ENHANCING SANDBOX PROGRAMS TO AID COMMERCIAL DEPLOYMENT OF FINTECH INNOVATIONS IN AFRICA

Financial technology (Fintech) innovations are becoming the mainstay of the global financial sector and user responses to these innovations have been remarkably positive and embraced at an unprecedented scale.

Today, the adoption and usage of fintech innovations particularly those facilitating payments are shown to have surpassed the volumes and values of traditional banking services in many African countries. While everyone is happy with this trend and projecting the same as the future of finance, there are valid concerns about the potential use of regulations to create a barrier to the design and deployment of new fintech innovations – due to the associated risks of the emerging innovations such as data protection and privacy, cybersecurity concerns and fraud, among others if left unregulated.

The need to implement strong regulatory oversight requires a balancing act to ensure such new innovations are deployed at the seemingly same rate of development as the underlying emerging technologies. To this end, most central banks are rolling out sandbox programs as vehicles to pilot and test such new unregulated innovations with strict oversight and to build a better understanding of their future regulations.

THE REGULATORY SANDBOX PROGRAM

Hailed as the regulator’s best response to the current pace of innovations, the regulatory sandbox program is set up as a “regulatory playground” for innovators with new innovations that are unconventional, and not falling within any category of existing licensing regime to on a restricted scale pilot the said innovations under the strict supervision of the central bank. In Ghana, the Bank of Ghana in Q1, 2023 launched and admitted the first cohort into its regulatory and innovation sandbox run in partnership with EMTECH services.

Sandbox programs are considered the best-suited regulatory response to match the pace of innovations due to their ability to facilitate the continuous design of innovations that current regulatory regimes do not permit. This means that innovators do not have to innovate to meet the demands of existing legislative frameworks but rather leverage the full extent of emerging technologies to develop what they consider the new possibilities for financial service offerings for commercial deployment.

Additionally, a sandbox serves as a regulation and supervision preparedness test for central banks in building their understanding of new innovations and provides the opportunity to institute measures or guidelines on their eventual regulation.

However, because they are designed as regulatory sandboxes, there is the tendency to have regulatory considerations overshadowing the review process – which may include seeking to give green lights to innovations that may provide synergies for existing approved products and services than such innovations being considered for their potential to set out new product or service lines.

LEVERAGING THE SANDBOX PROGRAMS TO PROMOTE FINTECH INNOVATIONS

While central banks like the Bank of Ghana must be applauded for rolling out regulatory sandboxes, such programs require constant reviews and accommodation of changing market demands to maintain their relevance as the licensing route for new innovations. It will be practically impossible for regulations either to be at par with innovation or stay ahead of same. Therefore, sandbox programs serving the purpose of a bridge between licensed and unlicensed financial products must be implemented in consonance with real-time industry circumstances.

In this light, the following will help enhance sandbox programs and facilitate their uses as catalysts for new fintech innovations:

1. A shift from cohort-based programs to rolling admissions

The desire to establish a regime that pilots and permits the commercial deployment of innovations which are at par with technological advances will be defeated if sandbox programs continue to be run on a cohort basis. This is because cohort-based sandbox programs set timeframes, especially for when new innovations can be submitted to the central bank for reviews for piloting. The time gap between cohorts which may be unnecessarily long may limit the potential for new innovations to seek early regulatory approvals and to be deployed in real-time.

The best chance to admit and pilot new ideas in real-time is to change the existing cohort models into rolling admissions where innovators can on an “as and when” basis submit their innovations for review and piloting.

2. Introduction of complementary innovation sandboxes

Innovation sandboxes are not the same as regulatory sandboxes. They are designed usually to test the commercial viability of new ideas rather than their compliance with regulations or to inform the enactment of new ones. In an innovation sandbox, innovators are allowed to demonstrate product fitness, functionality, and market viability whose objectives may be different from a regulatory sandbox. So, as the first step in assessing the commercial viability of new innovations, innovation sandboxes will help filter innovations which meet the admission criteria for regulatory sandboxes. This will help in reducing the time spent by regulators to review innovations submitted for consideration under regulatory sandboxes as those eligible applicants may have gotten their innovations vetted under innovation sandboxes.

The opportunity to develop and run these innovation sandboxes must be championed by industry stakeholders such as banks, fintech companies, industry associations, etc. as a way of providing innovation pipelines for the central bank’s regulatory sandbox.

3. Clarity on the sandbox review process and timelines

The application window for the 1^st cohort of Bank of Ghana’s regulatory sandbox ended on 14^th March 2023. As of now, submissions are still undergoing review with no definitive piloting timelines. As the first of its kind, such certainty may be difficult to provide and adhere to. However, with time, efforts should be made to provide clear guidelines on the process and timelines for review and piloting of submitted innovations. The suspense and delays may not encourage future participants to submit to the program.

4. A simple and streamlined application process

Strongly tied to the issues of clarity on the sandbox process is the need to simplify and streamline the application process. The regulator must be guided by the fact that innovators seeking to enter the sandbox cannot predict with certainty, the regulator’s approval of their innovation. Therefore, the expectation requiring such innovators to have in place some systems, processes, etc. must be assessed carefully. At worse, no compromises should be made on the technical details of the innovation which is really the product or service to be tested during the pilot phase. Other operational demands of personnel, evidence of existing contractual relationships, etc. may be deferred to such time when the regulator is confident of approving the innovation for commercial deployment.

5. Dedicated resources & partnerships

Technologies underlying new fintech innovations demand the engagement of dedicated staff with the requisite technical know-how to understand how these innovations work. Their ability to interpret how the submitted innovation works may affect which innovations are approved or rejected. Therefore, there is a need for skill upgrades, training, and tools to help such dedicated staff perform their duties effectively. Also, regulators must seek partnerships and collaborations with 3^rd parties service providers and parallel financial sector regulators to build a strong resource base for the sandbox programs.

CONCLUSION

In one way, we are all beneficiaries of new financial sector innovations enabled by technology and expect more. However, regulations hold the key to how quickly new innovations can be deployed. Therefore, it is important that a regulatory response such as the sandbox program which seeks to admit, and test-run new unlicensed innovations before their commercial deployments must be enhanced to ensure we enjoy the real-time benefits of technological advances. And some of the recommendations proposed in this article will be useful.