FACULTAD DE CIENCIAS ECONÓMICAS Y ADMINISTRATIVAS 

 

 

 

“Establishing Regulatory Sandboxes for FinTech Companies in the European 

Union to Foster the Development of the FinTech Sector –an Analysis” 

 

 

 

Trabajo de Investigación presentado para optar por el grado de Bachiller en 

 

ADMINISTACION Y FINANZAS que presenta: 

 

 

 
 

Linus Engelhardt 

 

 
 

Asesores: Prof. Anxo Calvo Silvosa  

Prof. Kerstin Bremser 

 

 

 

 
Lima – Perú 

Abril de 2021 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Linus Engelhardt 

Matriculation Number: 316737 

 

 
Establishing Regulatory Sandboxes for FinTech 

Companies in the European Union to Foster the 

Development of the FinTech Sector – an Analysis 



Affidavit 

 

 
I hereby affirm that this Bachelor’s Thesis represents my own written work and 

that I have used no sources and aids other than those indicated. All passages 

quoted from publications or paraphrased from these sources are properly cited 

and attributed. 

The thesis was not submitted in the same or in a substantially similar version, 

not even partially, to another examination board and was not published 

elsewhere. 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
 

Date Signature 



Table of contents 
List of Figures ................................................................................................................. I 

List of Tables .................................................................................................................. I 

Abbreviations ................................................................................................................. II 

Abstract ......................................................................................................................... III 

1. Motivation.............................................................................................................. 1 

2. FinTech – a broad concept ..................................................................................... 2 

2.1. Digital finance business functions ................................................................. 4 

2.2. Digital finance technologies and technological concepts .............................. 6 

2.3. Digital finance institutions ............................................................................. 7 

3. FinTech’s current situation and impact on the financial environment ................... 7 

3.1. Current situation ............................................................................................ 8 

3.1.1. Europe .................................................................................................. 11 

3.1.2. Americas .............................................................................................. 13 

3.1.3. Asia-Pacific .......................................................................................... 14 

3.2. Impact on financial environment ................................................................. 15 

3.2.1. Impact on retail and investment banking ............................................. 15 

3.2.2. Impact on central banks and monetary policy ..................................... 19 

4. Regulation approaches for FinTechs.................................................................... 20 

4.1. Innovation Offices ....................................................................................... 21 

4.2. RegTech ....................................................................................................... 23 

4.3. Regulatory Sandboxes ................................................................................. 25 

4.4. Concluding overview ................................................................................... 30 

5. Examples of Regulatory Sandbox approaches ..................................................... 32 

5.1. USA, China and the European Union .......................................................... 33 

5.2. Example of a Regulatory Sandbox: UK – Financial Conduct Authority 

(FCA) 34 

6. Applying Regulatory Sandboxes in the European Union .................................... 36 

6.1. Regulating authorities in the EU .................................................................. 36 

6.2. Relevant regulatory standards ...................................................................... 38 

6.2.1. Loan-based activities ........................................................................... 39 

6.2.2. Investment-based activities .................................................................. 39 

7. Summary, conclusion and recommended action .................................................. 39 

7.1. Summary ...................................................................................................... 40 

7.2. Conclusion and recommended action .......................................................... 42 

Appendix list ................................................................................................................ 45 

References ................................................................................................................... 55 



I 
 

List of Figures 
Figure 1: The digital finance cube ................................................................................. 4 

Figure 2: Transaction volume of traditional banking sector vs. FinTech in 2015 .......... 9 

Figure 3: Total global investment activity (VC, PE and M&A) in FinTech 2014-2Q 

2019 ............................................................................................................................... 9 

Figure 4: Regional online alternative finance market volumes 2013-2016 ................. 11 

Figure 5: European FinTech Market Volumes 2013-2016 (including UK) ................. 12 

Figure 6: European FinTech Market Volumes 2013-2016 (excluding UK) ................ 12 

Figure 7: Total European investment activity (VC, PE and M&A) in FinTech 2014-2Q 

2019 ............................................................................................................................. 13 

Figure 8: Total Americas’ investment activity (VC, PE and M&A) in FinTech 2014- 

2Q 2019 ....................................................................................................................... 14 

Figure 9: Total Asia-Pacific’s investment activity (VC, PE and M&A) in FinTech 

2014-2Q 2019 .............................................................................................................. 15 

Figure 10: Overview of global Regulatory Sandbox initiatives by jurisdictions ......... 26 

Figure 11: Number of countries that established Regulatory Sandboxes by PCI level as 

of 31.12.2018 ............................................................................................................... 32 

Figure 12: Structure of the European System of Financial Supervision (ESFS) ......... 37 

Figure 13: Top 10 global FinTech deals (VC, PE and M&A) in 2018 ........................ 46 

Figure 14: Top 10 FinTech deals in Europe (VC, PE and M&A) in 2018 .................. 47 

Figure 15: Fintech Categories by market volume in Europe 2013-2016 ..................... 48 

Figure 16: Examples of innovative regulatory initiatives around the world ................ 48 

 
 

List of Tables 
Table 1: Overview over number of counted deals, total and average deal volume 2014- 

2Q 2019 ....................................................................................................................... 10 

Table 2: Total FinTech market volume per European Country 2015 .......................... 12 

Table 3: General overview over regulatory approaches .............................................. 32 

Table 4: Currently operating sandboxes in the EU as of 31.12.2018 ........................... 49 

Table 5: Current non-EU operating Sandboxes as of 31.12.2018................................ 51 

Table 6: Sandbox countries ordered by income level, according to World Bank ........ 52 

Table 7: Regulatory sandboxes in USA (AZ) and China ............................................. 52 

Table 8: Overview over currently operating sandboxes in the EU .............................. 54 



II 
 

Abbreviations 

 
AI Artificial Intelligence 

API Application Programming Interface 

Bn Billion 

BTS Binding Technical Standards 

CAGR Compounded Annual Growth Rate 

CFPB Consumer Financial Protection Bureau 

CFTC Commodity Future Trading Commission 

CIB Corporate Investment Banking 

DLT Distributed Ledger Technology 

EBA European Banking Authority 

EIOPA European Insurance and Occupational Pensions 

EMDE Emerging Markets and Developing Economies ESA

 European Supervisory Authorities 

ESFS European System of Financial Supervision 

ESMA European Securities and Markets Authority 

ESRB European Systematic Risk Board 

FCA Financial Conduct Authority 

FTEG Financial Technology Enabler Group 

GDP Gross Domestic Product 

M Million 

M&A Mergers and Acquisitions 

MAS Monetary Authority of Singapore 

NFC Near Field Communication 

P2P Peer to Peer 

PE Private Equity 

Q Quarter 

SME Small and Medium Sized Enterprise 

SSM Single Supervisory Mechanism 

UK United Kingdom 

US United States 

USD US Dollar 

VC Venture Capital 



III 
 

Abstract 

 
This paper aims to find an answer to the question whether and to what extent the 

concept of a Regulatory Sandbox for FinTech companies should be applied at 

the supranational level of the European Union. In several steps the term 

"FinTech" will be narrowed down and its effects on the global financial sector 

analyzed. Afterwards, the three most common regulatory approaches are 

presented, whereby the Regulatory Sandbox is described in more detail using the 

sandbox of the Financial Conduct Authority from the United Kingdom as an 

example. Finally, the relevant regulatory authorities in the EU are discussed. The 

results make clear that the economic importance of FinTechs is increasing 

significantly. Considering the fact that FinTechs from Great Britain account for 

almost three quarters of the total market volume, it is still clear that the EU must 

become much more attractive in the face of the coming Brexit in order not to lose 

ground globally. One way to do so is to provide regulatory certainty. A regulatory 

sandbox is suitable for this purpose, as it reduces uncertainty for companies and 

makes them more attractive for investors. Regulators also benefit from receiving 

direct feedback on their regulatory framework and being able to adapt and 

develop it accordingly. It is proposed that in the run-up to a joint European 

sandbox, interested National States establish their own national sandboxes, 

whereby all of them should decide slightly differently on both the structure and 

the objectives. Based on the experiences of the National States, it is up to the 

competent authorities in the EU to prepare a supranational sandbox. When 

implementing the establishment of such sandbox, clear coordination and 

responsibility of the actors as well as the assumed demand and potential 

problems have to be considered carefully. 

