Collaboration and partnership opportunities between traditional large players and technology-enabled agile, innovative players have multiplied. ‘Future-first’ is a common goal. Sandboxes offered by various federal and private banks, regulators, and large-scale organizations reflect the changing environment of bringing innovation to the table through collaboration.
Typically, a sandbox is an isolated testing environment that enables users to run programs or execute files without affecting the application, system, or platform on which they run. The primary purpose is to develop and independently observe a solution’s execution in a live environment, isolated from the rest of an organization’s technology network.
Financial institutions design and launch sandboxes as an open digital marketplace for banks, tech startups, FinTechs, and regulators to collaborate to create, test, and adopt new products. They are used to launch projects to improve/transform internal operations and products and help partners demonstrate their innovation in a fully functional and integrated but controlled technology environment. The common objective for all stakeholders is to create innovative products faster and at a lower cost. The best part of sandboxes is that they provide partnership opportunities to a diverse set of ecosystem players at a significantly high execution speed.
Innovation initiatives and collaboration objectives vary for different parties. This results in somewhat distinct models determined by several factors. In a conventional FinTech-focused regulatory sandbox setup, participants may test their FinTech experiments (services or products) over a period of time, beyond the scope of regulations (by removing entry barriers) to determine whether their solutions have positive effects on customers and markets. Key elements of such regulatory sandboxes include:
- A framework with eligibility or identification criteria and monitoring checkpoints
- Customized guidance (regulator’s oversight) during the test phase
- Support to indicate which regulation(s) will be enforced for a particular project/product
- Exemptions from specific regulatory requirements for sandbox duration
- Evaluation and decision for possible new regulatory strategies or permanent regulation changes
Regulators may simultaneously look at the impact of new solutions and determine whether they are against regulations. They can mitigate regulations relatively quickly (if they need to be relaxed). Hence, these regulatory sandboxes may eventually solve the problem of delayed market release caused by regulatory uncertainty. Besides, they may lead to cost savings and innovations. One example is the European Commission, which has announced that a new blockchain regulatory sandbox will be in place by 2022.
Use of Sandbox by Commercial Financial Services Organizations and Development Banks
Big organizations in the financial services industry use sandboxes. Sandboxes focus on technology innovation for specific products and processes. They provide access to organizations’ products and services built on industry standards and are available for testing in an integrated sandbox (using organizations’ test data). Ready projects are easy to move to production.
Open Banking sandboxes provided by banks are expanding fast. Banks open up their customer data to authorized third-party providers via Open Banking API sandboxes. Consumers of banking sandboxes vary from FinTechs offering value-added banking solutions to end customers, challenger banks and neobanks, payment processors, transaction aggregators, and other third-party providers (TPPs).
Sandboxes offered by banks are part of banks’ larger Open Banking strategy. Their frameworks and processes are somewhat less defined than the regulatory sandboxes. However, global banks are leading the way in establishing sandboxes with well-defined frameworks.
Multilateral development banks’ sandboxes must be differentiated from commercial banks’ sandboxes as their scope and objectives are much broader and socialistic in nature. Development banks are international financial institutions set up mainly to provide infrastructure facilities for countries’ industrial growth. Creating a conducive environment for modernization and improvement in technology is one of their objectives. Presently, futuristic technologies are the focus of almost all development banks. Here are some of the key MDBs:
Development banks’ sandboxes carry the elements and characteristics of all of the above sandboxes (namely sandboxes by regulator, FinTechs, and banks). However, most of the elements they carry are of sandboxes established by regulators.
Development banks also play a major role in establishing regulatory sandboxes and frameworks in member countries.
- Inter-American Development Bank Group (led by IDB Lab) and Monetary Authority of Singapore have collaborated on inclusive financial services in Latin America and the Caribbean. Here MAS’ expertise of regulatory sandboxes and digital financial solutions were mentioned to be something that IDB would benefit from.
- The European Bank for Reconstruction and Development, a development bank, has initiated a structural support program to help the Bank of Greece establish a regulatory sandbox.
