova- tions cannot be tested within a limited
tion in support of financial inclusion. At period and at a small scale required by
the same time, regulators will remain re- regulatory sandboxes. And even if the
sponsible for supporting the creation of scalability of a sandbox can be improved
an enabling environment for digital finan- by automating the admission process or
cial services based on basic regulatory otherwise (e.g., through FinTech waiv-
enablers. A regulatory sandbox should ers such as those in Australia and Swit-
not be a distraction for policy makers. It zerland), certain innovations simply
should not draw their attention (and re- may neither fit a regulatory box nor a
sources) away from more urgent tasks. regulatory sandbox.

10
Regulatory Sandboxes and Financial Inclusion

ANNEX 1. COUNTRY COMPARISON TABLES

TABLE A1-1.  Countries with an Existing or Proposed Regulatory Sandbox

Australiaa Hong Kong Malaysia Singapore Turkey


Bahrain India Mauritiusb Republic of Korea UAE (Abu Dhabi)
Brazil Indonesia Mexico Sweden UK
Brunei Japan Netherlands Switzerlanda USA
Canada Jordan Russia Taiwan
China Kenya Sierra Leone Thailand
Note: The list includes the countries with an operational ( ), established ( ), and officially announced ( )
regulatory sandboxes (as of 31 August 2017).
a. Regulatory sandbox is used to describe a regime based on industry-wide waivers.
b. The regulatory sandbox is not limited to providers of financial services; is open to any industry.

11
Regulatory Sandboxes and Financial Inclusion

Table A1-2.  Examples of Regulatory Sandboxes

Options Illustrative Examples Comments


Innovation Abu Dhabi, Hong Kong, A legislative change may
Malaysia, Netherlands, UK be needed when (i) the
Objective(s)

Competition Abu Dhabi, Bahrain, envisioned objectives do


Indonesia, Thailand, UK not fall under the current
mandate or (ii) the
Consumer benefits Bahrain, Netherlands,
regulator does not have
Singapore, Thailand, UK
the powers necessary to
Financial inclusion Bahrain, India, Malaysia, set up a sandbox.
Sierra Leone
Regulated and aspiring Australia, Canada, The eligibility criteria
financial services Netherlands, Singapore, may be dictated by the
providers Switzerland, Thailand regulator’s mandate and
All innovators Abu Dhabi, Brunei, actual legal and regu-
Eligibility

Malaysia, US (Catalyst) latory framework (e.g.,


a regulator may not be
All products/activities Canada, Hong Kong,
allowed to let third-party
(within the regulator’s Singapore, Thailand, UK
providers into a sand-
remit)
box unless partnered
Defined products/ Australia, India, Thailand, with authorized firms—
activities Republic of Korea Hong Kong).
Minimum capital UK A regulatory sandbox
Fit & proper Netherlands should not promote
regulatory arbitrage,
AML/CFT Abu Dhabi, Australia,
generate inacceptable
Canada, Hong Kong,
risks, or become a
Netherlands
vehicle for forbearance.
Safeguards

Consumer protection Australia, Brunei, Hong Therefore, some


Kong, Malaysia, Thailand, regulatory requirements,
UK such as basic AML/CFT
Quantitative limits Australia, Bahrain, Brunei, and consumer protection
(max. no. of customers; Malaysia requirements, should
max. assets under not be waived even for
management) limited testing.
Reporting Australia, Brunei, Malaysia,
requirements Thailand, UK
Cohorts Bahrain, Kenya, Abu Dhabi Either option comes with
(UAE), UK benefits and downsides.
The actual configuration
Timing

Rolling Australia, Canada, Malaysia,


Mexico, Netherlands should be primarily
determined by the overall
objectives and the regu-
lator’s capacity.

12
Regulatory Sandboxes and Financial Inclusion

ANNEX 2. A SNAPSHOT OF SANDBOX FIRMS15

I. The Australian Securities and pricing decisions for consumer loans


Investments Commission’s Sandbox provided through its online lending plat-
form. Upstart evaluates consumer loan
First Rung: The firm offers an app that applications using traditional factors
customers can use to arrange savings such as credit score and income, as well
where they transfer their money in a as incorporating nontraditional sources
variety of ways (direct transfers, round of information such as education and
ups, other inbound transfers), and their employment history.
savings are held in a custodian bank ac-
count with an Australian bank. V. Financial Conduct Authority’s
Goodments Pty Ltd.: This start-up pro- Sandbox in the United Kingdom
vides a share trading application that Cohort 1 (July 2016)—69 applications,
matches retail investors to shares based 24 applications accepted, 18 firms tested
on their sustainability profile (ethical, (see www.fca.org.uk/firms/regulatory-­
sustainable, and social values). sandbox/cohort-1).

