Will Globally Popular Regulatory Sandboxes Ever Crack the U.S. Payments Market?

Will Globally Popular Regulatory Sandboxes Ever Crack the U.S. Payments Market?

Will Globally Popular Regulatory Sandboxes Ever Crack the U.S. Payments Market?

Deron Hicks

Deron Hicks

Deron Hicks serves as the head of the TSYS Government Relations Team. Deron is a graduate of the University of Georgia and Mercer Law School.

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Innovative ideas and products represent a break from the status quo. Innovation is about something new – something unique. As such, innovation – by its very nature – almost always precedes regulation.

After all, how do you effectively regulate an idea or product before it exists? Existing laws and regulations may provide some general guidelines within which new products and services can be generally assessed and constrained. However, there is inevitably a significant grey area – a space in which there is vast amount of regulatory uncertainty.

The concept of a 'regulatory sandbox' was developed to address this uncertainty. These sandboxes are effectively a limited waiver from normal regulations and licensing requirements, usually for a specified period of time, allowing startups or even established companies with new innovative ventures to test their products or services in a constrained and safe environment – i.e., the sandbox. It's intended to promote and encourage innovation – and up until this point, the idea has caught on a lot more abroad than in the United States.

The rules of engagement

If a country's government implements a regulatory sandbox, startups or even established companies trying out new ideas may operate for a limited time, about one or two years in most cases, marketing or selling to a limited number of customers. Most examples of such ventures are allowed to have between 10,000 to 20,000 customers.

In the payments space, the UK and a few Asian markets have seen the most regulatory sandbox ventures approved by governments. In the United States, the state of Arizona has approved a regulatory sandbox program (and there is debate about starting one at the federal level), but Illinois is the only other state currently actively considering such a program.

What are Regulatory Sandboxes?

Critics of the sandbox

While regulatory sandboxes give companies an easier road for trying out innovative services, particularly in the payments space, the concept has drawn the attention of consumer protection groups. These groups argue that regulatory sandboxes will enable companies to engage in predatory lending practices.

Even some state regulators and small business groups oppose the regulatory sandbox concept. The Small Business Authority, a nationwide advocacy group, warns that the designation will allow predatory lending. And Maria Vullo, superintendent of the New York State Department of Financial Services, vividly remarked, "Toddlers play in sandboxes. Adults play by the rules." However, this assumes that existing regulatory structures – i.e., the rules – are easily adaptable to new products and services. Unfortunately, that is not always the case.

In some situations, there may not be any rules that directly apply – only the barest of legal structures that are then twisted and stretched to apply to a concept for which they were never intended. By testing new products and services within the structure of a regulatory sandbox, both the innovator as well as the regulator have the opportunity to assess whether the existing legal structures are adequate and appropriate.

The first wave

The sandbox concept is getting more acceptance abroad. In the UK, five companies offering payment technology were among the 24 approved in June 2017 by the Financial Conduct Authority, in the second phase of its regulatory sandbox initiative. These include OKLink, Paylinko, Sabstone, Saffe and ZipZap. Saffe touts face recognition capability, and ZipZap focuses on cross-border payments.

In January, OKLink, which is based in Hong Kong, partnered with the Ripio Credit Network in Argentina, opening access to a new market for its technology. Also, notably, Saffe was a finalist in the Visa Everywhere initiative in 2017. The initiative is a competition among Latin American startups that offer services for users who had not previously been bank customers.

In Thailand, five established banks used regulatory sandboxes as a means to launch QR-code technology to use for payments. These include Kasikorn Bank, Siam Commercial Bank, Krungthai Bank, Bangkok Bank and Government Saving Bank.

Malaysia has two sandbox companies concerned with payments, Money Match Sdn Bhd and World Remit Ltd., out of just six companies that received the designation there in 2017. As of August, Money Match has handled about RM100 million (about $24 million) in payments for small- and medium-sized enterprises. World Remit expanded in June by taking over and replacing myRemit, a payment service in the Philippines.

In Australia, First Rung, a utility aimed at millennials, organizes savings toward home ownership. First Rung went through the country's regulatory sandbox program, which lasts for a year, after which the companies have to obtain a financial services or credit license. The company's year in the sandbox was completed on August 21. First Rung has the potential to be the first payments company anywhere globally to emerge from the sandbox category and be successful.

Back in the United States, however, it remains to be seen whether Arizona's venture into this territory will catch on with other states or at the federal level. Until then, we’ll be waiting, proverbial shovels in hand.

The statements and opinions of the writer do not necessarily reflect those of TSYS.

Other Articles by Deron

Deron Hicks

Deron Hicks serves as the head of the TSYS Government Relations Team. Deron is a graduate of the University of Georgia and Mercer Law School. Deron previously served as Inspector General for the State of Georgia and as General Counsel and Head of Government Relations for the Home Builders Association of Georgia.

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