Licensing & Innovation

Sandboxes
What is a Licensing Regime in
FinTech?
• A regulatory framework that authorizes FinTech firms to
operate legally.
• Typically focused on specific financial activities: payments,
lending, advisory services.
• Designed to protect consumers, ensure market integrity,
and enforce AML/CFT standards.
• Adapts existing financial regulations to digital-first business
models.
 Global Licensing Models
• China: Strong licensing enforcement; recent shift to classify
BigTechs like Ant Group as financial holding companies.
• Hong Kong: Tiered, tech-neutral licensing from HKMA and SFC.
• Singapore: MAS Payment Services Act uses a modular licensing
approach.
• US: Requires both federal and state licenses—complex structure.
• EU: Passporting system enables cross-border operations across
member states.
• UK: FCA issues activity-based licenses (e.g., e-money, lending).
Why Licensing Is a Major Hurdle
• Cost and complexity: Legal fees, compliance systems,
reporting.
• Regulatory uncertainty: Ambiguity about which license is
needed.
• Cross-border barriers: Expanding internationally often
requires multiple approvals.
• Mismatch with innovation pace: Licensing regimes may lag
behind technology.
 Alternatives to Full Licensing
• Regulatory Sandboxes – controlled environments for testing
innovation.
• Australia (Regulatory Sandbox): ASIC allows a 12-month
exemption for eligible FinTechs to test products without a full
license.
• Singapore (Sandbox + Modular Licensing): MAS provides
Sandbox Express and modular licensing under the Payment
Services Act—risk-based and innovation-friendly.
 Alternatives to Full Licensing
• Restricted Licenses – permits limited activities under specific
conditions.
• Lithuania (Restricted + Reciprocal Licensing): Fast-track licenses
enable startups to operate across the EU using passporting—
small-scale entry, big market access.
 Alternatives to Full Licensing
• Sponsored Licensing – operate under another licensed entity’s
framework.
• Hong Kong (Sponsored Licensing + e-Licensing): Tech-neutral
licensing system and e-platforms simplify approvals and
partnerships with licensed banks.
 Alternatives to Full Licensing
• No-Action Letters – assurance from regulators not to take
enforcement action.
• Malaysia (Transition from No-Action to Full Licensing): Early-
stage FinTechs operated in a loosely regulated space but exited
after strict e-money licensing rules were enforced.
 Alternatives to Full Licensing
• Reciprocal Licensing – mutual recognition between jurisdictions
for licensed entities.
• Lithuania (Restricted + Reciprocal Licensing): A FinTech licensed
in Lithuania could operate across the EU due to the passporting
mechanism
Challenges of Licensing Regimes
• Over-regulation: Applying full bank-like regulations to niche
FinTech startups can hinder innovation
• Regulatory Arbitrage: Some firms exploit lenient licensing in one
jurisdiction to enter another (cross-border risk).
• Lack of Regulatory Agility: Delay in updating laws to fit new tech
leads to uncertainty and market exits (e.g., Grab leaving
Malaysia)
 Regulatory Sandboxes
• A regulatory sandbox is a framework set up by regulators.
• Allows FinTech startups to test new products with real users.
• Testing occurs in a controlled environment with regulatory
support.
• Reduces entry barriers for innovation while managing risks.
 Evolution of Regulatory
Sandboxes
• 2015–2016: Early policy experiments (UK FCA, MAS).
• 2017–2018: Product-focused sandboxes for startups (e.g., FCA,
Kenya).
• 2019–2020: Thematic sandboxes emerge (e.g., RegTech, eKYC,
green finance).
• 2021–Present: Rise of cross-border sandboxes (e.g., GFIN,
Bahrain).
 Four Types of Regulatory
Sandboxes
• Policy-Focused – to shape or test regulatory frameworks.
• Innovation/Product-Focused – to support early-stage FinTechs.
• Thematic – focused on specific issues like AML, eKYC, green
finance.
