Regulatory sandboxes can play an important role in fostering the innovation needed for overcoming the barriers to financial inclusion that keep poor and excluded customers marginalized from the formal financial system. Sandboxes allow regulators to base their regulatory response to innovations on the results of live experiments. In frontier cases, this helps regulators to make faster and better informed decisions on how to appropriately regulate (and supervise) new services and providers reaching the marketplace.
Not all jurisdictions need a sandbox. Their suitability depends upon the regulatory objectives, the flexibility of the existing regulatory regime, the resources and capacity of the regulator, and the types of innovations emerging in the market. Under certain circumstances, they have potential to speed the regulatory adaptation towards an enabling framework in support of inclusive, innovative finance.
When is a regulatory sandbox the best method for financial regulators to test innovative products and services? And how can they use a sandbox for advancing financial inclusion? CGAP’s new guide leads regulators step by step through the decision-making process. It provides strategies for building and running a successful sandbox, and offers alternatives to consider. The guide is practical, specific, illustrated by country examples and complemented with work templates.
CGAP has collated data on a number of companies operating in and graduating from selected sandboxes. On this map, users can explore those firms, their technology and how they are contributing to financial inclusion. The map is interactive and includes 134 firms from 16 different sandboxes.
In this blog series, CGAP takes a critical look at the concept of a regulatory sandbox and how it has evolved in different parts of the world, and explores the practical aspects of setting up and implementing a regulatory sandbox.
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 2017 paper summarizes early insights concerning the concept. It explains key design elements, key benefits and associated risks, and hypothesizes about the use of sandboxes in advancing financial inclusion.
This global repository on sandbox resources is compiled from publicly available data around the world and features country policy documents, press releases, regulatory guidelines and reports.
In this 2017 webinar, speakers discussed the usefulness of sandboxes in emerging markets and developing economies to advance financial innovations that benefit poor customers.
Frequently asked questions
A regulatory sandbox is a tool for developing evidence about how a new product, technology, or business model (innovation) works and the outcomes it produces. Sandboxes operate under a special exemption, allowance, or other limited time-bound exception. The concept of a regulatory sandbox was developed in a time of rapid technological innovation in financial markets and is an attempt to address the frictions between regulators’ desire to encourage and enable innovation and the emphasis on regulatory objectives such as stability and consumer protection.
As sandboxes gain popularity, significant questions arise over whether and under what circumstances sandboxes should be used. Most innovations do not require this level of evidence-based regulatory analysis before launching into the marketplace. Regulators should have a clear understanding of the circumstances that warrant a sandbox test and when other tools and frameworks may suffice because sandboxes are time and resource intensive and generally not available to all market participants.
CGAP created a decision process to help guide your decision and point to alternatives where relevant.
The average cost of a regulatory sandbox is difficult to assess because the major cost components (such as salaries) are highly context specific. In an effort to learn more, CGAP and World Bank undertook a survey in 2019 and collected data from 31 financial sector regulators. Responses to the survey suggest that the range may be as wide as US$25,000 to 1 million.
The resources committed to a sandbox widely differ from a single point of contact (more akin to a fintech office) to more than 30 staff members. The CGAP / World Bank survey provides more detail. In most cases, three to five members are adequate to run a regulatory sandbox.
Regulators often face uncertainty and anxiety in the prelaunch phase. They wonder whether they have done everything they could to prepare for the real-life implementation. This uncertainty may delay the launch of a sandbox. In this case, regulators could create a minimum viable product (MVP) sandbox. An MVP sandbox launches quickly and provides an opportunity for feedback and iteration. Evidence from several jurisdictions suggests that initial sandbox designs often evolve and adapt to fit local market conditions. This CGAP blog post provides more information.
Regulators may also want to consider running a “sandbox simulation”— which is essentially a sandbox for a sandbox. This tool can help regulators test the sandbox before launching it and build the internal capacity and capabilities needed to make a sandbox success.
Not every regulatory sandbox publishes data about tested innovation. However, CGAP has collated data on a number of companies operating in and graduating from sandboxes. On the interactive map, users can explore the firms that are innovating in regulatory sandboxes, their technology and how they are contributing to financial inclusion.
The main advantage to a regulatory sandbox is that it allows regulators to generate practical evidence from live testing before making adjustments to the legal and regulatory framework. There may be instances where such adjustments will be necessary.
The key risks of running a regulatory sandbox are associated with costs and regulatory capacity.
There are multiple factors that determine whether a regulatory sandbox becomes a successful initiative. These include: clearly defined objectives, adequate design, and proper implementation. More specifically, this means designating the sandbox owner, defining internal processes and responsibilities, providing sufficient resources, ensuring coordination with internal and external stakeholders. Regulators should also be ready to make changes in the sandbox design and operations based on their continuously evolving experience.