Let us take a closer look at one of the development banks to understand development banks’ sandboxes and how innovation and collaboration pan out for multi-country projects.
A Case in Point: Asian Development Bank’s Digital Innovation Sandbox
Established in 1966, the Asian Development Bank is owned by 68 members (49 members from Asia and the Pacific). ADB’s primary platform is the ‘country partnership strategy’ for designing operations to deliver development results at the country level. It works with cooperation strategy and programs at the regional level as well.
ADB has created the Digital Innovation Sandbox Program, a platform where it invites partners from startups and academe, among other fields, to co-create innovative solutions for Asia and the Pacific. Solutions must be aligned with one or more of the sandbox programs. Each sandbox program represents a specific track corresponding to a particular emerging technology.
The program establishes a digital innovation process that enables the bank to adopt new digital technologies to ensure that technologies remain current and new digital business models are supported.
ADB’s Digital Innovation Sandbox – Current Technology Themes
ADB aims to infuse AI in most of the current technology systems so that it can focus its workforce on more value-adding work. ADB is looking at potential demand areas such as:
- Cognitive search for patterns in ADB unstructured data, such as lessons learned
- A robo-advisory platform using ADB’s knowledge
- Predictive analysis
ADB has established itself as a key player in the international trade community, providing fast and reliable trade finance support to fill market gaps for trade finance. The processes involved are highly manual, from the applicant’s email request to the manual encoding of guarantee data in the Trade Finance Processing Management System and manual review for data accuracy. Distributed ledger technology will be used to record transactions between two or multiple parties efficiently and in a verifiable and permanent way.
Robotic Process Automation
RPA could potentially be adopted for ADB internal processing. Here are some use cases:
- Managing large sets of accounts and transactions and detecting errors and fraud for accounting and treasury systems
- Providing consistent and round-the-clock support for service requests made to the IT service desk
- Performing real-time search for adverse news on non-sovereign operations’ clients and individuals
ADB is increasingly using large volumes of data, both structured and unstructured, for analysis and insights to create its digital products. Its sandbox for a big data development platform would provide a safe testing ground to create data lakes and warehouses for holding big data assets. Sample sources include data from in-house sources and live external financial services data, development data by country, social media, and satellite images. For example, these can generate early warnings and trends for projects in operations.
FinTech for Financial and Risk Services
Many financial institutions are trying a smarter approach to compliance by eliminating repetitive manual processes. Services related to financial, risk management, payment, loan, and treasury are now moving forward with digital products and services, with advances in financial technology, regulation technology, AI, transaction monitoring, and others. FinTech products using trade finance, payment systems, and digital ID are some of the use cases in ADB. This platform will enable ADB to explore opportunities that could lead to infusing innovation into its core financial services.
Other Digital Technologies
Mixed and augmented reality technologies have significantly evolved over the past five years. ADB operations and knowledge services can harness these technologies. For example, a digital twin of an infrastructure project pairs the virtual and physical worlds to plan and monitor operations projects, such as a new airport or mass transport system.
ADB has established a layered governance structure for detailed and agile governance of sandboxes. It has established a methodology with evaluation and approval gates at every stage. A typical timeline for a sandbox experiment is 6–9 months.
Highlighting the vision of ADB’s Sandbox Program, Ozzeir Khan (ADB’s Digital Innovation Sandbox Project Manager and Director, Digital Innovation and Architecture Division) said in an interview with MEDICI, “We have created the Sandbox Program to cater to innovation in a traditional organization. We have to create a safe place for people to experiment, which is a must for a traditional organization; otherwise, people get anxious for many reasons. They may not understand technology, and sometimes they are used to doing things a certain way for a long time. How do you change that? You have to provide them a safe place for experimentation—this is what the Sandbox Program does. It gives them the necessary resources and support to test ideas without any risk to their current operations or the risk of failure on their part. It allows them to work outside their day-to-day work so that they can explore. That’s the reason why this sandbox program is successful.”