Keywords: FinTech, Regulatory Sandbox, Regulation, European Economy, 

Single European Market 



1 
 

 

1. Motivation 

 
In 2016, Zavolokina et al. (2016) have examined in a scientific essay, among 

other things, how the number of published articles on the topic “FinTech” in 

literature and press has changed over time. The result was that, apart from a small 

peak during the years of the dotcom bubble around 1998 and 2001, the number 

of articles published was almost always between zero and five. In 2010, the 

number of publications was three. Suddenly, however, in 2012, this figure rose 

sharply and reached its highest level of 285 publications to date in the last year 

of the study, 2015. Today, FinTech is a term with which everyone already came 

into contact at some point and can somehow be classified accordingly. In 

Germany, for example, the term became known to the general public at the latest 

with the rise of companies such as the payment service provider N26, founded 

in 2013, or a subsidiary of Commerzbank, the online broker Comdirect. 

Although few people appear to know what exactly lies behind it, it seems as if 

everyone has their own idea about this topic. However, the fact that FinTechs, 

like all other participants in the financial world, must be regulated and supervised 

is common sense. Not only to ensure the stability of the system or to protect 

consumers, but also because FinTech is an area of great potential, huge markets 

and outstanding technological innovation, ideally promoted through adequate 

regulatory mechanisms and prudential supervision. To what extent the current 

regulation is adapted to the needs of FinTechs, however, remains questionable. 

An approach that has become increasingly important worldwide in recent years 

is the Regulatory Sandbox. They are not only used in the financial sector but in 

a variety of sectors,1 and also play a major role in considerations of FinTech 

regulation. In such Regulatory Sandbox, the FinTech companies, after fulfilling 

specific requirements, are supported by regulatory authorities in legal matters, 

which results in easier market entries for companies and relaxed regulation 

through the regulating authority. After conducting deeper research and finding 

out more about current worldwide regulatory approaches like Innovation 

Offices, RegTech and Regulatory Sandboxes, this work aims at answering the 

following general research question: 

“Should Regulatory Sandboxes be established in the European Union to foster 

the development of the FinTech sector?” 

Before coming to a conclusion about the central question, it is important to 

explain the underlying frameworks and concepts that are relevant to the central 

issue. This is achieved by answering three instrumental questions that arise when 

dealing with the subject matter and may be posed as follows: 

1. What exactly is FinTech and what is its current worldwide situation? 

2. Which regulatory approaches are currently used for FinTech? 
 

 
1 This includes e.g. energy transition, logistics, product development etc. (German Federal 

Ministry for Economic Affairs and Energy 2019). In the following work, the term Regulatory 

Sandbox will only be used in connection with the financial sector. 



2 
 

3. What is a Regulatory Sandbox? 

The work thus establishes a link between a number of topics that have been the 

subject of research individually but in scientific studies have not been related to 

each other in a clear way. The focus here is not leaning specifically towards legal 

regulations or rules in detail but rather based on experience and a look into the 

future to discuss to what extent the introduction of the Regulatory Sandbox 

makes sense at European level or not. 

To achieve this, the work first provides a definition about the term “FinTech” 

itself and introduces a possible concept to classify FinTech companies (Section 

2). Then, after having given the reader a more precise idea about FinTech, the 

current situation of FinTech is evaluated (Section 3). This includes the 

development of the FinTech sector in terms of market volume and investments 

in the sector, divided into the most important FinTech regions which are Europe, 

Asia-Pacific and America (including North- and South America). Furthermore, 

the impact of FinTech on banking and central banks is evaluated. After that, the 

three prevailing regulation approaches (Innovation Offices, RegTech and 

Regulatory Sandboxes) are presented (Section 4). To give an idea about the 

setup, aims and conditions of currently existing sandboxes, some real-life 

examples are given subsequently (Section 5). Lastly, the regulating authorities 

in the European Union and the most relevant regulation norms are examined 

(Section 6). Based on the findings, the work provides a recommended action how 

to further proceed with Regulatory Sandboxes in the European Union. 

 

 

2. FinTech – a broad concept 

 
“Banking is necessary. Banks are not.” 

Bill Gates, 1994 

 

 
This quote, stated by Microsoft founder Bill Gates in 1994, has served as the 

mantra for the first wave of FinTech. Following the Silicon Valley obsession 

with disrupting incumbent industries, numerous FinTechs were ready to 

challenge every aspect of banking and deliver better banking services directly to 

consumers. Armed with the recent Millennial disruption index where 71% of 

respondents claimed to rather visit the dentist than listen to their bank everyone 

was convinced that the days of incumbent banks were numbered (Hernæs 2017). 

Times have changed a little since then. Contrary to the prevailing opinion at the 

time that FinTechs are always newly established companies in the financial 

sector, today, in addition to the new players, there is also a considerable number 

of FinTechs on the market that come from large and long-established financial 

institutions. Furthermore, despite the bankruptcies originating from the financial 

crisis 2008/2009, all major financial institutions which were active to that time 

still play an important role in today’s banking landscape. 



3 
 

FinTech, a term which originates from the marriage between “finance” and 

“technology”, is currently an innovative and emerging field, which attracts 

attention from the public as well as up-growing investments. Dorfleitner et al. 

(2017) define FinTechs as “companies or representatives of companies that 

combine financial services with modern, innovative technology” and 

furthermore “[…] aim to attract customers with products and services that are 

more user-friendly, efficient, transparent, and automated than those currently 

available” (p.5). According to a McKinsey report by Galvin et al. (2018), global 

fintech investment has grown in average 50% p.a. from USD 1.8 bn in 2011 to 

USD 30.8 bn in 2018. These figures demonstrate that the sector is becoming of 

high interest in the world of finance and, therefore, provide fruitful soil for 

further ingenious ideas and research. Furthermore, FinTech brings new 

opportunities to give power to people, e.g. by allowing transparency, reducing 

costs or cutting middlemen and – more importantly – to make information 

accessible. FinTech also affects banks which are cautious of being disrupted and 

therefore try to catch on the FinTech-train by observing new entering startups 

which create alternatives to traditional banking services. 

Even though the term “FinTech” is in the limelight of hot public debate in fields 

of business, finance and innovations, its meaning remains fuzzy. This vagueness 

refers both to experts, who deal with FinTech in their working practices or create 

and shape the field by themselves, and to those, who are looking at it from 

outside, who are mainly targeted customers or just observers. One reason for this 

could be novelty and rapid tremendous rise of the FinTech industry. FinTech is 

a very broad phenomenon which changes every day through new entering 

entrepreneurs who step into the industry, willing to transform and adjust it to 

market requirements. On the one hand, FinTech could be understood as a 

financial service, which is disrupted by innovative technologies in order to 

satisfy the major requirements of “tomorrow”: high efficiency, cost reduction, 

business processes improvement, rapidity, flexibility and innovation (Dapp 

2014). On the other hand, the term “FinTech” is also used to refer to companies 

(mostly startups), which serve as enablers of such kinds of services. At this point 

this term is ambiguous and leaves space for further discussion (Zavolokina et al. 

2016). 

Apart from that, further approaches have been made to categorize FinTech 

companies. Gomber et al. (2017) categorize FinTechs based on a concept called 

the “Digital Finance Cube” which is made off the “three central Digital Finance 

dimensions: Digital Finance business functions, relevant technologies and 

technological concepts as well as institutions providing Digital Finance 

solutions” (p.542). These three dimensions are shown graphically in Figure 1: 



4 
 

 

 

 

 

 

 
 

 
 

Figure 1: The digital finance cube 

Source: Gomber et al. (2017) p.542 

Below, the three categories as well as their sub-categories are further explained. 

 

 
2.1. Digital finance business functions 

 
The Digital Finance Business Functions dimension defines business ideas 

related to real, monetary payment transactions that use new technology. This 

includes new options for the procurement of capital, investing capital and all 

kind of financial services. 

The first sub-category is Digital Financing. Traditionally, banks are the suppliers 

of financial resources for individuals or companies. To become independent 

from these traditional ways, the internet can be used to acquire the 



5 
 

necessary financing (“Digital Financing”). Financing can be further 

distinguished in factoring,2 invoice financing,3 leasing4 and crowdfunding5. 

The second sub-category, Digital Investments, supports individuals and 

institutions in investment decisions and in arranging the required investment 

transactions on their own by use of the respective devices and technologies. 

Digital Investments include mobile trading,6 social trading,7 online brokerage,8 

and online trading9 in the B2C area and high frequency10 and algorithmic 

trading11 in the B2B context. 

