Word in the New$: Sandbox
by Ryan Ong
THERE is a slight schizophrenia regarding Fintech in Singapore. On the one hand, we’re the sort of people who will walk three blocks to throw a candy wrapper. We like well-defined rules, and Fintech is inherently disruptive to the rules. On the other, we like to complain we’re not innovative enough, and really want to do something about it. So the regulatory sandbox proposed by the Monetary Authority of Singapore (MAS) is a nice compromise between these two conflicting impulses. Now, new Fintech companies will be allowed to disrupt as much as they like – within a fixed space:
What is a regulatory sandbox?
A regulatory sandbox is a defined space, in which Financial Technology (Fintech) companies can test out their products or services. Within the sandbox, MAS will relax some of the standing regulations regarding financial products. This is necessary because, if you go by strict rules, many Fintech products and services wouldn’t be allowed.
Take, for example, the advent of Peer-to-Peer Lending (P2P Lending) – while these are now becoming established in Singapore, they were in a legal grey area when they first appeared. It was uncertain if non-moneylenders could go around giving business loans, much less loans funded by investors over the Internet. If MAS had stepped in to block it, we wouldn’t now have an alternative source of credit for small businesses and start-ups.
Many Fintech innovations may not even have rules to break, because the law hasn’t processed their existence. A product like P2P insurance, in which a group of people pay premiums to cover one another instead of to an insurance company, would have few or no regulations as lawmakers haven’t dealt with it before.
The sandbox allows the Fintech product or service to be tested within defined boundaries. So going back to the example of P2P insurance, such a company might be allowed to be sold to 300 people maximum, of a certain age and income bracket, and for a fixed duration of three years (that’s just an example, the sandbox will vary based on each different situation).
While working within the sandbox, the Fintech company will be subject to relaxed regulations. MAS may not, for instance, require them to get the same licence as a full blown insurer (which may require millions in assets).
The rules of the sandbox will aim to minimise damage to everyone involved, in the event that the business falls apart. It ensures that there’s a fixed ceiling to how much damage a failed Fintech product causes to our economy in general. A P2P insurance scheme that fails 300 people has negligible impact on our economy. But if 300,000 Singaporeans gave up their regular insurance for P2P insurance, and then it fails, we’d have a serious problem.
Who gets to play in the sandbox?
MAS has already released the guidelines, but the definitions are not concrete. A lot of the applications will come down to a judgement call by MAS. However, a summary of the key requirements would come down to:
- Degree of innovation
- Societal benefits
- Actual intention to deploy
- Measurable boundaries and results
Degree of innovation
The guidelines mention that the applicant should “show that few or no comparable offerings are available in the Singapore market“. However, this does not rule out iteration (improving on an existing Fintech service or product), as the guidelines also say the applicant can be using “existing technology in an innovative way“.
This requirement would block conventional companies from trying to game the system. Otherwise, a bank might claim it’s online banking is “Fintech” that needs a sandbox, because they want to have looser risk management requirements for a year.
Still, it’s a little strange that MAS – and only MAS – is judging how innovative the product or service is. It would seem more logical to have other government bodies, like SPRING Singapore, Infocomm Development Authority of Singapore (IDA), and so forth, present to make the call with them. As organisations like SPRING Singapore already support start-ups, they would arguably have more experience in gauging the degree of innovation. And they would know how many similar products and services are already out there, since they work with so many start-ups.
The product or service must be beneficial to society as a whole. And it’s highly possible for some Fintech products to only benefit the company.
For example, take e-wallets, accounts that store credit for online shopping (PayPal is a good example). Because most people don’t spend all the credits in their e-wallet, it’s possible that the company could invest or loan out the cash left in the wallets, and earn a return on it. This would effectively be copying the fractional reserve system used by conventional banks (loaning out deposited money for gain). Systems like these probably won’t be allowed under the guidelines, as it does nothing for the consumer beyond risking their money.
Actual intention to deploy
The Fintech company must show the clear intention to deploy the service in Singapore, if the sandbox works.
Now we would be nuts to let a company test their system in Singapore, if they intend to deploy it in Canada. But the question is, how can this be enforced? If a company does well in the sandbox, and then later they decide they want to deploy elsewhere first, what can MAS do about it? Is MAS going to sue them? Shout at them? Write an angry letter to The Straits Times forum page?
Also, one factor to consider about start-ups (and this applies to all start-ups, not just Fintech) is that few plans are set in stone. Sometimes, a start-up will discover, a year or two after launching, that it can’t survive except in another country. Or that it needs to deploy on a much smaller scale than it previously thought.
A lot of flexibility and trust will be needed for this one.
Measurable boundaries and results
Pretty straightforward. The boundaries have to be concrete (how many people, how much, for how long, and so forth), and the results need to be measurable.
What will or won’t be relaxed in the sandbox?
MAS has guidelines on what it is willing to relax. But it’s shorter to just look at some of the things on their “to be maintained” list, which they probably won’t budge on:
- Confidentiality of customer information
Fit and proper criteria particularly on honesty and integrity
- Handling of customer’s moneys and assets by intermediaries
- Prevention of money laundering and countering the financing of terrorism
Barring the last one, these are what we might call “naturally occurring” regulations. That is, customers won’t work with a company that discloses their personal information, or that has no honesty and integrity, and so forth.
The last one – prevention of money laundering and terrorism financing – might be a bit difficult. Because of the anonymous and global nature of the Internet, it will always be the preferred medium for shady transactions. It will be hard, albeit not impossible, to trace the financial activities of someone using cryptocurrencies like Bitcoin. A small Fintech start-up may struggle to meet compliance regulations, which even big banks consider arduous.
Exiting the sandbox
The duration of the sandbox will vary based on the product or service in question. However, companies can request an extension of the sandbox one month before the deadline.
At the end of the sandbox period, the Fintech company can proceed to deploy the product or service if it meets the given criteria (that is, it can meet the regulatory restrictions that will be designed for it by MAS, and it meets parameters such as not having anyone lose horrendous amounts of money during the sandbox stage).
Alternatively, companies can be kicked out of the sandbox if they break the rules (selling to more customers than was agreed upon, for example), if they need to radically change the product or service, or they can’t meet even the lax regulations set for the sandbox.
Companies can also exit the sandbox voluntarily.
This might be fun for consumers
This is a fun way for consumers to test new Fintech products and services. There’s still risk involved, but unlike in the past, we’ll at least know there are some regulations in place. If it’s something like P2P lending for instance, it would be great to have a “test” service with strong capital protections to limit potential losses.
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