• Cross-Border – enables international FinTech testing and
cooperation.
 Policy-Focused Sandboxes
• Used to assess the impact of regulations before full
implementation.
• Allows empirical testing of rules on new financial services.
• The Philippines’ e-money rules were piloted through sandbox
trials.
 PBOC’s regulatory sandbox
pilots
• The PBOC’s regulatory sandbox pilots in cities like Beijing and
Shanghai were used to explore regulatory frameworks around
blockchain, credit scoring, and payments.
• These sandboxes helped shape national policies and licensing
rules before wider rollouts.
• Objective: Observe how emerging tech interacts with existing
financial laws and identify needed reforms.
 Innovation/Product-Focused
Sandboxes
• Enable startups to test ideas without full compliance burdens.
• Help identify and remove barriers to market entry.
• UK FCA sandbox helped launch products in crypto, lending, and
insurance.
 HKMA Fintech Supervisory
Sandbox
• The HKMA Fintech Supervisory Sandbox (since 2016).
• Allowed banks and tech firms to test robo-advisory tools,
biometric authentication, and new mobile banking apps without
full compliance upfront.
• Focused on helping firms trial and iterate real-world products
before full-scale launch.
 Thematic Sandboxes
• Focus on targeted innovation areas like RegTech, green finance,
or digital ID.
• Aligned with national policy goals or sector-specific priorities.
• Thailand’s QR code sandbox, Malaysia’s eKYC sandbox.
 China’s thematic sandbox
approach post-Ant Group
• Ant Group’s reclassification led to thematic focus on BigTech
financial holding regulation.
• Emphasis on risk containment in credit platforms, e-wallets, and
asset management—particularly in response to the systemic
risks of large-scale digital finance platforms.
• Targeted issues: AML/CFT, data privacy, algorithmic fairness.
 Cross-Border Sandboxes
• Allow FinTech firms to operate across borders in collaboration
with multiple regulators.
• Encourage regulatory harmonization and reduce market
fragmentation.
• GFIN multi-jurisdiction trials
 HKMA participates in cross-
border testing
• HKMA participates in cross-border testing via platforms like the
Global Financial Innovation Network (GFIN).
• Also collaborates with mainland China through the Greater Bay
Area Fintech Pilot Trials, enabling cross-boundary financial
innovation testing with Shenzhen and Guangzhou.
Global Experiences and Lessons
Learned
• Objectives and Context
• The Impacts So Far
 Objectives and Context
• Sandbox goals: innovation, competition, inclusion,
supervision
• Effectiveness depends on regulatory context and
policy alignment
 Market Maturity & Demand
• Low FinTech activity = limited sandbox value
• Better suited for innovation-ready markets
• Alternatives to a Full Sandbox
• Test-and-Learn
• Innovation Hubs / Regulatory Helplines
• Sponsored Licensing
• Reciprocal Licensing
• Proportional or Risk-Based Licensing
 One or Many?
• Some countries run multiple sandboxes by sector
• Financial sectors are often regulated by multiple
authorities
• Central bank → banking & payments
• Securities commission → capital markets
• Insurance authority → insurance tech (InsurTech)
 The Case of Hong Kong
• Regulatory Authorities in Hong Kong
• HKMA – Hong Kong Monetary Authority (banking &
payments)
• SFC – Securities and Futures Commission (capital
markets)
• IA – Insurance Authority (insurance)
• MPFA – Mandatory Provident Fund Schemes Authority
(retirement savings)
 The Case of Hong Kong
• Coordinated Sandbox Model
• In 2017, HKMA, SFC, and IA launched or enhanced
sandboxes simultaneously.
• These sandboxes were linked by a common entry point
to simplify access for firms testing cross-sectoral
FinTech products.
• Coordination between authorities is managed through
existing Memorandums of Understanding (MOUs).
 One or Many?
• Benefits:
• Supports more tailored innovation in each regulatory
domain.
