Rodrigo García de la Cruz is CEO and Founder of Finnovating, a global open innovation strategy consultancy and a pioneer consultant in Disruptive Innovation specialising in FinTech, InsurTech, PropTech, RegTech, LegalTech, WealthTech, Neobanks and Blockchain. Rodrigo was recognised in the TOP 17 of the TOP World influencers in FinTech, and TOP 35 in InsurTech. He is an Industrial Engineer in Electronics and Robotics with a degree in Business Administration and 20 years of experience in the Financial Sector and in international technology companies.
How would you explain a sandbox, or sandboxing, to a layman?
Nowadays, there is a greater need to be at the forefront of the technological revolution, and the rapidly evolving new Fintech services can undermine the regulator’s obligation to protect consumers and mitigate market risks. In view of this, “The Financial Conduct Authority” (FCA), which is a financial regulatory body independent from the UK Government, published a report that established ‘The Project Innovate’. This jumped on the idea of setting up a regulatory Sandbox for Fintech in 2016, in order to set strict financial regulations for the upcoming disruptive business models.
The FCA’s main purposes are to encourage innovation in the interests of consumers and promote competition through disruptive innovation. This raises the question: What does Sandbox mean? More generally, a regulatory Sandbox is a framework set up by a regulator that allows FinTech start-ups and other innovators to test their offerings at a fast pace in a safe, controlled and structured environment.
What are the advantages of regulatory sandboxes?
A primary aim of a Sandbox is to maintain the right balance between compliance and regulation with the quick growth of Fintech companies, and at the same time, trying to not compromise customer’s security. On the other hand, there is another goal by drawing the attention of different players such as banks, private equity and venture capital funds avoiding the uncertainty of working and investing in unregulated landscapes. In addition, investors don’t necessarily want to invest in an over-regulated market either. Overregulation can lead to hindering or slowing down innovation. Besides, this affects a company’s growth rate and ability to achieve a profitable return on investment.
Sandboxes were created based on the idea that regulators would be able to fully understand the technology if they have also explored that space and worked closely with industry experts. Is this the case?
Regulators need to make sure they are protecting consumers, and not getting lost in the “financial innovation” quicksands.
When considering a regulatory sandbox, regulators should clearly define the objectives and challenges that need to be addressed. They also need to dedicate sufficient resources to support implementation. It is crucial to engage the industry early in the process to get its perspective and secure its buy-in.
One of the reasons for companies to enter a sandbox is because they want to understand if they can put a product out into the market. If you take part in a sandbox does this automatically give you a stamp of approval?
One of the biggest reasons that companies enter a Sandbox is because they want to understand if they can put a product out into the market and see if it’s thoroughly viable in the real world thanks to the regulator’s supervision. Moreover, once you have passed the test you get a license with which you can operate freely in the market. With the launch of the regulatory sandboxes, authorities brought up important benefits for the startup community and the financial services industry: firstly, it reduces time-to-market at potentially lower cost since the FCA bought up an estimation that time-to-market can be increased by about a third in this way, at a cost of about 8% of product lifetime revenue. Secondly, it gives better access to finance, because the startup ecosystem is heavily reliant on investments to facilitate the growth. Finally these projects get a regulatory relief, as we mentioned before, apart from reaching the best solution for the customer.
The Financial Conduct Authority (FCA) is taking regulatory sandboxing global to enable fintech innovation in emerging markets. Will it become a global model?
The Global Financial Innovation Network (GFIN), a network of regulatory bodies chaired by the UK’s Financial Conduct Authority (FCA), has opened applications for its cross-border testing pilot. Accepted companies will be able to use the cross-border innovation sandbox to test their products, services, and business models. To participate in the six-month-long pilot phase, expected to start in the second quarter of 2019, firms must meet the regulators’ application requirements in all the jurisdictions in which they wish to test.
In my opinion a global sandbox does raise knotty questions around regulatory harmonisation, as well as requiring thinking on the best model for it. Nevertheless, these concerns were not enough to dissuade the desired project. Whatever shape a global sandbox ends up taking, it is clear that there is motivation, inspiration, and willingness for it.
Can you tell us a little bit about the current status in Spain when it comes to the idea of implementing Sandboxes?
In early April of 2018, the Ministry of Economy announced the upcoming implementation of a regulatory sandbox in Spain with the goal of facilitating innovation in financial services and their development. The launch date is not yet determined but it was estimated that this instrument could be operating in Spain no later than the fourth quarter of 2018.
The idea is for Spain to position itself at the forefront of efforts to stimulate financial innovation as there is currently an attractive window of opportunity given that very few countries have set up a financial regulatory sandbox.