Digital Money, a generic term for ‘digital currency’, ‘virtual currency’, ‘e- 

money’ and ‘cryptocurrency’, describes a type of currency that fulfills all typical 

functions of money but exists only electronically and is mainly used on the 

internet. The most famous examples are crypto currencies such as Bitcoin or 

Ethereum. 

Digital Payments are all kinds of payments that are initiated, processed and 

received electronically and contain only traditional currencies (“fiat currencies”) 

that are issued and regulated by central banks (Hartmann 2006). They can be 

further distinguished in mobile payments, P2P payments12 and e-wallets/digital 

wallets. 

Digital Insurances (also known as InsurTechs or InsuranceTechs) are technology 

companies that specialize in customer-oriented services in the insurance industry 

(Mitschele 2018). 

 
2 Factoring means selling all or only part of the accounts receivable of a company to a factoring 

firm to a value less than the original invoice value. The factoring company is then in charge of 

dealing with the accounts receivable, while the company receives its money directly from the 

factoring company and thereby improves its working capital management. 
3 Similar concept as factoring with the difference that the company receives money from the 

invoicing firm directly and pays pack the total amount + interest after collecting the accounts 

receivable. 
4 Leasing is a special type of renting, where a company uses e.g. production facilities which are 

owned by another company over a certain time while paying a monthly fee. At the end of the 

time period, the production facility returns to the owning company. 
5 Crowdfunding defines a form of financing (“funding”) a project/product/idea through a big 

number of small investors (“crowd”), mostly over the internet. The investors do not necessarily 

have to get payed back with money. 
6 Mobile Trading is the use of wireless technology in securities trading. Investopedia.com, 

“Mobile Trading”, last access 29.12.19. 
7 Usually online platforms, where private investors can review and copy the investment strategy 

of more experienced investors. bafin.com, “Social Trading”, last access 29.12.19. 
8 Online brokerage a service to trade securities over an online platform, mostly offered by bigger 

financial institutions. The user acts as its own broker. 
9 Similar to mobile trading, with the use of non-wireless devices. 
10 High frequency trading (HFT) is a trading method that uses powerful computer programs to 

transact a large number of orders in split seconds. nasdaq.com, “High-frequency trading”, last 

access 29.12.19. 
11 Algorithmic trading is a process for executing orders using automated and pre-programmed 

trading instructions by taking into account variables such as price, timing and volume. 

nasdaq.com, “Algo or Algorithmic trading”, last access 29.12.19. 
12 P2P: A grouping of workstations with equal rights in networks that enables the use of 

distributed applications and the exchange of files. A central server is not necessary. In the 

FinTech context, P2P defines (mostly) transaction processes between two or more individuals 

without intermediation by a financial institute like a bank or insurance company. 



6 
 

Digital Financial Advices fulfil the same purpose as review sites and comparison 

portals in the non-financial sector that rate, score, rank, evaluate and compare 

products and services. In the financial sector, however, those platforms exist as 

well and can be differentiated based on two characteristics: firstly, providers that 

primarily offer financial product reviews and secondly, providers that focus on 

financial product comparisons which are for example based on figures and 

features. 

 

 
2.2. Digital finance technologies and technological concepts 

 
The Digital Finance Technologies and Technological Concepts dimension 

describes all new invented technologies and concepts by FinTech companies. 

Those inventions include for example new introduced technologies on which 

new forms of payments are based to make the process more transparent as well 

as technologies that enhance P2P transactions. 

The first sub-category is Block Chain. The block chain concept has its origin in 

the invention of the crypto currency Bitcoin and basically is a decentralized, 

distributed, and public, digital ledger13 that is used to record transactions across 

many computers so that any involved record cannot be changed retroactively, 

without changing all the subsequent blocks. That makes it safe against fraud and, 

apart from financial purposes, can also be used for many other purposes. 

Secondly, Social Networks, are “web-based services that allow individuals to (1) 

construct a public or semi-public profile within a bounded system, (2) articulate 

a list of other users with whom they share a connection, and (3) view and traverse 

their list of connections and those made by others within the system” (Boyd and 

Ellison 2007, p.211). On this type of websites, people can share their opinions, 

experiences, photos, videos and can ask for specific questions or initiate 

discussions. 

NFC is a ‘‘short-range wireless point-to-point interconnection technology’’ that 

enables two devices to ‘‘communicate without any further configuration steps 

when […] brought very close [to] each other’’ (Nagashree et al. 2014, p.20). 

These days, most phones and even credit cards use this technology, making it 

possible to pay within milliseconds by just holding the card/phone close to the 

end device while the payment transaction is initiated, and the transfer of money 

is arranged. P2P Technology or ‘P2P systems’ are “self-organizing system of 

equal, autonomous entities (peers) [which] aims for the shared usage of 

distributed resources in a networked environment avoiding central services” 

(Steinmetz and Wehrle 2005, p.10). That means that participants in such a 

network share part of their own resources, such as processing power, storage 

capacity or network-link capacity. 

Big Data Analytics is characterized by an enormous volume of data to be 

analyzed with high processing velocity and a variety of data sources (McAfee 

 

13 graphics.reuters.com, “Blockchain explained”, last access 29.12.19. 



7 
 

and Brynjolfsson 2012). Big data analytics should be able to deal with very large 

amounts of data in order to be able to scale to big data volumes, fulfill data 

loading and the calculation of answers to related requests in an appropriate time, 

support analytic modeling and manage visual display of data and results (Russom 

2011). 

Further Enablers are new technologies and devices that facilitate financial 

processes, functions and business models such as mobile devices, worldwide 

connectivity, intuitive user interfaces and security technologies (Gomber et al. 

2017). 

 

 
2.3. Digital finance institutions 

 
Digital Finance Institutions refer to all kind of companies that offer digital 

financial services. 

Traditional Service Providers are referred to as the “brick-and-mortar” financial 

service providers like investment banks, retail banks, insurance companies and 

brokerage firms. FinTech Companies emerge either as FinTech start-ups or 

technology companies which lack a history in banking business and/or financial 

services. According to Lee (2015) especially new entrants apply business models 

that promise more efficiency, security, flexibility and opportunities compared to 

traditional service providers. Another feature of FinTech Companies is that they 

face barriers to entry such as regulatory burdens and the demand for bank 

licenses, which can make market entry significantly more difficult. 

 

 
In conclusion it can be said that "FinTech", contrary to what is often erroneously 

assumed, is not only the generic term for newly emerging companies in the 

financial sector, but rather describes a number of matters. It starts with business 

functions which describe the characteristics of new business fields within the 

financial sector and continues with technologies, with which completely new 

approaches are created, e.g. in data transmission or data processing. Finally, there 

is financial institutions (in the following report “FinTech companies”) which 

ultimately make use of all this and transform it into business concepts. 

 

 
3. FinTech’s current situation and impact on the 

financial environment 

 
Over the past three years, the banking industry was confronted with a wave of 

new emerging terms from the financial sector: P2P, crypto currencies, 

blockchain, AI, big data etc. Simultaneously, new service providers emerged in 

all fields of digital finance: companies like Alipay and WeChat Pay from China, 



8 
 

PayPal from the US or M-Pesa from Kenia14 disrupted the market of digital 

payment. TransferWise and WorldRemit, both from the UK, compete with well- 

known players Western Union and MoneyGram for international money transfer 

and remittance. On the credit side, Lending Club, Prosper and SoFi from the US, 

Zopa and Funding Circle from the UK, Prêt d’Union from France or Alibaba 

from China compete with established banks in the unsecured consumer loan and 

SME market as well as the residential lending market. Furthermore, Prodigy 

Finance from the UK offers loans to international students attending top 

universities (Dermine 2017). FinTechs are considered to attract new clients 

easily through simpler propositions, a more convenient user experience, more 

transparency and better personalization options. Their core characteristics are the 

focus on the customer proposition and their willingness to apply technology in 

new ways. All these are powerful differentiators in a market, where many 

product-focused incumbents struggle to deliver the seamless and personalized 

user experience that is more and more expected by the customers (Obe et al. 

2017). 

In October 2015, the Financial Times commented on the recent development 

regarding the object these new emerging FinTechs pursue as following: 

“The aim is to inflict death by a thousand cuts. Fintech start-ups are nimble 

piranhas, each focusing on a small part of a bank’s business model to attack.”15 

This quote impressively demonstrates the pessimistic outlook one of the most 

influential finance newspaper had regarding the future of the traditional banking 

industry. Soon replaced through an innumerable amount of highly specialized 

FinTech companies, old-established financial institutions are either too big to 

implement more efficient business models or did realize upcoming trends and 

new consumer preferences too late. Four years later, after some time has passed 

and more studies were conducted this quote can be considered more 

differentiated. The following part examines the current situation of FinTechs and 

its implications for the financial environment. 

