Fintech sandbox in banking sector

ngoc nguyen

Sandbox is used to create experimental legal frameworks for innovative new products, services or business models for which the current legal framework has not yet regulated or has some shortcomings.

AN ExPERIMENTAL LEGAL FRAMEwORK

It was not until 2016 that the world saw the creation of the first regulatory sandboxes—frameworks set up by regulators that allow fintech startups to conduct live experiments in a controlled environment under a regulator’s supervision. In only four years, sandboxes have become synonymous with fintech innovation, offering the unique benefit of providing the empirical evidence needed to substantiate decisions in the field.

According to the World Bank, sandboxes are usually classified into four types, based on their objectives: (i) policy-focused; (ii) product or innovation focused; (iii) thematic; and (iv) cross-border. These categories are not mutually exclusive, however.

Policy-focused sandboxes: These sandboxes use the sandbox process to evaluate particular regulations or policies.

Innovation- or product-focused sandboxes: These sandboxes encourage innovation by lowering the cost of entering the regulated marketplace, allowing firms to test the market viability of new business models. Thematic sandboxes: Sandboxes of this type focus on a precise theme with the objective of accelerating adoption of a specific policy or innovation or supporting development of a particular subsector or even of specific products aimed at particular population segments.

Cross-border sandboxes: Cross-border or multijurisdictional sandboxes support firms’ cross-border movement and operations while encouraging regulator cooperation and reducing arbitrage. Objectives for these sandboxes include improving cross-border regulatory harmonization and fintech firms’ ability to scale more rapidly on a regional or global basis.

In fact, a multiplicity of actors across the innovation ecosystem take part in the regulatory sandboxes, including:

Innovators and knowledge providers: This group includes people with innovative products, technologies, services or business models who want to test them in a sandbox. They can be

organizations, companies of all sizes, those already entering the market, startups, startups or new market entrants.

Regulators and other government bodies: They develop the regulatory sandboxes, monitor, advise, supervise and evaluate the experimental activities in the regulatory sandbox and make recommendations to amend and supplement policies and regulations based on the results of the sandbox activities. Consumers: As regulatory sandboxes operate in real-life environments, provisions for the participation of consumers who opt-in or are informed that the product or service they are using is being tested in a sandbox.

GLOBAL APPLICATION

Many countries around the world have successfully applied regulatory sandboxes. In November 2017, the US Federal Aviation Administration released a regulatory sandbox to test unmanned aerial vehicles for a period of 3 years. With data and experimental evidence collected from the program, the Federal Aviation Administration and the US Department of Transportation have come up with new regulations regarding unmanned aerial vehicles, especially those relating to security and privacy.

On 18 October 2016, the central bank of Malaysia (Bank Negara Malaysia) launched a fintech sandbox framework in the financial services sector. Malaysia's regulatory sandbox eligibility requirements cover financial inclusion goals. In 2018, the Malaysian Ministry of Finance launched national regulatory sandboxes in the fields of: agriculture, biotechnology, construction, education, energy, finance, food, green technology, healthcare, smart cities, sports, telecommunications, transportation, tourism, water management, and waste management. In 2020, the Ministry of Science, Technology and Innovation of Malaysia launched a national innovation and technology regulatory sandbox in the fields of medical technology, manufacturing, agriculture, education and tourism.

In 2017, the Bank of Thailand launched a regulatory sandbox with a key focus on fintech and fintech developers, including financial and non-financial institutions. That same year, the Office of the Insurance Commission of Thailand (OIC) launched a Thai Insurtech regulatory sandbox with a key focus on developing digital insurance solutions in the country.

SANDBOx BANKING

On 6 September 2021, the Government issued Resolution No.100/NQ-CP approving the proposal to formulate a Decree on a fintech regulatory sandbox in the banking sector. In October 2021, the State Bank of Vietnam sought for opinions from units/organizations on the draft Decree on regulatory sandboxes and is expected to submit to the Government for promulgation in the fourth quarter of 2021.

Under the draft Decree, the subjects licensed to participate in the regulatory sandboxes are credit institutions and fintech companies. Fintech solutions in the banking sector that are allowed to participate in regulatory sandboxes will include new services such as: Credit extension based on technology platforms; Credit scoring; Sharing data via application programming interfaces (APIs); Peer-to-peer lending (P2P); Applying blockchain technology, distributed ledger technology in banking activities; Applying other digital technologies to support banking operations…

The Decree on regulatory sandboxes is expected to boost financial technology to grow strong, bring great opportunity for credit institutions and fintech companies to be ready to participate in regulatory sandboxes. It also poses challenges to those who start late or stay out of the development trend.