II. Bank of Thailand’s Sandbox ■■ Start-up (15)

Kasikorn Business-Technology Group: ■■ Billon: An e-money platform


A technology arm of Kasikornbank based on distributed ledger tech-
(KBank) will be using blockchain tech- nology that facilitates the secure
nology to certify letters of guarantee and transfer and the holding of funds
could use the same technology to certify using a phone-based app.
other documents.
■■ BitX: A cross-border money trans-
III. Bank Negara Malaysia’s Sandbox fer service powered by digital cur-
rencies/blockchain technology.
■■ GetCover: Motor insurance start-up.
■■ Blink Innovation Limited: An
■■ MoneyMatch: Fully digital peer-to- insurance product with an auto-
peer currency exchange platform with mated claims process that allows
eKYC functionality that enables users travelers to instantly book a new
to conduct cross-border remittances ticket on their mobile device in
and exchange foreign currencies. the event of a flight cancellation.

■■ GoBear: Free comparison site for ■■ Bud: An online platform and


insurance, credit cards, and loans in app that allows users to manage
several Asian markets. their financial products, with
personalized insights, on a single
■■ WorldRemit: Helps people send dashboard. Bud’s marketplace
money abroad at affordable rates. introduces relevant services that
users can interact with through
IV. Consumer Financial API integrations.
Protection Bureau
■■ Citizens Advice: A semi-auto­
Upstart Network: A company that uses mated advice tool that allows
alternative data in making credit and debt advisers and clients to

15 As of 31 August 2017.

13
Regulatory Sandboxes and Financial Inclusion

compare the key features of time a user spends money, and


available debt solutions. calculates an affordable sav-
ings amount based on the user’s
■■ Epiphyte: A payments services spending behavior.
provider that aims to provide
cross-border payments using ■■ Tradle: An app and web-based
blockchain technology. service that creates personal or
commercial identity and verifi-
■■ Issufy: A web-based software plat- able documents on a distributed
form that streamlines the overall ledger. In partnership with Aviva,
initial public offering distribution it will provide a system for auto-
process for investors, issuing com- mated customer authentication.
panies, and their advisers.
■■ Tramonex: An e-money plat-
■■ Nextday Property Limited: form based on distributed ledger
An internet-based property technology that facilitates the
company that will provide an use of “smart contracts” to trans-
interest-­free loan for a guaran- fer donations to a charity.
teed amount to customers if they
are unable to sell their property ■■ Incumbent (1)
within 90 days.
■■ Lloyds Banking Group: An ap-
■■ Nivaura: A platform that uses au- proach that aims to improve the
tomation and blockchain for issu- experience for branch customers
ance and lifecycle management that is aligned with the online
of private placement securities. and over-the-phone experience.
■■ Otonomos: A platform that rep­ ■■ Partnership (2)
resents private companies’ shares
electronically on a blockchain. ■■ Govcoin Limited: A technology
This enables these companies to provider that has partnered with
manage shareholdings, conduct the Department for Work and
book-building online, and facili- Pensions (DWP) to determine the
tate transfers. feasibility of making emergen-
cy payments using means other
■■ Oval: An app that helps users than cash or the Faster Payments
build up savings by putting aside Scheme. The payments platform
small amounts of money. These will use blockchain to allow DWP
savings can then be used to pay to credit value to a mobile device
off existing loans early. Oval to transfer the value directly to a
will be working with Oakam, a third party.
consumer credit firm, and sever-
al Oakam customers during the ■■ HSBC: An app developed in part-
test period. nership with Pariti Technolo-
gies, a FinTech start-up, to help
■■ SETL: A smart-card-enabled re- customers better manage their
tail payment system based on an finances.
OpenCSD distributed ledger.
Cohort 2 (January 2017)—77 applica-
■■ Swave: A microsavings app that tions, 31 accepted, 24 testing (see www.
provides an across-account view, fca.org.uk/firms/regulatory-sandbox/
enables a round-up service every cohort-2)

