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These oases of regulatory safety are being leveraged by fintechs and challenger banks to trial groundbreaking technologies, and incumbents should join them. Bill Lumley reports.
Regulatory sandboxes, where banks, fintechs and other firms can trial products and business models in full view of regulators but unrestricted by many regulatory barriers, are continuing their upward trajectory in growth and popularity.
Among such participants in these controlled spaces are fintechs such as Singapore-based regulated decentralised security token trading platform DigiFT. In June, it was granted a year’s access to the Monetary Authority of Singapore's regulatory sandbox as part of its bid to become the first licensed decentralised security token exchange.
In September, financial services group Société Générale won approval to operate digital asset services in France. And last month, in the UK, Lloyds Banking Group announced it was launching its Innovation Sandbox, in conjunction with fintech platform NayaOne, in an initiative aimed at accelerating innovation and growth.
Meanwhile, the Reserve Bank of India recently set up a regulatory sandbox mechanism enabling both the regulator and banks to evaluate the benefits and risks of emerging financial innovations. In October, it announced a procedure for interoperable sandboxes to regulate fintechs that are subject to the oversight of more than one regulator. In a statement, the bank said it proposes to gradually move towards implementing more active regulations.
Don’t fear failure
Sandboxes, along with the advantages they purport to enable, are widely supported across the fintech and banking world. But Franco Severini, chief technology officer at multinational IT services provider Fujitsu, warns that large banks face the challenge of overcoming their “long-established caution” when it comes to trying out new technologies.
“Their focus on reducing risk and avoiding failure means their workforce does not feel motivated to try out new ideas, particularly when the management structure sees new technology as experimental and unproven,” he says.
Their focus on reducing risk and avoiding failure means their workforce does not feel motivated to try out new ideas
In order for any sandbox to succeed, the technologies on which it is built must support a modern, multi-cloud-hosted implementation, stresses Mr Severini. “Adopting and maximising [use of] the cloud is vital in order to scale services, modernise applications, drive faster innovation and enhance the customer experience, enabling banks like Lloyds to compete with fintechs.”
Fujitsu itself has its own multi-cloud innovation sandbox integrating offerings from major cloud providers such as Google and Azure, as well as innovations from small start-ups.
“Good data” is also necessary to show desirable results for any innovative solution, adds Mr Severini. “This is why investment in synthetic data generation and provision capabilities is vital – and ideally it should be the very first innovation that is produced in a sandbox.”
Adapt and innovate
Sushil Kuner, principal associate at law firm Gowling WLG, says traditional legacy systems have hampered banks’ ability to keep up with evolving consumer demands. But, she says, challenger banks have disrupted the banking space over the past few years and have proved to be a credible threat to traditional firms due to their ability to meet customers' demands for speed, efficiency and a significantly improved user experience through frictionless journeys.
“In order to stay competitive and to retain and attract new customers, incumbents must become more innovative and either find ways of delivering on customer expectations at pace themselves or partnering with those who can,” says Ms Kuner.
To create its own Innovation Sandbox, she says, Lloyds is collaborating with fintechs to design and test innovative new solutions in the bank's existing IT environment to enable the delivery of products and services that can genuinely compete with those being offered by challenger banks.
Asserting Lloyds’ commitment to innovation, Kirsty Rutter, the bank’s group fintech investment director, says: “Our fintech engagement strategy is one of the key enablers of the group strategy and the Sandbox is one of the actions we have taken to demonstrate our commitment.”
“Lloyds has been partnering with fintech for a while, embedding fintech into our customer journeys that support superior customer experience, like subscription management platform Minna Technologies, [...] or developing technology infrastructure, like Form3, as part of our new payments architecture.”
The bank recognises the importance of fintechs when it comes to delivering better outcomes for its customers, clients and colleagues, says Ms Rutter. Lloyds is currently the UK’s biggest digital bank, she adds, stressing that “we are committed to strengthening our collaboration in this area.” In addition to Form3, Lloyds has also recently partnered with consultancy AND Digital and the sustainability focused CFP Green Buildings.
A sandbox is a safe innovation space that requires high-quality data. As Mr Severini explains, it’s where colleagues can innovate with enthusiasm. Provided it is built on the foundations of the cloud and good data, and treated as a safe space, banks should be able to reap the rewards of the fintech revolution.
