Regulatory Sandboxes and Financial Inclusion

11 October 2017
A regulatory sandbox may be a useful tool for regulators to promote innovation for financial inclusion.
Regulatory sandboxes may enable financial innovations that benefit excluded and underserved customers. In most cases, a regulatory sandbox is a framework set up by a financial sector regulator to allow small-scale, live testing of innovations by private firms in a controlled environment under the regulator’s supervision. This concept, which was developed in a time of rapid technological innovation in financial markets, is an attempt to address the frictions between regulators’ desire to encourage and enable innovation and the emphasis on regulation following the financial crisis of 2007–2008. 
While low levels of financial inclusion are still prevalent in emerging markets and developing economies (EMDEs), innovations have emerged in those markets, and they hold the promise of positive change. Financial sector regulators need to be responsive to this opportunity, but they face challenges due to several factors, including the following:
Lack of regulatory capacity in terms of adequate resources, staff, expertise, and tools. 
Underdeveloped financial market infrastructure and limited market with retail financial services. 
Complexities of balancing key regulatory objectives of financial inclusion, stability, integrity, consumer protection, and competition.
Insufficient ability to adapt to the fast-changing environment of digital finance and technology-driven financial innovation (FinTech).
Regulatory sandboxes can help to address some of these challenges by doing the following:
Opening space for improvements in financial inclusion through innovation.
Enabling the regulator to revise and shape the regulatory and supervisory framework with agility.
Changing the nature of the relationship between regulators and innovative financial services providers toward a more open and active dialogue where each side learns from the other.
However, regulatory sandboxes are not a one-size-fits-all solution. There may be other approaches that are more efficient, nimble, responsive to the market, and appropriate to the specific circumstances of an individual country and/or market. Importantly, regulatory sandboxes should not be thought of as a solution looking for a problem or, even worse, a distraction that draws the attention of policy makers away from more urgent tasks.
This paper is for financial sector regulators in EMDEs, development agencies, and financial inclusion professionals who want to better understand regulatory sandboxes and their potential impact on financial inclusion. It is based on a combination of desk research and interviews with selected regulators, sandbox firms, supervisors, and other stakeholders. It provides an overview of the current landscape for regulatory sandboxes, analyzes potential benefits and risks of the sandbox concept in the context of financial inclusion, outlines key issues that every policy maker considering a regulatory sandbox should be aware of, and offers speculative points about future developments.