The current economic environment is highly competitive and fast changing. Fintech or financial technology has a massive potential to innovate the environment and enable the development of new products and services.

While innovation is poised to bring new business opportunities, better quality services, and significant benefits to customers, it also involves exorbitant cost and greater financial risks. In extreme cases, it can also lead to a financial crisis or increase the severity of potential risk factors.

Moreover, the global finance industry is heavily regulated space which might discourage Fintech startups to develop new financial products. Complying with all regulations and standards could also be challenging thereby hindering innovation.

The ideal product or service must comply with regulations and preserve the safety of financial consumers. Fintech regulatory sandbox can act as a layer between regulatory bodies and Fintech companies to facilitate processes and smoothen collaboration. Now many of us would ask, “What is a regulatory sandbox?”

Here is the explanation.

Consider a Fintech company that wants to launch an online payment and wallet product that can be used by anybody having a mobile with an internet connection. There is a chance that the product could be a massive hit and will be a game-changer in the online payment segment. However, the product will have to clear various regulatory check posts before approval.

Regulatory authorities of the country could not assess the risk involved in the product or will it comply with the current banking standards. As a result, the company aborts the launch of their product due to regulatory ambiguity. However, an avenue called as ‘regulatory sandbox’ could be created where the product could be tested in a secure environment. The regulatory sandbox would allow limited-scale testing of the new product in a controlled environment temporarily exempted from regulations. It could help regulatory bodies to assess the potential benefits of the product and the risk involved.

What is Fintech Regulatory Sandbox?

It can be defined as, “A regulatory sandbox is a framework set up by a financial sector regulator to allow small-scale, live testing of innovations by private firms in a controlled environment (operating under a special exemption, allowance, or other limited, time-bound exception) under the regulator’s supervision.”

Adding to that, “The Fintech regulatory sandbox also brings the potential to change the nature of the relationship between Fintech companies and regulators toward a more open and active dialogue.” Read more here.

Potential benefits of Fintech sandbox

Encourage innovation

Due to regulatory ambiguity, many financial products and services do not get tested and get abandoned at initial stages. Fintech sandbox enables companies to play with technology and develop innovative products in line with the regulations and industry standards. Moreover, it also encourages more trials and experiments during the testing stage to lead better outcomes.

Ensure consumer protection

The regulatory sandbox enables authorities to work closely with companies to ensure that the product or service does not hinder consumer rights. It also enables live experimentation with regulations in place to avoid any potential harm to consumers and the whole financial market.

Helps startups raise funds

Regulatory ambiguity can seriously hinder startups to raise fund from the market. According to reports VC offered to startups is reduced to 15-20% due to regulatory uncertainty or no funding is offered at all. On the other hand, Fintech sandbox promotes open and transparent functioning resulting in unbiased funding. Fintech startups participating in Fintech regulatory sandbox have a better chance to convince investors as they comply with all regulations ticking all the right boxes.

Reduced time-to-market cycle

Regulatory sandbox significantly reduces time-to-market cycle by reducing uncertainties and streamlining authorization process.

Fintech regulatory sandbox is the way forward to more result-oriented and an evidence-driven process of innovation. Given the rapidly evolving market scenario, regulators must adopt such a framework to promote rapid development in the global finance industry.

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