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Regulatory Sandboxes: Harnessing Innovation for Financial Inclusion?

Regulatory sandboxes are gaining popularity, mostly in developed markets, as a safe space where FinTech startups and other innovators can experiment under the watchful eye of a financial supervisor. On Monday, October 16, CGAP is hosting a panel discussion on the potential of regulatory sandboxes for financial inclusion, as the organization recently published a working paper surveying more than 30 regulatory sandboxes worldwide.

Regulatory Sandbox is a guidance issued by a financial sector regulator to allow small scale, live testing of innovations by innovators in a contained environment under the regulator’s supervision. Ivo Jenik, a financial sector specialist at CGAP presented the benefits and risks of regulatory sandbox. On the one hand, the regulatory sandbox can lower cost of innovation, open access to regulator, improve communication between regulators and innovators, formalize framework for safe testing, and assist the market monitoring. These are all good reasons to explore regulatory sandboxes, in order to address innovations that could advance financial inclusion. However, policy makers should be prepared to face challenges and risks, which include competition issues, limited capacity of regulator to run sandbox, liability issues in case of failed testing, and fragmentation of regulatory regimes nationally and internationally.

“CGAP has been working on making financial services meet the needs of poor people. Promoting innovation by regulatory sandboxes may ultimately help financial inclusion since in the past there were many innovations that contributed to financial inclusion either through developing new more affordable and suitable products through exploring distribution channels or operational efficiency that bring the cost of providing financial services down to make it

more affordable, also through increase competition and experimentations with new business models”, according to Ivo.

To respond to the initial question “Could regulatory sandboxes be useful in emerging markets and developing economies (EMDEs) to advance FinTech innovations designed to benefit unserved and underserved customers?” Ivo summarized that regulatory sandbox is one out of several other options instead of an exclusive point of entry for innovation, and it’s too early to evaluate real impact at present.

As to the major functions of regulatory sandboxes, Dea Markova, head of programs at Innovate Finance, said they came up with three different problems that the sandbox can solve. The basic one is solution development for innovative solution. Typically, you can think of it as startups come in to the sandboxes, you can also think of it as big institutions trying to pile up something new. This is important from financial inclusion perspective because the sandboxes take the new ideas to market faster. The second one is complex problems solving, in markets where you don’t have the regulator installing digital identity or eKYC, indu

stry can use the sandboxes to solve some of their problems through government process which is already out there for them. The last one is it can improve regulatory efficiency because it allows industry to do some of the regulator’s job and invite them to see solutions been developed on their creative mechanism. 

Xinran Xu, Fellow, FinTech4Good

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