Sandboxes have come a long way since the UK’s Financial Conduct Authority pioneered the concept in 2016. CBPN was pleased to catch up with Financial Sector Specialist Ivo Jenik about his intersecting work on financial inclusion and regulatory sandboxes with the Consultative Group to Assist the Poor. We were interested to find out about the new trend in “thematic” sandboxes that focus more on advanced policy objectives, as well as his thoughts on the original market-driven regulatory sandbox model and the need for dialogue between regulators and innovators.
CBPN: You work at the Consultative Group to Assist the Poor (CGAP). Can you tell our readers more about CGAP and its mission and governance?
IJ: CGAP is an independent global partnership of more than 30 leading development agencies, foundations and national governments that works to empower poor people through financial services. We research, experiment, test and learn with the objective of achieving proof of concept and extracting lessons that can be shared with the wider development community and scaled by our partners.
About 1.7 billion people worldwide have no financial account at a formal financial institution, which means that they lack the financial services they could use to dramatically improve their lives. They have no formal savings for a child’s education; they cannot access loans to buy seeds and fertilizers; they have no insurance to protect them from medical or natural disasters. At CGAP, we are trying to change this. A growing body of research shows that when poor people have access to financial services and better opportunities for how to manage their money, over time their income and consumption improves.
CBPN: Financial inclusion can be a broad topic – what areas are of interest to CGAP, and what do you tend to focus on?
IJ: When CGAP started in 1995, the focus was almost exclusively on microfinance. Over time, the development community learned that while access to credit through microfinance institutions can be an important catalyst, it frequently is insufficient to improve the lives of large numbers of poor people. There are many more hurdles to overcome for achieving financial inclusion. With the emergence of digital financial services such as mobile money and the explosion in financial technologies, our work also has expanded.
At CGAP, we have the privilege of working with a variety of stakeholders both in the private and the public sectors, a feature that sets us apart from many other organisations working on financial inclusion. Additionally, in-country work and global presence allows us to synthesise knowledge from one part of the world and extract lessons that can be applied in another. We constantly scan the financial inclusion horizon for new insights and experiment with new technologies, policy approaches or consumer products to find out what works in empowering poor people. Regulatory sandboxes, RegTech/SupTech, PAY-Go services and market place banking are a few examples of the topics we have been working on recently.
CBPN: Much of your work has focused on regulatory sandboxes, which have been in the fintech news a lot lately. How can regulatory sandboxes provide “safe spaces” for fintech innovation? What are the key characteristics of a sandbox that people should understand?
IJ: Regulatory sandboxes are really an exciting policy approach to analyse – they’re innovative, with a great potential, yet too new to be considered a proven concept. They embrace the idea of ‘starting small and failing fast.’ Sandboxes allow time-bound testing of market-ready financial innovations with real clients in live, yet ring-fenced environments under the oversight of a financial sector regulator. If something goes wrong, the test can be immediately discontinued, and customers remedied.
While the concept is relatively simple, it is often misunderstood. For instance, more than a physical space or infrastructure, sandboxes are policy frameworks and processes publicised by financial sector regulators that provide an opportunity for an active dialogue between financial innovators and the regulators.
Sandboxes create neither regulatory loopholes nor regulatory arbitrage as many critics have said – at least, not if they are well designed and implemented. Every innovation undergoes close scrutiny before they are allowed into a sandbox, and safeguards are put in place for live testing to mitigate potential risks. In fact, in many jurisdictions the innovators must be formally authorised before entering the testing stage – this can take different forms, including a bespoke license.
We should keep in mind, though, that sandboxes are not fit for every regulator as they serve particular objectives and are often expensive to implement. They also come along with several risks, which if not addressed properly, may cause more harm than good. Developing countries in particular should carefully consider whether a regulatory sandbox is among the most burning priorities on which they need to spend their resources.
CBPN: Can you describe what a “win-win” outcome looks like for a regulatory sandbox environment?
IJ: If I had to answer with a single word, it would be “dialogue” – a dialogue between the regulator and innovators that allows the regulator to learn about innovations and the innovators to learn about regulatory requirements. But obviously the answer is a bit more complex.
Many readers might have heard about the success of the UK’s Financial Conduct Authority’s (FCA) sandbox, which has helped to improve competition by bringing down the cost of innovation and reducing barriers to entry while allowing FCA to learn about innovations quickly. It would be a mistake to think, though, that all sandboxes are the same and that all “win-win” outcomes look alike.