• Reflects real-world structure of financial regulation.

• Challenges:
• Risk of conflicting rules, duplicate processes, or
regulatory arbitrage.
• Requires interagency communication and alignment.
• Coordination critical to avoid duplication and confusion
 The Impact So Far
• Assisting Policy Decisions
• Sandboxes allow regulators to observe real-world
behavior of financial technologies and business models.
• This creates a strong evidence base for drafting or
revising regulation—similar to how clinical trials work.
• Sandboxes are most useful when:
• Regulations are unclear or missing, or
• Existing rules are disproportionate to the risk of the
innovation.
WBG-CGAP global survey
 The Impact So Far
• Benefits for Regulatory Institutions
• Regulators build innovation capacity
• 73% of regulators reported that sandboxes helped them
build internal capacity on FinTech.
• 85% said sandboxes helped them evaluate their regulatory
frameworks more effectively (WBG-CGAP survey).
• Sandboxes also improve regulator–market engagement,
strengthening feedback loops and trust.
• Faster, data-informed responses to new risks
 The Impact So Far
• Enhancing Financial Inclusion
• Tested services improve access for underserved users
• Enables mobile credit, e-wallets, and inclusive savings
tools
• Countries with Inclusion-Focused Sandboxes:
• Bahrain, Malaysia, India – These have built financial
inclusion directly into their sandbox objectives.
• Jordan – Made its sandbox a pillar of its national financial
inclusion strategy.
• Mexico – Under its FinTech Law, the sandbox is legally tied
to supporting financial inclusion goals.
 The Impact So Far
• Supporting Private Firms
• Lowering Barriers to Entry
• Real-World Value
• Some FinTechs credit sandbox participation for enabling their
market launch, especially in strictly regulated environments (e.g.,
digital lending, payments, crypto).
• Limitations
• Not all sandboxes are easy to access—complex applications and
narrow eligibility criteria may prevent smaller or earlier-stage firms
from benefiting.
• The impact is not universal; some firms may benefit more from
innovation hubs or guidance units.
 The Impact So Far
• Supporting Private Firms
• Innovation Hubs Outperform Sandboxes (Quantitatively).
• Innovation hubs typically provide:
• Regulatory guidance
• Clarification of licensing paths
• Early engagement channels with supervisors
• Why Hubs May Work Better:
• They are more flexible, open to a wider variety of firms, and
focused on ongoing support, not just testing.
• They don’t require live testing or sandbox infrastructure, making
them more cost-effective and accessible.
 The Impact So Far
• Fostering Partnerships in the Market
• Help FinTechs and banks collaborate instead of compete
• Some sandboxes require partnerships with licensed firms
• Encourage knowledge sharing and trust between
startups and incumbents
• Build investor confidence through close engagement with
regulators
 APIX Platform
• APIX, part of the ASEAN Financial Innovation Network (AFIN), is a
sandbox-like platform launched by MAS and IFC.
• It serves as a shared API testing space, connecting FinTechs with
banks and governments across borders.
• This model goes beyond testing—it builds a developer ecosystem,
accelerates go-to-market, and reduces duplication.
 The Impact So Far
• Stimulating Market Competition
• Levels the playing field for new entrants
• Encourages diverse product offerings and better pricing
• Direct vs. Indirect Impact:
• In places like the UK (FCA), sandboxes were explicitly
designed to foster competition.
• In other regions, competition benefits are more often
indirect, coming from related initiatives, not the sandbox
alone (e.g., Brazil, Jordan).
 The Impact So Far
• Enabling Fintech Market Development
• Sandboxes are not a substitute for strong, permanent
regulatory frameworks
• Best used as a temporary, targeted measure with clear
objectives
• Provide empirical evidence to support smarter
policymaking
• Most effective when part of a broader FinTech strategy
(e.g. credit systems, infrastructure)
• Can help extend financial access, especially in
developing countries