Entering regulatory sandboxes helps fintech startups raise capital, boosting financial innovation, suggests a BIS working paper.In 2015, the UK’s Financial Conduct Authority created a sandbox to give startups in the fast-growing fintech sector the chance to try out their products in a controlled testing environment.
Five years on, around 50 countries have followed the UK’s lead, prompting BIS to investigate the effect that sandboxes have on the firms that use them and the general fintech environment.
BIS says that a key objective of sandboxes is to foster innovation by facilitating fintechs’ access to financing by reassuring investors concerned by regulatory uncertainty.
The paper finds that firms that enter the FCA sandbox have “a higher probability of raising funding and an increase in the average amount of funding raised by around 15%” relative to startups that do not join.
This is in part because sandboxes reduce information asymmetries by acting as a “stamp of approval”. They also address regulatory uncertainties because dedicated case officers help sandbox firms in navigating uncertainties about legal challenges to their services or products.
Concludes the paper: “Our findings can be seen as an encouragement for policymakers to scale up experimentation in sandboxes and share the lessons learned by means of regular publications and guidelines based on their experience.”