Abstract
Fintech emergence post-Global Financial Crisis puts a threat to the banking industry. One of the strategies for the banks to stay afloat and relevant in the current digital era is through regulatory sandbox. A regulatory sandbox is one of the tools opted by financial regulators in certain jurisdictions to regulate the rapid growth of fintech products within their financial sphere. The pioneer of which was the UK's market and conduct regulator, the Financial Conduct Authority (FCA). Bank Negara Malaysia (BNM) was also one of the first jurisdictions that followed suit. One of the basic structures in a sandbox is the eligibility criteria that the regulators draw for the financial service provider to participate in the sandbox. This chapter shall address the entry requirements in both jurisdictions as the structure of the regulatory sandboxes differs from one jurisdiction to another. This topic is crucial to the banks as they need to understand further how regulatory sandbox may help them offer innovative financial products to level the competition with the fintech players in the market.
TopIntroduction
Financial regulation rests on the basis that financial regulators are mandated to regulate to ensure financial stability and provide adequate customer protection. The landscape of financial regulation has changed its course since the Global Financial Crisis (GFC) happened in 2007. Numerous reasons were cited (Arner, 2009), however, the main reason was due to a proliferation of financial innovations that were unsupervised and coupled with de-regulation incentives. Thus, post-GFC, the financial regulators around the world are more cautious in dealing with financial innovations. The latest financial innovation that caught the regulators' eye is the emergence of fintech in the financial industry. Fintech is a combination of the words between finance and technology whereby the financial services provider leverage on technology to provide products that are cost-effective to the financial consumers. Although the relationship between finance and technology have been established since the 19th century during the introduction of pantelegraph and telegraph, (Arner, Barberis, & Buckley, 2016), it is only recently the financial industry has accepted the usage of the term fintech.
The emergence of fintech brings a challenge to the financial industry, especially in the banking sector. The financial markets have evolved to accommodate the growing demands of fintech products. At a glance, the fintech products have more advantage than the traditional banking industry on several points. Fintech products leverage technology; hence the products are more efficient and convenient especially in providing banking services to unbanked or underbanked financial consumers (Ajlouni & Al-Hakim, 2018). This is further supported by the survey conducted in 2019 stating that there was significant growth in the adoption of fintech by the consumers in the financial market especially in the payments and remittance sector (Young, 2019). Hence, fintech players are a definite contender for the traditional banking system (Ajlouni & Al-Hakim, 2018) post GFC. In responding to the threat that fintech has against the banking sector, the banks need to explore opportunities offered in the fintech scene. One of the strategies that the banking sector has already applied in widening its horizon in this current digital era is, by partnering with fintech players in offering innovative products to the financial consumers. Thus, such collaboration between the banks and fintech players (Juengerkes, 2016) offering innovative financial products may fall under the category of fintech as well.
Not only fintech disrupts the banking industry but it has also added a new regulatory burden towards regulators around the world. The regulators are now expected to regulate without hampering innovation. (Board, 2017) In effect, this means the regulators will not only need to ensure financial stability and provide adequate customer protection but nowadays the regulators are burdened with another mandate of promoting innovation. As fintech exponentially increases in meeting the demands in the market, there is a need to regulate them to ensure financial stability. Therefore, for the regulators to discharge its’ duties in regulating this new type of financial innovation, the regulators turned to regulatory sandboxes. Similar to children’s sandbox, regulatory sandbox creates a perimeter between the regulators, financial service providers and financial consumers to test. It is a pilot program where the regulators may supervise the financial service providers in a more relaxed environment of reduced regulations to serve the best innovative financial products to the consumers before the fintech products are released to the markets.
Key Terms in this Chapter
GFC: Global Financial Crisis that occurred during 2008 which was mainly caused by proliferation of financial innovations that are unsupervised and coupled with de-regulation incentives.
FTEG: Financial Technology Enabler Group held under BNM as part of its regulatory sandbox’s initiatives to formulate regulatory policies to assist the adoption of financial innovations that leverage on technology in the current financial services industry.
Fintech Players: The financial innovators that develop disruptive innovation in the financial system, which ranges from start-ups, companies or collaboration with the incumbent financial institutions.
Regulatory Sandbox: A pilot program that creates a parameter for the financial service provider that are given regulatory relaxations, to test their fintech products with the financial consumers under the supervision of the regulators before releasing the fintech products in the market.
BNM: The Central Bank of Malaysia that acts as the financial regulator for financial institutions, insurance and takaful companies, payments system and money service businesses. The regulatory sandbox is under the purview of BNM.
Financial Service Provider: Incumbent banks and fintech players as participants in the regulatory sandbox.
Systemic Risks: The possibility that when an event occurs, it will contribute to the collapse of an institution or in this case, the financial system at large.
Regulatory Capture: The regulators that are expected to act in the best interest of the public may be controlled by the industries that they are supposed to be regulating.
Fintech: The combination of words of finance and technology that belongs to the type of financial innovation after the Global Financial Crisis.
FCA: Financial Conduct Authority is the United Kingdom’s market conduct regulator that oversees the UK’s financial system. FCA oversees the UK’s regulatory sandbox.
Financial Innovations: The changes brought to the financial products or services to attract the financial consumers in the market.