 

 
3.1. Current situation 

 
FinTech is considered to have the potential to change the financial sector 

substantially. It could disrupt existing financial intermediation which includes 

banks, insurances, funds, leasing and factoring companies and asset managers, 

with new business models empowered by intelligent algorithms, cloud 

computing, big data and AI. Driving forces could be the lower costs and better 

consumer experience. However, by looking at empirical data, FinTech remains 

very small compared to the traditional financial intermediation sector, especially 
 

 

 
 

14 M-Pesa has been founded 2007 by Kenyan telecom company Safaricom in cooperation with 

the British telecom company Vodafone. 
15 ft.com, “Mobile bank chief mocks big high street rivals”, last access 28.10.19. 



9 
 

in the European Union. Even China, the largest FinTech market, is of marginal 

size compared to overall financial intermediation, as shown in Figure 2. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Figure 2: Transaction volume of traditional banking sector vs. FinTech in 2015 

Source: own elaboration, data from Demertzis et al. (2018) 

Especially in the EU (excluding UK) the financial intermediation landscape 

changes slowly and remains dominated by traditional banking (Demertzis et al. 

2018). Nevertheless, investments in all major FinTech markets USA, Asia- 

Pacific and Europe steadily increased in the last years on average with reaching 

a record year in 2018 with counted deals of 2590 and USD 120.2 bn in total 

investment activity (see Figure 3). 
 

 

Figure 3: Total global investment activity (VC, PE and M&A) in FinTech 2014-2Q 2019 

Source: Pollari and Ruddenklau (2019) p.9, data provided by PitchBook 

Traditional financial intermediation FinTech 

90000 
80000 
70000 

60000 
50000 
40000 
30000 
20000 

10000 
0 

78942 

  55637  

44760    

18120 

36 102 1 5 

US China EU (excluding 
UK) 

Country 

UK 

in
 U

SD
 b

n
 



10 
 

Even though deal size plummeted in the first half of 2019, this year can still be 

a record year since major investments have been signed but not executed yet. 

Furthermore, the total amount of deals is predicted to decline while average deal 

size is said to increase which is a sign that investors are moving away from the 

“fear-of-missing-out” mentality and making more mature investment decisions 

by using a considerable amount of money instead of making smaller investments 

in a larger number of companies (Pollari and Ruddenklau 2019). Data from the 

past five years in Table 1 seem to confirm this prediction only in part. Although 

the average deal size is steadily increasing with one exception, this is more due 

to the fact that more money is being invested. In fact, the total number of 

transactions is rising in the same period. Annex 1 provides a more detailed 

summary over the top ten deals regarding transaction size in 2018. By far, the 

biggest alternative finance16 market in terms of market volume is China, which 

exploded by 134.3% from €94.61 bn in 2015 to €221.66 bn in 2016. 
 

 

2014 2015 2016 2017 2018 
1Q+2Q 
2019 

Total number of counted deals in FinTech 2014-2Q 2019 

1,556 1,981 1,998 2,318 2,590 962 

Total deal volume in FinTech 2014-2Q 2019 (in bn USD) 

45.5 59.1 64 51.2 120.2 37.8 

Average deal volume 2014-2Q 2019 (in m USD) 

29.24 29.83 32.03 22.09 46.41 39.30 
Table 1: Overview over number of counted deals, total and average deal volume 2014-2Q 2019 

Source: own elaboration, data by Pollari and Ruddenklau (2019) 

Figure 4 provides an overview over the development of the alternative finance 

market from 2013-2016 in the three most relevant regions. Especially in the 

Asia-Pacific region, the market volumes rocketed whereas in America and 

Europe the market volumes only slowly increased. 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
16 Alternative finance refers to channels, processes and instruments that have emerged outside of 

the traditional finance system such as regulated banks and capital markets including 

crowdfunding, P2P consumer/business lending and third-party payment platforms and excluding 
e.g. InsureTechs, jbs.cam.ak.uk, last access 13.11.19. 



11 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Figure 4: Regional online alternative finance market volumes 2013-2016 

Source: own elaboration, data by Ziegler et al. (2018) 

One similarity all the regions share is the fact that in each of the regions one 

country accounts for a substantial proportion of total market volume, namely UK 

in Europe, US in Americas and China in Asia-Pacific. This applies in particular 

to Americas and Asia-Pacific, which are highly dependent on USA and China, 

respectively. Anyway, there is differences between the main FinTech markets 

Americas, Asia-Pacific and Europe which will be more closely examined in the 

upcoming part. The main problem FinTechs face across the globe is according 

to Gulamhuseinwala et al. (2017) the fact that the companies are not articulating 

the clear benefits of their work and technology to consumers and banks they 

could potentially collaborate with. FinTechs must communicate their value 

proposition clearly, differentiate themselves with regulatory prowess, must be 

well-networked and have to build a robust business model in order to survive and 

grow in the market. 

 

 
3.1.1. Europe 

The total European FinTech market grew by 41% from 2015 to reach €7.67 bn 

in 2016 (Figure 5). Excluding UK, the European FinTech industry grew 101% 

from €1.02 in 2015 bn to €2.06 bn in 2016, which is above the CAGR of 85% 

between 2013 and 2016 (Figure 6). This indicates that while the UK is the key 

volume driver for the region, Europe’s growth in transaction volume is higher 

when excluding the UK from the data set due to fast developing markets in 

smaller European countries and an increasing importance of other European 

countries in FinTech, like France and Germany. UK's dominance on the 

European FinTech market can also be confirmed by looking at the Top ten deals 

in Europe regarding transaction size (Annex 2). Except for the second place 

among the largest transaction volumes in the FinTech sector, position one to 

seven were executed in the UK. Apart from regulatory incentives, which are 

discussed more detailed in Section 5, the reasons for this may be greater 

attractiveness for American investors due to London as the financial capital in 

Europe and lower language barriers. It is worth highlighting the fact that the 

transaction volume generated does not necessarily correlate with the amount of 

250 

 
200 

 
150 

 
100 

 
50 

 
0 

2013 2014 2015 2016 

Year 

 
Europe (Inc. UK) Americas (Inc. US) Asia-Pacific (Inc. China) 

in
 €

 b
n

 



12 
 

alternative finance platforms17 distributed across the country. For instance, 

Finland only had eight platforms 2016 but ranked fourth in terms of transaction 

volume whereas Italy with a total of 26 platforms is only ranked sixth place 

(Ziegler et al. 2018). 
 
 

  
Figure 5: European FinTech Market Volumes 

2013-2016 (including UK) 

Figure 6: European FinTech Market Volumes 

2013-2016 (excluding UK) 

 

Source: Ziegler et al. (2018) p.21 
 

One interesting particularity in the European market is the market share 

distribution across the countries (Table 2). The UK is with 73% of total market 

volume (as of 2015) in the whole European region by far the biggest and most 

important country while the remaining European countries share the outstanding 

27%. France, Germany and the Netherlands are following as most important 

single markets. Looking at the European Union, it becomes clear that the Brexit 

will result in major shifts in the FinTech sector and will significantly reduce the 

market position of the European Union as a whole. 
 

 

Rank Country 
Total market volume 
(in m €) 

% on total market 
volume 

1. UK 5,608 73.11% 

2. France 444 5.79% 

3. Germany 322 4.20% 

4. Netherlands 194 2.53% 

5. Finland 142 1.85% 

6. Spain 131 1.71% 

… … … … 

21. Russia 4.8 0.06% 

Table 2: Total FinTech market volume per European Country 2015 

Source: own elaboration, data by Ziegler et al. (2018) 
 

Like in any other region, investments in FinTech decreased in 1Q and 2Q 2019 

in Europe due to the initially mentioned causes (see Figure 7). Like the other 
 
 

17 Ziegler et al. (2018) broadly refer to alternative finance platforms as a variety of financial 

activity being realized on online platforms. 



13 
 

regions, 2018 marked a peak in investment activity. Annex 3 provides an 

overview over the FinTech segments ranked by market volume. It can be 

observed that P2P consumer lending (34%) and P2P business lending (17%) are 

the most important markets in the European region since several years, followed 

by invoice trading (12%) and equity-based crowdfunding (11%). Based on 

company’s valuation, the biggest FinTechs in Europe are the payment processor 

Adyen from Netherlands (USD 8.3 bn), digital payments platform Nexi from 

Italy (USD 8.2 bn) and payment provider Klarna from Sweden (USD 5.5bn)18. 
 