FCA pioneered the concept of a market-driven sandbox open to all potential innovators. This kind of sandbox is particularly appealing for jurisdictions with a vibrant FinTech industry where regulators and FinTech innovators are pressed to find common ground. In other jurisdictions, sandboxes are meant to promote fintech industry (e.g., Indonesia, Mozambique) or test boundaries of the regulatory framework (e.g., Australia, Singapore).
We are also seeing a new kind of sandbox emerge – thematic sandboxes designed to promote a narrower innovation agenda around specific types of technologies, products, business models, or policy objectives. Examples of such programs include the Bank of Thailand’s sandbox on QR code standards and the Bank of Sierra Leone’s financial inclusion-oriented sandbox. With a grain of salt we can say that the performance of a market-driven sandbox is measured by the number of graduating firms. The success of a thematic sandbox would be ultimately defined by the “theme” it was meant to promote.
CBPN: Regulatory sandboxes have proliferated around the world; what are a few of your favorite ongoing experiments and/or outcomes?
IJ: What I find intriguing about this whole regulatory sandbox movement is the diversity of approaches and outcomes we see. Even two years ago when most sandboxes were using the FCA’s blueprint, the overall context and practical implementation would vary. So ‘regulatory sandbox’ really means many different things when you look more closely.
I am a big fan of the jurisdictions that go beyond sandboxes and create a wider, interconnected ecosystem of frameworks and processes meant to facilitate responsible financial innovation. A regulatory sandbox is primarily meant to address regulatory uncertainty before an innovation is launched. But innovators, particularly fintech start-ups, often need assistance even before they are ready to test their innovation. For those, regulators have created innovation hubs or fintech offices to provide early guidance and informal assistance that may ultimately result in sandbox testing. I am convinced that regulatory sandboxes can only have a significant impact if imbedded in such a wider ecosystem.
More specifically, there are two initiatives in which CGAP has been closely involved as a thought partner that I am very excited about. The first one is the Global Financial Innovation Network aimed at promoting international cooperation among regulators and other public stakeholders interested in supporting responsible innovation. The second one is the regulatory sandbox established by the Capital Markets Authority of Kenya aimed at developing and deepening the capital market in Kenya as a way, among other things, to improve SME finance.
CBPN: Are there any sandboxes under consideration that excite you?
IJ: Every time I learn about a new sandbox, I am excited. But recently, it is not any one national sandbox that excites me, but ‘sandbox simulation.’ CGAP is developing a set of materials for any policy maker with a regulatory sandbox framework to test the framework before public launch. It is effectively a sandbox for sandbox that allows policymakers to experience their sandbox framework and fine tune it before going live.
CBPN: How can sandboxes be employed to promote financial inclusion? Is this a harder issue than for fintech generally?
IJ: We are far from being able to make any conclusive statement. Our hypothesis is that increased market capacity to generate innovation is critically important to financial inclusion since new technologies and/or business models have significant potential to address the most challenging barriers. We know, though, that innovation alone is not enough as it does not necessarily benefit the excluded and underserved segments. I see many fintech start-ups targeting millennials and the up-and-coming middle-class segment rather than poor customers. This is precisely where policy makers need to step in to incentivise innovation with positive social impact.
In the context of sandboxes, this can be done in many ways, some of which are proposed in our 2017 working paper – streamlined authorisation, pro-inclusion KPIs, tax incentives. However, we have not seen many such initiatives yet. As regulatory sandboxes keep spreading across emerging markets and developing economies, we are likely to see more.
CBPN: With your focus on financial inclusion and innovation, what payments apps or services have caught your eye recently? What can these innovations make possible?
IJ: Without making any endorsements whatsoever, I have been recently excited about the emerging class of digital banks that take different shapes and forms across the globe and most of which are app-based. I really indulge in the idea that one day everyone will have access to a set of financial services and personal finance management tools that will be individualised, semi-automated, voice controlled and platform-based. There are many players trying to make this happen – Monzo, N26, Fidor in Europe, Better, MyBucks and Thyme in Africa, NuBank, BruBank and Simple in America, WeBank, Neat and Yoma Bank in Asia and this is just to name a few out of many.
I feel very fortunate to live in this time of change, observing how the banking industry is evolving and investigating which of the many innovators may succeed in their quest for better financial services. At CGAP, we all work hard to make sure that poor people are not left behind as this change happens.
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