14
Regulatory Sandboxes and Financial Inclusion

■■ Start-up (24) by increasing their awareness


of their eligibility, based on the
■■ AssetVault: A firm that enables
lender’s affordability criteria.
consumers to catalog all their
assets in a secure online register ■■ FloodFlash: A firm that provides
and better understand their to- event-based flood insurance, in-
tal value. AssetVault works with cluding in high-risk areas. Custom-
insurance providers to protect ers receive a pre-agreed settlement
consumers and their assets with as soon as the company’s sensor
appropriate insurance products. detects that flood waters have ex-
ceeded a certain depth.
■■ Assure Hedge: A web-based plat-
form that offers foreign exchange ■■ Insure a Thing: An alternative
options to help small and medium insurance business model where
size enterprises and individuals the consumer makes payments
protect against losses incurred at the end of the month, based
because of currency fluctuations. on the exact cost of claims settled
during that period.
■■ Beekin: A firm that leverages arti-
ficial intelligence and data-sharing ■■ Money Dashboard: A tool that
to build transparency and liquidi- offers an instant view of consum-
ty in alternative assets (real estate, er affordability by aggregating
angel investments) and offers risk and organizing financial transac-
management and analytics ser- tions from online accounts and
vices to small investors. mapping them to mortgage lend-
ers’ criteria that support a digital
■■ BlockEx: A firm that aims to test mortgage journey.
a bond origination, private place-
ment, and lifecycle management ■■ Moneyhub Enterprise: A firm
platform based on a distributed that applies a combination of
ledger technology. artificial intelligence, data ana-
lytics, and psychology to nudge
■■ Canlon: An insurance policy that consumers to encourage affirma-
saves a portion of the net premi- tive financial actions.
um to reimburse policyholders if
a claim is not made. ■■ Nimbla: A firm that provides flex-
ible trade credit insurance and
■■ Disberse: A blockchain-based credit and invoice management
services provider that distrib- tools to U.K. small and medium en-
utes and tracks development and terprises, via an online platform.
humanitarian finance.
■■ Nivaura: A firm that focuses
■■ Evalue: An on-going, fully auto- on automating the primary is-
mated online streamlined advice suance and administration of
process for employees in the work- financial assets through a cen-
place designed to help them set and tralized system or a blockchain
achieve realistic retirement goals. infrastructure.
■■ Experian: A mortgage eligibil- ■■ Nuggets: A consumer blockchain
ity tool that can be used to help application that gives users a sin-
consumers who are in the re- gle biometric tool for login, pay-
search phase of buying a home ment, and identity verification,

15
Regulatory Sandboxes and Financial Inclusion

without sharing or storing ■■ Systemsync: An employee ben-


private data. efits comparison platform for
small and medium enterprise
■■ nViso: An online platform that that is powered by payroll’s
provides advisers and clients be- automated Workplace Pension
havioral assessment profiles gen- submissions.
erated by artificial intelligence
and facial recognition. ■■ YouToggle: An app that uses mo-
bile phone telematics to monitor
■■ OKLink: A money remittance a user’s driving and create an in-
service that combines domestic dividual score that can be shared
e-money transfers on OKLink’s with a car insurer to obtain a dis-
cross-border blockchain settle- count. Driving information cap-
ment system. tured by the app could also be
used as evidence in the event of
■■ Oraclize: A distributed ledger
a motor accident.
technology based on an e-money
platform that turns digital iden- ■■ ZipZap: A cross-border money
tity cards into secure digital wal- remittance platform that choos-
lets through smart contracts and es the most efficient means
fiat-backed tokens. for a payment to reach its des-
tination, including via digital
■■ Paylinko: A DLT-based payments currencies.
solution that enables users to send
and receive payments using a link.
VI. Monetary Authority of
■■ Sabstone: A blockchain-based Singapore’s Sandbox
platform that aims to help compa-
nies receive early payments from PolicyPal Pte Ltd.: A firm that provides
their clients against their invoices. an app that brings together all insurance
policies of a customer to allow him/her
■■ Saffe: A face recognition pay- to manage his/her policies in an easy
ments and authentication ser- and efficient way and to purchase addi-
vices provider. tional coverage where needed.