 

Figure 7: Total European investment activity (VC, PE and M&A) in FinTech 2014-2Q 2019 

Source: Pollari and Ruddenklau (2019) p.51, data provided by PitchBook 

 

 

3.1.2. Americas 

In the region “Americas”, consisting of Canada, the USA and Latin America the 

US accounts for 98% of total market volume in 2018 which makes it the most 

important market in the region (Pollari and Ruddenklau 2018). As in the years 

before, US investors are the driving force in the region regarding FinTech 

investment. Furthermore, seven of ten top deals in Americas region took place 

in the US, two in Canada and one in Argentina. In 1Q+2Q 2019, FinTech 

investment in the Americas reached USD 21,1 bn across 545 deals (see Figure 

8) where number of deals counted and transaction volume decreased compared 

to 1Q+2Q 2018. This dip, especially in the US, is not expected to last long since 

there are massive M&A deals announced in 3Q+4Q 2019 which are supposed to 

be record-breaking. The payment segment together with B2B services are 

considered to be the major investment fields in the second half of 2019 (Pollari 

and Ruddenklau 2019). Based on company valuation, the biggest FinTechs in 
 

18 insights.invyo.io, “The European Top 50 of the most valued Fintech”, last access 29.10.19. 



14 
 

Americas are B2B service provider Stripe (USD 22.5 bn), cryptocurrency trading 

platform Coinbase (USD 8 bn) and online broker Robinhood (USD 5.6 bn), all 

from the US19. 
 

 

Figure 8: Total Americas’ investment activity (VC, PE and M&A) in FinTech 2014-2Q 2019 

Source: Pollari and Ruddenklau (2019) p.29, data provided by PitchBook 

 

 

3.1.3. Asia-Pacific 

In the Asia-Pacific region China accounts for 99% of market volume in 2018. In 

1Q+2Q 2019, investments in FinTech companies in this region received USD 

3.6 bn across 102 deals (see Figure 9). After a record high of USD 25.5 bn in 

2018, investment activities in the region are declining because of a lack of 

megadeals triggered by the US-China trade tensions and an increasing regulatory 

focus on FinTech by the Chinese government (Pollari and Ruddenklau 2019). 

Hong Kong Monetary Authority made efforts to develop the FinTech sector 

during 1Q+2Q 2019 by issuing its first eight virtual banking licenses and thus 

offers simplified access to the banking sector20. Compared to the 154 banking 

licenses that are currently in circulation and held by incumbent banks, this marks 

a new step towards the digital age. Motivated by that, Singapore wants to follow 

by issuing five digital banking licenses in the upcoming half a year. China is 

expected to see its main investment activity in blockchain technology, AI, big 

data and cloud services. What differentiates China from the two other major 

regions is the fact that not many small FinTech companies are dominating the 

market but essentially three major players which are Baidu, Alibaba and Tencent 

(Pollari and Ruddenklau 2019). According to Tong et al. (2018), China and India 

are the largest FinTech ecosystems in the world based on investments and 

number of startups. In 2018, Ant Financial raised with USD 14 bn the world’s 
 

19 forbes.com, “The 11 biggest Fintech companies in America 2019”, last access 04.11.19. 
20 vantageasia.com, “Eight virtual banks approved for HK”, last access 15.11.19. 



15 
 

largest VC round ever in order to fund its global expansion (Pollari and 

Ruddenklau 2018). 
 

 

Figure 9: Total Asia-Pacific’s investment activity (VC, PE and M&A) in FinTech 2014-2Q 

2019 

Source: Pollari and Ruddenklau (2019) p.65, data provided by PitchBook 

 

 

3.2. Impact on financial environment 

 
FinTech is said to have a huge impact on the financial sector. This is true in two 

ways: on the one hand, its disruptive power will influence the incumbents in the 

traditional sector and banks need to find out how to deal with the not-so-new 

phenomenon. On the other hand, FinTech will have impact on macroeconomic 

circumstances and therefore on monetary policies and central bank decision. The 

following part is examining those two fields in more detail. 

3.2.1. Impact on retail and investment banking 

Taking into account the previously examined massive deal sizes and increasing 

investments in the FinTech sector it is no wonder that the incumbent financial 

sector is striking back. Traditionally, banks have focused more on products, 

while new entrants are more focused on the customer. According to Vives 

(2017), traditional retail banks have two competitive advantages. Firstly, banks 

can cheaply borrow money with their beneficial access to deposits and explicit 

or implicit governmental guarantees. Secondly, they enjoy privileged access to 

a stable customer base that can be sold a range of products. However, those 

advantages can be eroded by the new entrants in the future. FinTechs intervene 

in the traditional business of banks, the banks have recognized this and are now 



16 
 

also reacting to the digital change. At the beginning of the rise of FinTechs the 

incumbents were slow to respond directly to the new players and started their 

first steps in the FinTech world with digital offerings in non-core businesses or 

geographical areas where they could take more risk (Galvin et al. 2018). 

Nowadays, they realized the possible threat and now counterattack the market 

with more determined products. Goldman Sachs’ “Marcus” is perhaps the most 

high-profile push into digital by an investment bank and the bank’s first step into 

private retail. It is a consumer lending franchise and offers different types of 

loans to customers while being transparent and easy to understand21. Entering in 

2016, Marcus already surpassed the USD 3 bn mark in US consumer lending 

volumes in 201622. Furthermore, it hit the USD 1 bn mark in loans in just eight 

months while many competitors took over a year. To achieve this, Goldman used 

established digital sales and marketing techniques to become a leading provider 

in a short period of time. Marcus’ success in the US let Goldman Sachs to launch 

it as well in the UK in September 2018, where it captured 100,000 customers in 

the first month (Cahill 2018). Another example for a FinTech entry of an 

investment bank is “Access Investing”, a digital wealth management platform in 

the US, launched by Morgan Stanley in 2017. In order to use the platform, 

customers must invest a minimum amount of USD 5,000. In the same year, Bank 

of America Merrill Lynch with “Merrill Edge Guided Investing” and Deutsche 

Bank with “Robin” launched similar offerings. Furthermore, there is an 

increasing number of partnerships between incumbents and FinTechs to profit 

from benefits in combining partnership models. The incumbent banks bring their 

higher speed and risk tolerance as well as their flexibility in reacting to market 

changes. In addition to that, they do already have a large client base, the 

associated data bases and long-established relationships. FinTechs can 

furthermore profit a lot from the incumbent’s compliance and regulatory 

competencies, which are especially valuable for newer, smaller entrants. Global 

banks which already are in a partnership with FinTechs are for example JP 

Morgan and ING. JP Morgan’s digital strategy includes partnerships with 

Roostify, a digital, self-service mortgage platform,23 AccessFintech, which aims 

to deliver collaboration and transparency to the financial service industry24 and 

Symphony, a platform providing business intelligence25. ING, on the other hand, 

launched with ING Ventures in 2017 a €300 million fund focused on FinTech 

investing and has already invested or partnered with a total of 115 startups 

between 2014 and 201726. 
 

 

 
 

21 marcus.com, “We created Marcus to help people achieve financial well-being”, last access 

03.11.19. 

22 compliance.com, “Goldman Sachs so far has loaned USD 3 billion to Main Street America”, 

last access 08.11.19. 

23 roostify.com, “Delivering a simpler and faster lending process with JPMorgan Chase”, last 
access 08.11.19. 
24 fintechfutures.com, “JP Morgan extends partnership with AccessFintech”, last access 

14.06.19. 
25 businessinsider.de, “Wall Street made an ambitious, 300 USD million bet to build a challenger 

to Bloomberg – here’s how it’s getting on”, last access 09.11.19. 
26 ing.com, “ING launches ING Ventures: a EUR 300 million fintech fund”, last access 09.11.19. 



17 
 

Another approach is taken by Chinese financial institutions, partnering with large 

technology ecosystem firms27 as opposed to smaller FinTechs. In 2017, each of 

China’s “big four” banks28 has partnered with at least one ecosystem company 

(Galvin et al. 2018). Examples are a joint FinTech-laboratory launched by Bank 

of China and technology-giant Tencent in 201929 or an agreement between China 

Construction Bank, Alibaba and Ant Financial to digitize customer banking 

experience in 201730. 