Talking about the rationale behind current themes and milestones achieved so far in ADB’s Digital Innovation Sandbox, Ozzeir said, “The themes come from both supply and demand side. When you look at the demand side, you see that there is demand in the core areas of the bank, such as infrastructure projects or knowledge projects. When we look at the supply side, we see a lot of advancement and innovation happening in the FinTech sector and AI. So, we developed themes based on both demand and supply. This resonates in the projects we have done, as they tend to be on the operational or knowledge side, or they are AI-related thematic areas. In terms of milestones, among a dozen or so products and services that we have launched, some have been received very well and some so-so. Out of those, we are trying to find some golden nuggets through which our internal unicorns can take to the next stage for mainstreaming or adoption (institution-wide or member country-wide). There are a few of them that we are developing for scaling up in the next phase—investing multi-million dollars in those products.”
What to Anticipate from ADB’s Digital Innovation Sandbox
ADB’s Digital Innovation Sandbox has become a popular and successful sandbox program within a year of its launch, given its progressive approach to collaborating and bringing in innovation through hackathons, crowdsourcing, and partnerships.
By September 2020, ADB had shortlisted seven initiatives that have the potential to be scaled. Most of these initiatives are ADB administration-focused. Here are a few of the use cases:
- AI-based Insights into ADB’s Infrastructure Projects: EVA uses AI to unlock evaluation lessons and evidence-based evaluation knowledge, in context and intent, from independent evaluation reports to improve future operations. This AI-based system can scan thousands of evaluation documents and identify useful lessons in a dashboard categorized around country, sector, theme, modality, and year, which cannot be meaningfully captured by manual effort.
- Intelligent Integrity Due Diligence Platform (KYC): I2D2 combines AI and digital technology to conduct integrity due diligence and sanctions checks on prospective recipients of funding. I2D2 uncovers hidden risks relevant to ADB’s portfolios by identifying the earliest indication of risk, from accusation through conviction. Manual screening cannot keep pace with the sheer volume of transactions and the social footprint generated by current and potential clients. I2D2 increases workflow efficiency, minimizes manual reviews, and provides real-time coverage on risk exposures at the portfolio and individual levels.
- Robotic Process Automation Program: The initial focus has been on helping the organization understand RPA. The sandbox pilot-tested five use cases in 2020 to demonstrate RPA applications. The next step is to bring RPA services to the organization by forming a center of excellence to create bot velocity and acceleration on the cloud. The platform will be expanded with new components, such as analytics insights. The aim is to increase adoption and benefits realization.
- Blockchain for Trade Finance Program: Through the sandbox program, in September 2020, ADB’s Trade and Supply Chain Finance Program successfully completed its first credit guarantee transaction using blockchain, in partnership with Standard Chartered Thailand and the Bank for Investment and Development of Vietnam (BIDV). The transaction financed a $50,000 shipment of plastics from Thailand to Vietnam in August and was supported by Contour Pte. Ltd., a Singapore-based company that facilitates trade finance digitization. Contour represents a three-year-old network of banks using blockchain to replace the conventional, paper-intensive process used for trade deals. This work will continue.
ADB has established four partnership arrangements to date to co-create digital solutions on a non-commercial basis with startups, academia, and the private sector (Asian Institute of Management [AIM], Microsoft, Oracle, and Singapore FinTech Association), as well as share learning materials and platform access. It hopes to sign two more in 2020.
Sandboxes are proving to be one of the most effective tools for technology innovation and collaboration. Sandboxes are being launched primarily in the asset management, infrastructure, advice, wholesale, payments, lending, insurance, and credit sectors. FinTechs are the prime beneficiary of sandboxes as they get a fully integrated and well-regulated playfield to develop, test, and demonstrate their innovative solutions and products. The lead time to launch and scale reduces substantially, giving room for further improvements and continuous innovation.
For more details on ADB’s Digital Innovation Sandbox, you may contact email@example.com.