16
Regulatory Sandboxes and Financial Inclusion

ANNEX 3. EXAMPLES OF OTHER REGULATORY APPROACHES

I. Test and Learn and payments system services through


agents. The program followed the issu-
A. Kenya ance of Branchless Banking Guidelines
Kenya has become known for sanctioning/ that were based on voluntary compli-
endorsing innovative solutions—the de- ance and applied to all banks and tele-
velopment of mobile money—outside the communication companies that chose
existing regulatory framework until the to join the pilot branchless banking pro-
framework could be modernized. gram. The principles or guidelines were
not full authorization for banks to use
In 2007, during early meetings between agents to extend services. Instead, BI
Safaricom and the Central Bank of Kenya authorized a limited number of banks to
(CBK) on the initial prototype of the funds conduct services through agents (known
transfer service, CBK (including Bank Su- as UPLKs or Financial Intermediary Ser-
pervision, Legal, National Payment Sys- vice Units) in certain pilot areas.
tems and Research Departments) raised Until 2013, mobile money or branch-
several questions and areas of potential less banking services in Indonesia faced
concern (e.g., what was the nature of the limited uptake, in large part because of
activity, the legal status of M-Pesa, integ- regulatory obstacles. Through the Branch-
rity risks [including anti-money laun- less Banking Guidelines/Principles, BI
dering and combatting the financing of removed some of these obstacles and
terrorism], technology-­related risks). allowed the branchless banking and mo-
Following response from Safaricom, bile money sector to develop through pi-
CBK’s legal counsel concluded that lots with five banks (Bank Mandiri, BRI,
Safaricom would not be doing bank- BTPN, Bank Sinar, and CIMB Niaga) and
ing business by offering M-Pesa. CBK four MNOs (Telkomsel, Indosat, XL Com,
further concluded that due to the lack and Telkomall). The pilots were imple-
of mandate over nonbank funds trans- mented in close partnership with BI to
fer providers, CBK would not interfere extract learnings and experience to shape
in the launch of M-Pesa and issued a the subsequent full regulations.
short letter of no objection (February The pilots concluded in November 2014.
2007) that allowed Safaricom to pro- Soon after, BI and OJK (Financial Services
ceed, provided certain basic conditions Authority) released further updates to
were met. the branchless banking regulations that
expanded the number of financial insti-
CBK later developed specific regulations
tutions able to provide branchless bank-
that clarify the standards for mobile
ing services, and enabled participants
money providers.
in the pilots to build a more concrete
branchless banking or digital financial
B. Indonesia services program.
In 2013, Bank Indonesia (BI) launched C. The Philippines16
the Pilot Branchless Banking Pro-
gram. The program allowed banks Bangko Sentral ng Pilipinas (BSP) has
and/or telecommunication companies established a policy environment that is
(with BI oversight) to offer banking intended to enable and promote useful

16 “C. The Philippines” was written with input from Pia Bernadette Roman-Tayag, head, Inclusive Finance Advocacy Staff, BSP.

17
Regulatory Sandboxes and Financial Inclusion

innovations that can improve the design II. Wait and See
and delivery of financial services. Typi-
cally, transformational innovations have A. China
features that are not contemplated by
existing regulations. BSP, recognizing the China, especially before 2015, is often
potential of these innovations, has delib- praised for adopting a liberal approach
erately taken a test-and-learn approach. before designing a comprehensive reg-
Specifically, BSP engages with innovators ulatory system approach for the new
to understand their innovations, to assess environment of what is called internet
risks, and to determine how appropriate finance (the Chinese equivalent to digi-
regulations can be applied. BSP adopted tal financial services).
this approach when e-money was intro-
duced and just developing. It permits non- A typical scenario to illustrate this ap-
bank providers to operate on a pilot basis proach is China’s approach to peer-
with identified parameters, in close coor- to-peer (P2P) lending. For some time,
dination with BSP and using existing reg- Chinese regulators refrained from inter-
ulations as the operating framework. BSP ventions and let the industry grow and
adopted e-money regulations five years evolve. While this has helped to grow
after the first pilot was approved—when the industry, it has also created some
the business, risks, and appropriate regu- issues, including platform failures and
latory approach were fully understood. practices such as (i) pooling, slicing, and
packaging of underlying loans, (ii) guar-
Since then, BSP has used the test-and- antee of repayment and financial re-
learn approach for various innovations, turns without proven capacity to deliver,
including digital agnostic platforms that and (iii) shadow banking-like maturity
facilitate credit origination for banks, transformation.
cloud-based core banking solutions that
can allow banks to expand their reach, Emerging issues and instances of fraud
new e-money instruments designed (the largest of which was the E’zubao
for e-commerce, use of individuals as Ponzi scheme, which exposed 900,000
payments agents, and e-KYC solutions. investors to losses upwards of US$7.5
These innovations are presented to BSP, billion) led to a focused regulatory inter-
evaluated, and allowed within certain vention.17 The intervention was meant
parameters (i.e., limitations in geog- to support the industry by creating a
raphy, number of accounts, or types of transparent and level playing field for
transactions). Regular reporting is re- platforms, investors, and borrowers.
quired throughout the pilot stage. The regulation resulted in a drop in the
number of P2P platforms from more
Aside from the test-and-learn approach, than 3,000 platforms in 2015 to 2,448 in
BSP proactively monitors emerging 2016, but it has not had adverse effect
FinTech applications and relevant mar- on the overall lending volumes (Aveni
ket developments. and Jenik 2017).

17 See., e.g., Aveni and Jenik (2017).

18
Regulatory Sandboxes and Financial Inclusion

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