In conclusion, two major observations can be made: 

1. FinTechs can help incumbents – not just disrupt them 

Dietz et al. (2016) found that that a substantial majority – almost three-fourths 

of FinTechs – focus on retail banking, wealth management, lending, and 

payment systems for SMEs. While this indicates that FinTechs seek to target the 

end consumer directly and therefore bypass traditional banking business, the 

trend develops to more B2B offerings (from 34% of B2B start-ups launched in 

2011 to 47% of launched B2B start-ups in 2016, worldwide). This shows that 

FinTechs more and more prefer to partner with and provide services to 

established banks which continue to own the relationship with the end customer. 

That trend is especially true in corporate and investment banking (CIB), which 

accounts for 15% of all FinTech activity across the market. Two-thirds of all 

FinTechs active in CIB provide B2B products and services, and only 12% truly 

try to disrupt existing business models and directly attacking incumbents. There 

are many reasons for that. On the one hand, CIB is mostly based on relationships 

and trust, which is a huge incumbent advantage. On the other hand, CIB services, 

like fixed-income trading, financial derivatives or structured financial products, 

are capital intensive or require highly specialized knowledge. That is why 

FinTechs rather focus on retail and SME segments, while those active in CIB 

enter into partnerships to provide specific solutions with long-established players 

that own the technology infrastructure and client relationships. Incumbent banks 

thereby profit from an improved value chain and can focus on their core business. 

According to Vives (2017), the true disruption may come to the full-scale entry 

of top digital internet companies such as Amazon, Apple or Google. They indeed 

are already active in the FinTech market but have not entered the market in a 

resolute way yet. 

2. Collaboration – not competition – will be the primary driver of disruption 

coming through the emergence of FinTech 

According to Gulamhuseinwala et al. (2017) the biggest near-term threat to most 

banks does not come from FinTechs but from traditional competitors that know 

how to better leverage those FinTechs. All 45 major banks which were analyzed 
 
 

27 Technological ecosystem companies are large and well-established tech-companies active in 

a variety of other business fields, e.g. Tencent or Alibaba. 
28 “Big four” banks: Bank of China, China Construction Bank, Industrial and Commercial Bank 

of China, Agricultural Bank of China 
29 chinabankingnews.com, “Tencent Teams up with Big State-owned Bank to Launch Fintech 

Lab in Shenzen”, last access 14.11.19. 
30 spglobal.com, “China Construction Bank, Alibaba sign corporation pact”, last access 07.11.19. 



18 
 

in the report were engaged with FinTechs in one way or another, but only a 

quarter of them were extensively engaged with them because of barriers that 

hinder incumbents to effectively collaborate with FinTechs. True to the motto 

“partner or perish” the core strategic challenge for incumbents is to choose the 

right FinTech partner and not the question to or not to collaborate. Regarding the 

huge amount of FinTechs on the market, finding the right cooperation partner 

can be difficult and is considered to be the key strategic challenge. Furthermore, 

cooperating can be very complex and costly. Successful incumbents need to 

consider many options, including acquisitions31, simple partnerships like the 

previously mentioned one between JP Morgan and Roostify or more-formal joint 

ventures32. 

In order to participate in future developments, incumbents must focus on three 

critical behaviors that can transform them into “digital winners”, which could 

ultimately decide over success and failure (Skan et al. 2015). First, it is important 

to act open. That is meant in the way that incumbents have to open up the 

organization’s own intellectual property, assets and expertise to outside 

innovators in order the help generate new ideas, identify and attract new skills, 

change organizational culture and discover new areas for growth by using the 

concept of Open Source33. This concept has already been adopted and 

implemented by many banks including Fidor Bank (Germany), BBVA (Spain) 

and Goldman Sachs (USA). 

Second, it is important for incumbents to collaborate with newly emerging 

FinTechs. Collaboration inside the financial sector is a common phenomenon, 

especially when there is opportunity to share processes or services that are 

considered to be “non-core”. One of the most famous examples is MasterCard, 

which was founded by a consortium of banks to support interbank card payments 

for consumers in 1966. While collaboration with new start-ups is getting more 

and more common, incumbents still need to open up for new players in order to 

maintain and increase value. Skan et al. (2015) reveal that 80% of 25 business 

leaders in the financial sector think that working with start-ups brings new ideas 

to their business and improves their competitive situation. 

Third, incumbents have to venture invest. Start-ups usually have a high 

innovation quotient but are in need for capital, whereas incumbents with a lot of 

capital must increase their ability to innovate. By investing in new entering 

companies, synergies can be created, even though venture investing is always 

connected to high risk which must be considered when investing. 
 

 

 
 

31 Example: reuters.com, “London Stock Exchange shareholders bless USD 27 billion Refinitiv 

deal”, last access 04.01.20. 
32 This applies in particular to joint ventures established between two incumbents like the one 

between Saxo Bank and Geely Holding in December’19. home.saxo, “Saxo Bank and Geely 

Holding Group to establish fintech joint venture serving the China market”, last access 

04.01.20. 
33 “Open Source“ is a term used to describe software whose source text is available for the public, 

so it can be reviewed, changed and used by third parties. gruenderszene.de, “Open Source”, last 

access 17.11.19. 



19 
 

3.2.2. Impact on central banks and monetary policy 

Not only will FinTech have an impact on the commercial finance sector but on 

central banks and their different areas of responsibility – mainly monetary policy 

and financial stability – as well. Central banks have to react on the recent 

development in the financial sector by developing new models and operational 

frameworks. Amara’s law describes the expected impact of technological change 

as tending to be overestimated in the short run but underestimated in the long 

run34. In the long run, FinTech may affect the different areas of responsibility of 

central banks in two main ways (Meyer et al. 2017): changing money demand 

and changing the industrial organization of the financial system which both can 

directly affect the conduct of monetary policy, currency demand, financial 

stability and the need for a lender of last resort. Central banks and its 

representatives have to ask themselves two main questions in order to continue 

carrying out their mandates effectively: (1) When should a central bank be 

concerned about developments in FinTech? (2) If there is a concern, what should 

the policy response be? 

Certainly, the most important responsibility of a central bank is conducting 

monetary policy. The adoption of new forms of electronic means of payment, 

especially through DLT technology35 and value storing may fundamentally 

affect money demand and thus how central banks achieve low and stable 

inflation. A second traditional area of responsibility is the design and distribution 

of currency. FinTech could affect this function if there is a widespread 

substitution away from banknote retail transactions where its main impact would 

be a drastic change of the composition of the balance sheet of the central bank. 

However, both cases seem to be unlikely in the near future, especially in 

countries with a credible monetary policy. In the long run, citizens may prefer 

virtual currencies since they offer the same cost and convenience as cash – no 

settlement risks, no clearing delays, no central registration, no intermediary 

(Lagarde 2017). In this case however, as a last resort, central banks can still 

choose to issue their own digital alternative to banknotes for retail transactions 

(Fung and Halaburda 2016). 

Currently, FinTech is more likely to bring change by creating new financial 

intermediation applications rather than changing the ones that exist today, 

Therefore, the best response of central banks is to monitor FinTech to form a 

view on its risks and opportunities. This, however, can be accomplished by 
 

 

 
 

34 Roy Charles Amara was an American researcher and scientist and president of the “Institute 

for the Future”. He is best known for his “Amara’s Law” among technologists, Silicon Valley  

entrepreneurs and economic historians which is based on the observation that most applications 

of new technologies are implemented only after much trial and error. neatorama.com, “Four 

Geeky Laws That Rule Our World”, last access 30.12.19. 
35 Distributed ledger technology is a database that exists across several locations or among 

multiple participants and eliminates the need for a central authority or intermediary to process 

through its decentralization. It is considered to be the most revolutionary technology within the 

FinTech industry. The most famous example for a distributed ledger is the blockchain technology 

with its well-known representative Bitcoin. tradeix.com, “The Difference Between Blockchain 

& Distributed Ledger Technology”, last access 10.11.19. 



20 
 

providing access to the infrastructure central banks control and to encourage the 

testing of new business models with the new technology. 

 

 
4. Regulation approaches for FinTechs 

 
The previous two sections have shown that FinTech will have an increasing 

impact on the financial landscape, both on the commercial sector and, in the long 

run, on monetary policy too. Both FinTech companies and governments have a 

genuine interest in having clarity about the prevailing regulatory situation in the 

particular jurisdiction. For example, the high cost of regulatory uncertainty is a 

major concern of new entering innovators. Regarding high uncertainty costs in 

the US, GAO (2018) states the following: “…the cost of researching applicable 

laws and regulations can be particularly significant for FinTech firms that begin 

as technology start-ups with small staffs and limited venture capital funding. 

