A new Competitive Enterprise Institute report discusses the regulatory barriers financial services companies face in trying to bring innovative products and services to consumers and explores one needed solution: regulatory sandboxes.
“Consumers at all income levels could benefit from access to innovative financial products and services, from biometric payment systems to alternative credit evaluations for individuals without a long credit history—but only if regulators allow such innovation to happen,” said Ryan Nabil, CEI research fellow and author of the report, How Regulatory Sandbox Programs Can Promote Technological Innovation and Consumer Welfare: Insights from Federal and State Experience.
Sandbox programs can be an effective tool in promoting innovation and designing innovation-friendly legal frameworks. The programs offer regulatory relief for innovative businesses for a limited period and enable close interaction between companies and regulators, the report explains.
“Lawmakers at the national and state level must design flexible regulatory frameworks that allow firms to experiment with emerging technologies and offer new products and services,” said Nabil. “Government red tape should not stand in the way of innovations that make financial products and transactions easier, quicker, more affordable, and more accessible to all Americans.”
Currently, the financial services industry remains among the world’s most heavily regulated sectors. In the U.S. and elsewhere, existing laws often do not reflect the rapidly changing nature of financial technology. That makes it hard for companies to bring untested, innovative financial products and services to market because tech startups and established companies alike have trouble predicting how regulators will treat an unusual, unconventional product – one that does not neatly fit into the existing regulatory framework.
To fix that problem, innovative financial centers around the world — from the United Kingdom to South Korea — have launched regulatory sandbox programs. While more than ten U.S. states have launched regulatory sandboxes, due to varying approaches, their effectiveness has been mixed. However, with properly designed sandbox programs, federal and state lawmakers can help accelerate financial innovation, promote consumer welfare, and expand access to financial products and services.
The CEI report describes ways that American lawmakers and regulators can design better sandbox programs and make them more available to financial firms and startups from different sectors.