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As anybody who regularly reads our blog posts and breaking news updates will probably know, we have recently been travelling in Asia, visiting Malaysia, Singapore, and Thailand, and exploring the countries’ fintech and international money transfer ecosystems.

Fintech in Asia is booming; along with London, New York, and parts of Africa, places like Singapore, and, not to be underestimated, Bangkok and Kuala Lumpur are forging ahead with truly disruptive services and products that will change the face of banking forever.

But in this post we are going to look at some news from Hong Kong, courtesy of Open Gov Asia; last week, not one, not two, but three financial regulators announced plans to introduce “sandboxes” to aid the development of disruptive startup fintech firms.

What is a Regulatory Sandbox?

What is a regulatory “sandbox”? Quite simply, it allows firms to test out new ideas and products in a controlled environment, protected by a regulatory authority, without being penalised if the products and services turn out to malfunction, contravene current regulations, ultimately make no financial sense or prove to be based on unsound ideas.

So, a fintech firm testing a blockchain-based payments system, for example, might apply to be part of a sandbox program to test that the software works and avoid a high-profile failure in the real world, which would more likely than not result in the commercial failure of the company.

What are the 3 new sandboxes in Hong Kong?

First of all, the Hong Kong Monetary Authority has announced plans to upgrade its Fintech Supervisory Sandbox, which was first launched in September 2016.

So far 23 technology products have been tested in the sandbox, with the backing of 9 different banks. 11 pilot trials have been completed, and the sandbox has seen 13 collaborations between banks and tech firms. Many products have subsequently been successfully rolled out to real-life consumers.

HKMA have encouraged firms to conduct pilot trials without the need to achieve full compliance with HKMA’s supervisory requirements, allowing them to refine and enhance their products before unleashing them on the market.

Now HKMA are planning to introduce significant upgrades to the sandbox. A Fintech Supervisory Chatroom is being set up to provide early stage development feedback to banks and their tech partners. But it also means that tech firms will be able to access the sandbox and obtain feedback directly through the chatroom facility, without necessarily having to seek to partner with a bank.

This should in theory help agile young tech firms to go to market with both approval from the HKMA, and the public, but without having to find endorsement from a major financial player, which is truly what financial disruption is all about – fighting monopolistic service providers with better, more effective ways of doing things.

SFC sandbox for firms that carry out “regulated activities”.

At the same time, the Securities and Futures Commission has launched its own sandbox.

This version of the sandbox is aimed at firms who want to carry on “regulated activities”, but also find ways to improve on and introduce new ways of doing things.

The SFC say that:

“The Sandbox would enable qualified firms, through close dialogue with and supervision by the SFC under the licensing regime, to readily identify and address any risks or concerns relevant to their regulated activities.”

The sandbox is open to both licensed corporations and startups, which perhaps reveals that the SFC are aware that innovation can come from within large firms as well as their nimble startup competitors.

But to qualify to use this facility, firms will need to prove their commitment to fintech.

“The qualified firm must be fit and proper, utilise innovative technologies and be able to demonstrate a genuine and serious commitment to carry on regulated activities through the use of Fintech. The establishment or activities of these firms should also increase the range and quality of products and services for investors and benefit the Hong Kong financial services industry.”

Licensing conditions will also apply on qualified firms; limiting types of clients the firm can serve, maximum exposure of each client, possibly introducing a compensation scheme, and submitting to being audited by SFC.

In other words, being part of this sandbox will result in a lot of scrutiny from the authorities, which some firms will welcome, whilst others may not for a whole host of different reasons: privacy, and competition being two which immediately spring to mind.

Expect to see anything from robo-advisory / chatbot technology, a particularly hot fintech topic in Asia currently, to corporate services, investment products, and automation, playing in this sandbox.

It may be the case that the SFC fears a swathe of new disruptive companies entering the market, with questionable; unreliable or illegal; products. Starting your product testing at the SFC sandbox could be a great way to get the jump over your rivals as you fight for market share, recognition, and exposure.

Hot Fintech Sector Insurtech now has its own sandbox.

Lastly, Insurtech. This may be the biggest buzz in fintech currently; big data analytics and machine learning can teach firms so much about the risk involved in insuring people and businesses, and what premiums to charge.

Hong Kong’s Insurance Authority has launched its sandbox to help firms test out innovative technologies and see if they meet the supervisory requirements of the IA, but the beauty of sandboxes is that they work both ways.

If a regulatory body like the IA sees a new technology that is extremely effective but also non-compliant, they may well be persuaded to adjust their own rules and regulations to make sure the new technology is able to be introduced to the market.

A virtuous circle indeed, although any failure or mis-step could prove costly, damaging the reputation of company and regulatory authority, and not helping the state, either.

The Insurtech sandbox is available to firms that are authorized insurers and intend to launch in Hong Kong. The IA says that it intends to work closely with the firms, and is also offering fast-track registration, an insurtech facilitation team and a Working Group on Embracing Fintech in Hong Kong, under the Future Task Force.

The Money Cloud View

Why are we so keen to tell you about sandboxes? First of all, our product, comparing the prices of overseas money transfers all over the world to find you the best prices, is a good example of a service that could benefit from the sandbox treatment.

In fact, we considered entering The Money Cloud into the FCA sanbox, but ultimately felt that out product was too advanced to benefit.

London has put in place agreements with HKMA to work closely together on the development of fintech products, sharing knowledge and providing access to their domestic markets. London has done likewise with the MAS in Singapore, and they in turn announce a new partnership nearly every day!

In short, a lot of the tech of the future, the kind that will save customers time, money, and yes, in time, make the financial services unrecognisable form what it is today, are being developed in sandboxes around the world, from Hong Kong, to the Caribbean. 

And we’ll be doing our best to keep you up to date, in the know, and announcing a few exciting new products and services ourselves very soon. Stay tuned!