Sandboxes and innovation hubs

A measure that can spur innovation and smoothen the licensing process for businesses offering innovative financial products are regulatory sandboxes. These are ‘safe spaces’ where these business models or delivery mechanisms can be tested without immediately incurring the whole burden of regulatory consequences¹ . The authority sets up the rules for participation, maximum time and licensing steps upon exit; from experimenting with sandboxes, regulatory changes can be implemented if deemed useful to innovation and competition. Empirical examination has shown that sandboxes improve competition by increasing funding received by fintechs, chances of survival and number of registered patents² . Hackathons and tech challenges also bring authorities closer to innovation in financial services, in an even more premature stage of the product cycle, serving to sieve and kickstart nascent DFS ideas.

Innovation hubs, which are dedicated units or platforms established by authorities to engage with the market and support the development of innovative DFS, also favor contestability and improve competition. These hubs typically provide non-binding regulatory guidance, offer direct channels of communication with authorities, and help new entrants understand licensing, compliance, and operational requirements. By lowering informational and procedural barriers, innovation hubs facilitate market entry, particularly for smaller or non-traditional players, thereby enhancing competition in financial services.