When the UK’s Financial Conduct Authority announced the first round of Fintechs for their regulatory sandbox in 2015, it was heralded as a progressive move and reinforced the UK’s dedication to financial innovation.
The FCA is now hosting their fourth cohort of companies, and it is evident that this may not be the right model for everyone. Even the FCA admits a number of shortcomings, including limited access to banking services for their companies and hindrances for companies trying to test at scale. Being in the sandbox does not necessarily mean legality, so many incumbent financial institutions may still deny these types of companies accounts, partnerships or connectivity to their networks. Similarly, many potential Fintech customers, especially at the enterprise level, do not view the sandbox membership as enough of a regulatory assurance to pass on-boarding compliance requirements.
The truth is that not all regulatory bodies have the budget, expertise, or bandwidth to be even able to implement a sandbox as well as the FCA did. Unless planned and operated correctly, sandboxes pose a number of risks, such as companies going rogue. There must be clearly designed parameters and also an ability to optimize learnings from each cohort in the sandbox, or the sandbox may not be able to sustain itself. Countries with the most successful sandboxes, such as Singapore and Switzerland, are already highly regulated economies with strongly enforced frameworks for operating in the financial sector.
Currently in Africa, out of 54 countries, only Kenya, South Africa, and Sierra Leone have regulatory sandboxes. Promoting financial innovation has either not been a priority for many governments, especially where traditional financial operations are becoming even more difficult to continue, or there is a lack of capacity on how to move forward to promote innovation. Where innovation has been a priority, some governments have turned to private donors or companies to lead efforts on creating new regulatory frameworks, which can lead to frameworks that are less than competitive. Global de-risking has already put many frontier market financial institutions, especially those in markets deemed “high-risk”, on the defensive. New business models can be viewed as suspect and distracting to the higher prioritized issues of finding international settlement banking partners from shrinking pool of options (like in Nigeria) or managing a fast-growing banking sector that previously had loose oversight (like in Kenya). Quite frankly, it is unsurprising that governments of frontier markets are less willing and less prepared to take on the risks of sandboxes. However, in some cases, if there has been an internal champion, progressive policies have passed, as in the case of M-Pesa and mobile money in Kenya without the need for a sandbox at all. In this case, the adoption and scale has greatly surpassed that of developed nations.
Regulators should not reinvent the wheel. Just because companies are starting to use a new technology does not mean their actual operating model is not already governed under existing law. Most regulations are categorized by business model, so many of these technologies–like blockchain and AI– that regulators are finding hard to manage may not actually affect the business model itself. Blockchain is a protocol, which changes the method in which a company carries out operations. Banking regulations did not dramatically change when branches started digitizing paper records and using online databases. Most “e-banking” regulation in Africa is remarkably similar to prior regulation. Is there really a need for a sandbox to observe companies that are merely optimizing existing business models with better technology? By putting these companies in the regulatory purgatory of a sandbox, you risk hindering their mere existence.
The internet is regulated underneath the broadcast regime because, like TV and radio, internet companies generate revenue from content. In certain instances it might be necessary to create a separate body to manage specific, technical aspects of technology, like ICANN in the US. In the same vein, companies using blockchain technology may be regulated with the same payments and securities licenses, unless it’s necessary to create special commissions to oversee one specific area of the technology.
Sandboxes are difficult to create and take technical expertise, clear communication, and extended buy-in from stakeholders. Considering the simultaneous nascency of the market and its breakneck speed, FinTechs in frontier markets, and in Africa in particular, need regulatory clarity to be recognized by customers and partners. Given the real and relative size of Africa’s unbanked population, informal economy, and lack of mid-market financial services, this is a fertile continent for Fintechs to make deep and resonating impact. However, in order for FinTechs to be successful, they need support and collaboration with incumbents such as banks and telcos. Critical to enabling partnerships is regulation, and currently the fragmented regulation makes strategic partnerships hard to establish. In order to more quickly facilitate the success of FinTechs, emerging market governments should start trial reciprocal licensing programs from other jurisdictions as well as be willing to extend existing regulations to new technologies.
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