FinTech start-up businesses told us that navigating this regulatory complexity 

can result in some firms delaying the launch of innovative products and services 

— or not launching them in the United States — because the FinTech firms are 

worried about regulatory interpretation” (p.41). Of course, this statement can 

be applied to all other jurisdictions and demonstrates the need for clear regulation 

specifications. Regulating FinTech, however, can be difficult when considering 

that FinTechs are not financial entities in the traditional sense but companies 

with different techniques, new technologies and business models. This poses a 

challenge to regulators when willing to promote Fintech’s prosperity and at the 

same time avoiding financial exclusion because the typical regulatory model 

assumes well-defined financial institutions. Especially in emerging and 

developing economies, regulators with limited expertise in technology may find 

it difficult to understand FinTech and assess its implications for regulation. 

Furthermore, in those regions, regulators often have limited resources and 

technology-led innovation adds additional pressure. Therefore, it is important for 

governments and regulators both in advanced and developing economies to find 

a way how to deal with the new emerging players and how to properly regulate 

them. 

To do so, it is worth to take a look on why regulation, especially in the financial 

sector, is necessary. In an economic sense, regulation takes place when market 

failures occur. This in turn happens, when the allocation of goods and services is 

not efficient (pareto-efficient), often leading to a net social welfare loss. Market 

failures are often associated with five core problems36, whereby the relevant ones 

for the financial sector and therefore for FinTechs are information asymmetries 

and non-competitive markets. Information asymmetries occur when market 

participants lack information to make a rational choice about the value of an 

asset. This, in turn, can lead to adverse selection37 which defines the 
 

36 These core problems include public goods, time-inconsistent preferences, information 

asymmetries, non-competitive markets, principal-agent problems or externalities. edchoice.org, 

“Defining Market Failure”, last access 04.01.20. 
37 wirtschaftslexikon.gabler.de, “Adverse selection”, last access 04.01.20. 



21 
 

retrieve of high-quality companies from a certain market due to the insufficient 

information customers can obtain38. This can have several implications for 

FinTechs and FinTech’s customers, including the disappearance of high-quality 

providers of financial services and a reduced cost-benefit ratio. Non-competitive 

markets, on the other hand, occur, when a relatively small number of financial 

institutions dominate particular financial markets which may lead to a cartel-like 

behavior (e.g. the Libor scandal)39. This is especially true when referring to the 

emergence of new platforms that are serving specific niches, for example a 

FinTech providing Mezzanine financing for real estate40. The more specific the 

niche, the less competitors on the markets and the bigger the net welfare loss 

through overpriced services. 

Regulators in advanced, emerging and developing economies have responded to 

such challenges by establishing new regulatory approaches in order to achieve 

market improvements and financial inclusion41 (see Annex 4 for a detailed 

overview about the yet applied approaches in the world). In this part, three 

common regulatory approaches (Innovation Offices, RegTechs and Regulatory 

Sandboxes) will be examined more closely. 

 

 
4.1. Innovation Offices 

 
Innovation Offices can have different names, forms and functions but all engage 

with, and provide regulatory clarification to, financial service providers that seek 

to offer innovative products and services and are often the first step for a 

jurisdiction when considering applying a regulatory framework. 

The key objective of Innovation Offices is to promote regulator-innovator 

engagement and mutual learning in a pro-innovation setting. This can work in 

many ways: holding office hours, offer a dedicated telephone number, maintain 

a website or link FinTech employees with a dedicated case officer42. For 

regulators, this interaction helps to identify emerging issues and can be used as 

evidence base for broader regulatory reform. They provide insights on whether 

further innovative regulatory initiatives are appropriate or necessary. For 

instance, they can provide input on the pros and cons of introducing a Regulatory 

Sandbox, which is considered to be a bigger, complex and cost-intensive step, to 

facilitate product or policy testing and could be called a “Regulatory Sandbox 
 

38 “The Market for Lemons” is a phenomenon in economic science discovered in 1970 by G.A. 

Akerlof. 
39 economicsonline.co.uk, “Financial market failures”, last access 04.01.20. 
40 Example: Linus-capital, FinTech that provides mezzanine financing for high net-worth 

individuals, family offices and institutional investors that has a unique business model in 

Germany. linus-capital.com, last access 04.01.20. 
41 Financial inclusion refers to efforts to make financial products and services accessible and 

affordable to all individuals and businesses, regardless of their personal net worth or company 

size and is particularly important in emerging and developing countries. worldbank.org, 

“Financial Inclusion”, last access 03.11.19. 
42 See as an example LabCFTC, an Innovation Office within the CFTC in the US. 

https://www.cftc.gov/sites/default/files/2018-09/labcftc_officehours102318.pdf, last access 

03.11.19. 

http://www.cftc.gov/sites/default/files/2018-09/labcftc_officehours102318.pdf


22 
 

light”43. One of the earliest Regulatory Sandboxes, in the UK, grew out of 

evidence of demand for the service of an existing Innovation Office. For the 

participants it helps understand the current regulatory landscape in a local context 

and in what direction FinTech-related regulation might be going. 

Innovation Offices are a favorable option for capacity-constrained regulators 

(poor financial and material resources, insufficient staff, etc.) and therefore are 

likely to be installed in emerging and developing countries. They are often easier 

to establish than other regulatory approaches since they don’t require protracted 

legislative or regulatory change. In reality, however, most Innovation Offices are 

active in advanced and near-advanced countries. The offices consist mostly of 

officials from the regulating organ which can start small and simply educate the 

FinTech’s representatives e.g. by explaining relevant regulations for a planned 

new service or providing guidance for licensing. Those Innovation Offices can 

then iteratively expand based on demand. Innovation Offices usually choose the 

FinTechs based on eligibility criteria to determine which providers they engage 

with on specific regulatory objectives. This helps the regulators to find the 

innovators where support is most appropriate. That is especially important in the 

context of scarce resources and capacity problems, which problems authorities 

are mainly facing in emerging and developing economies. Common eligibility 

criteria (criteria names) of Innovation Offices are for example genuine 

innovation, consumer benefit, financial inclusion, need for support, or risk 

mitigation (UNSGSA FinTech Working Group and CCAF 2019). A prominent 

example for an Innovation Office is the Financial Technology Enabler Group 

(FTEG) in Malaysia44. 

Empirically proven impacts of Innovation Offices according to UNSGSA 

FinTech Working Group and CCAF (2019) are: 

- Reduced costs for innovators and consumers: 

Innovation Offices, a key point of contact between innovators and 

regulators, help FinTech companies quickly and easily understand 

regulatory frameworks, reduce barriers to entry and regulatory 

uncertainty. This can furthermore result in lower prices for the end 

consumer and better access to financial services. 

 
- Improved consumer protection: 

Consumer protection is according to Mazer and McKee (2017) an 

integral part of financial inclusion. Financial innovation can lead to both 

opportunities and risks for consumer protection. Innovation Offices’ 

guidance to FinTechs about consumer protection requirements helps the 

companies to more efficiently develop compliant products by clarifying 

appropriate regulations. Furthermore, regulators profit from 

understanding trends and potential issues and risks for consumers. 

 

43 Term developed by the author. 
44 FTEG was initiated by Bank Negara Malaysia (BNM) in June 2016 to improve the quality, 

efficiency and accessibility of financial services in Malaysia and is responsible for formulating 

and enhancing regulatory policies to facilitate the adoption of technological innovations in the 

Malaysian financial service industry, myfteg.com, last access 25.10.19. 



23 
 

 

- Better informed policy making: 

Based on the experiences Innovation Offices made while working with 

the innovators, policy makers can identify risks of innovative new 

financial services and their implications for regulatory policies easier and 

apply the newly acquired knowledge on their policies. 

 
- Increased competition: 

Innovation Offices decrease entry barriers by reducing regulatory 

uncertainty which promotes the entry, capitalization and growth of new 

firms in this sector. Besides do new entrants promote innovation and 

competition which, in turn, leads to lower prices for consumers, a greater 

range of products and better services. All this result in enhanced financial 

inclusion, which is important for countries with a high unbanked 

population (Mazer and Rowan 2016). 

On top of that, due to the experiences made with Innovation Offices, some other 

remarkable observations can be made. On the one hand do Innovation Offices 

facilitate international regulatory knowledge exchange on financial innovation. 

