Regulating For Innovation In Low Resource Economies

Categories : Blog

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Author: Sephutile Mhlongo

Financial Policymakers, Regulators and Supervisors are often faced with the difficult task of balancing financial and monetary stability, enabling innovation, and promoting competition whilst protecting consumers. This responsibility is further complicated by the exponential growth and development of new financial technologies, products, and business models, as summarized by the PAFI fintech wheel: 

Figure 1: PAFI Fintech Wheel  

Source: BIS (2020) 

Regulators use different approaches to engage with the growing range of financial technologies including regulatory sandboxes, which have been embraced globally since their inception in 2015, as means of providing a dynamic, evidence-based regulatory environment to test emerging technologiesii. 

Regulatory sandboxes are commendable in that they encourage responsible innovation. However, innovation by its nature and definition is multidirectional and oftentimes disruptive. Therefore, it makes one wonder if it is truly possible for financial policymakers and regulators to responsibly enable innovation through regulatory sandboxes. 

Although widely popular among financial regulators, there remains little evidence that supports regulatory sandboxes’ effectiveness in initiating change, although they are known to provide useful insights that can inform changeiii. Additionally, sandboxes are typically expensive to run, with CGAP estimating that running a sandbox may cost well over USD 1 millioniv . Given the constrained national budgets in low-resource economies, it is therefore imperative that we question the impact regulatory sandboxes have on their financial regulatory development. When considering if regulatory sandboxes would be the best approach, CGAP recommends that regulators should closely question whether there is a need for live testing; and if the answer is unclear or negative upon further research, they ought to consider alternative regulatory toolsv. These could include innovation offices or hubs, accelerator programs, “test-and-learn”, “wait-and-see”v, or the relatively new regulatory tool- TechSprint. 

TechSprints are events that bring together participants from across and outside of financial services to develop technology-based ideas or proof of concepts to address specific industry challenges over a short period of timevi.  

TechSprints have a lot of positive outcomes for their conveners such as rapid learnings for regulators, new partnerships, as well as initiating change that is impacts beyond just the TechSprint, resulting in increased regulatory, academic and market focus on technology or an issuevii. However, the major drawback of a TechSprint is that it works best for problems for which technology is the answer. TechSprints require exceptionally well-crafted problem statements to spur action post-event, and compelling business cases to justify the time and resource costs of an event as shown in Box 1viii. 

Box 1:  Women’s Economic Empowerment TechSprint 2021  

  • How has the Covid-19 pandemic impacted women in the UK? 
  • What were the use cases that needed solutions? 
  • How many participants? 
  • What was the main/overall question that the solutions needed to answer? 
  • Highlight 2 solutions of the 9 teams that presented 

Given their capabilities to provide rapid learning and ease of virtual adaptation, TechSprints are beginning to be adapted in low resource environments. One such event is the April 2022 Swanari TechSprint hosted by India’s Reserve Bank Innovation Hub and was aimed at enhancing women’s financial inclusion by encouraging gender-intelligent bankingix. This TechSprint’s problem statement explored whether innovative products such as digital financial services can improve access, usage, and the quality of financial services for women. 

We will be closely following the outcomes of India’s TechSprint and would also be keen to hear your thoughts on whether you will be adopting TechSprints as one of your innovation regulation tools. You can have this discussion with us on our League of Digital Finance Professionals LinkedIn group.

Sources:

[1] Sephutile Mhlongo, Assistant Manager Financial Regulation & Supervision, Digital Frontiers.

[1] BIS (2020): Payment Aspects of Financial Inclusion in the Fintech Era, available here.

[1] World Bank Group (2020), Global Experiences from Regulatory Sandboxes, available here.

[1] CGAP (2019), Do Regulatory Sandboxes Impact Financial Inclusion? A Look at the Data, available here.

[1] CGAP (2019), Running a Sandbox May Cost Over $1M, Survey Shows, available here.

[1] CGAP (2020), Technical Guide How to Build A Regulatory Sandbox, available here.

[1] Financial Conduct Authority (2017), TechSprints, available here.

[1] Financial Conduct Authority (2020), Fostering Innovation Through Collaboration: The Evolution of the FCA TechSprint Approach, available here.

[1]  Financial Conduct Authority (2021), Women’s Economic Empowerment TechSprint 2021, available here.

[1] RBIH (2022), Swanari TechSprint, available here.