Regulators take the inspiration and lessons learned by other regulators who had 

launched innovative regulatory initiatives and apply it on their regulatory 

initiative. On the other hand, do Innovation Offices act as a catalyst for a pro- 

innovation culture. Studies have shown that a dedicated Innovation Office with 

knowledgeable staff and the strong will to “push things through” is a key enabler 

of a pro-innovative culture (UNSGSA FinTech Working Group and CCAF 

2019). 

 

 
4.2. RegTech 

 
The term “RegTech” is a mixture of the words “regulation” and “technology” 

and represents an increasingly important tool for regulators when trying to 

achieve innovation and promoting financial inclusion. It encompasses all 

technologies used for regulatory purposes and was first conceptualized to 

describe compliance technology used to improve regulatory processes. First- 

generation RegTech primarily focused on reducing compliance costs of large and 

well-resourced financial firms. In the past few years, however, the definition of 

RegTech has broadened. Regulators and regulating institutions began to consider 

RegTech as a tool to keep up with the substantial changes in the financial services 

sector. 

According to Murphy and Mueller (2018), RegTech consist of two distinct but 

complementary branches: compliance technology (CompTech) and supervisory 

technology (SupTech). Compared to Innovation Offices and Regulatory 

Sandboxes RegTech is unique. First, while the other two initiatives help 

regulators determine which set of activities to include within their scope, 

RegTech focuses on how to monitor and enforce those activities against relevant 

regulations and can therefore create opportunities for new ways to regulate the 



24 
 

financial sector. Second, it is not yet a common term among regulators. While 

Innovation Offices and sandboxes are common-known regulation approaches, 

the term “RegTech” can be difficult to pinpoint. Third, regulators must often 

overcome significant burdens within their organizations to meaningful use 

RegTech. In most cases it requires upgrading existing technology, including data 

infrastructure, and navigate difficult procurement requirements in the process. 

Another important component is trusted machine-readable data. Furthermore, 

regulators also have to attract relevant staff and align organizational culture 

towards innovation. For those reasons RegTech is more considered to be a 

longer-term proposition that often develops over a more extended timeframe to 

see tangible financial inclusion results than other regulatory initiatives. However, 

RegTech can turn out to be a longer lasting solution due to its potential to help 

regulators adapt to a changing market environment. 

There is a great range of technologies underpinning RegTechs such as 

application programming interfaces (API), AI, machine learning, big data or 

cloud computing. RegTech approaches in the past have demonstrated that they 

improve effectiveness and lead to positive financial inclusion outcomes. 

RegTech can be used for the following purposes (UNSGSA FinTech Working 

Group and CCAF 2019): 

- Supervising institutions: 

Regulators can use RegTech to keep up with the technology 

transformation that are changing the industry and to ensure compliance. 

Its impact is most visible in regulatory data collection and analysis 

efforts, where it can aid human decision-making. One example is the 

Bankgo Sentral ng Pilipinas (BSP) that used API-based regulatory 

reporting45. It provided greater real-time visibility on the conditions of 

supervised institutions and enabled them to act swiftly when necessary. 

Another example is the Central Bank of Brazil (BCB), which 

implemented a web based RegTech solution to allow the easy and secure 

sharing of information between regulators and providers. This system in 

particular collects data to assess risks and supports the supervisory 

process by generating automated reports (World Bank et al. 2018). 

 
- Monitoring the marketplace: 

RegTech can help regulators monitoring the financial service 

marketplace. Just as the previously mentioned API-based tool used by 

the BSP that helps to better oversee individual institutions, data can also 

be visually aggregated to provide real-time snapshots of the entire 

market. Monitoring the market allows regulators to spot systemic risks 

and other forms of consumer harm that could extend beyond a single 

institution. 

 
- Protecting consumers: 

Another area of application is the protection of consumers. RegTech can 

be used to engage more directly with consumers to ensure that they are 
 

45 https://www.r2accelerator.org/bsp, last access 27.10.19. 

http://www.r2accelerator.org/bsp


25 
 

protected properly. For instance, the Consumer Financial Protection 

Bureau (CFPB) in the US developed a consumer complaint portal and 

database46 that makes it easier for consumers to report issues and 

provides greater visibility on consumer trends. Other examples are 

chatbot solutions which have the potential to promote consumer 

protection through better oversight of consumer complaints and firm 

behavior. 

 
- Supporting rulemaking: 

Improved data collection and analysis through RegTech tools can help 

generate insights that lead to rule refinement and guidelines that 

contribute to financial inclusion. 

On top of that, further observations can be made. On the on hand, it is important 

that the implemented RegTech is supported by senior leadership of the regulating 

institution, which is especially true for capacity-constrained environments. On 

the other hand, multi-disciplinary teams with complementary skillsets can be 

essential to establish useful RegTech solutions for addressing the identified 

problems in the adequate way. This works even better when individuals from the 

outside are involved (UNSGSA FinTech Working Group and CCAF 2019). 

Regarding the FinTech development, RegTech is a useful tool for regulators to 

process and analyze data coming from the FinTech sector. This data can be used 

to predict trends and anticipate gaps in a regulatory framework as well as 

necessary changes in such framework because of too tightened-up regulatory 

requirements. Those trends can only be discovered in a medium to a long run 

time period. 

 

 
4.3. Regulatory Sandboxes 

 
Regulatory Sandboxes are, at their core, a framework set up by financial sector 

regulators or regulating entities to allow small-scale live testing of innovations 

by private firms in a controlled environment (operating under a special 

exemption, allowance, or other limited or time-bound exception) under the 

regulator’s supervision (UNSGSA FinTech Working Group and CCAF 2019). 

They are established in order to promote FinTech development in a jurisdiction 

by applying laxer regulation, lowering entry barriers and proving support in all 

kinds of question regarding regulatory interrogations. They are furthermore 

meant to change the nature of the relationship between regulators and FinTechs 

towards a more open and active dialogue (Jenik and Lauer 2017). FinTech 

companies profit from having easier access to the traditionally high regulated 

financial sector and therefore higher chances of being successful, as do 

regulators by developing valuable experiences which they can apply on future 

regulation frameworks. In recent years, Regulatory Sandboxes have become a 

synonym for regulatory innovation (UNSGSA FinTech Working Group and 

 

46 https://www.consumerfinance.gov/complaint/, last access 27.10.19. 

http://www.consumerfinance.gov/complaint/


26 
 

CCAF 2019). If a sandbox is successful or not, regarding the intended impact, 

highly depends on how it is framed and on the prevailing market conditions 

(providers, competition, quality of innovations, level of development of the 

financial market infrastructure, customer trust and engagement). 

The first sandbox approach was set up in the US by the CFPB in 2012 under the 

name “Project Catalyst” in order to serve as an opportunity for the FinTech 

industry and government regulators to work together on behalf of the consumers 

(McGreevy 2018). After the Financial Conduct Authority (FCA) from the UK 

coined the term “Regulatory Sandbox” in 2015, the concept has spread across 

more than 20 countries worldwide. In fact, most literature consider the FCA’s 

sandbox as the first sandbox to be ever established. The global interest in 

Regulatory Sandboxes is strong with sandboxes now live or planned in over 50 

jurisdictions. Today, many other sandbox-like frameworks have been established 

around the world under the names innovation hubs, incubators, accelerators and 

industry sandboxes, which are, however, not only restricted to the FinTech sector 

(McGreevy 2018). They all follow the idea of facilitating innovation but differ 

slightly from each other (see Annex 9) 

Figure 10 shows that currently many jurisdictions implemented Regulatory 

Sandboxes. Especially in the European Union, African countries and in the Asian 

region are many Regulatory Sandboxes operating at the moment. The same is 

true for forthcoming and proposed sandboxes. This can be explained through the 

legal structure of the particular regions: while the US, Canada or Russia are each 

controlled by one supervising financial authority, the EU, Asia-Pacific or Africa 

are all regions consisting of many small countries with independent financial 

supervision. 
 

 

Figure 10: Overview of global Regulatory Sandbox initiatives by jurisdictions 

Source: UNSGSA FinTech Working Group and CCAF (2019) p.26 



27 
 

 
 

According to UNSGSA FinTech Working Group and CCAF (2019), Regulatory 

Sandboxes can be further divided into (1) product testing sandboxes, (2) policy 

testing sandboxes and (3) multi-jurisdictional sandboxes. 

1. Product testing sandboxes 

Product testing sandboxes are used as a safe zone to allow FinTech companies 

to live test their new products prior to formal licensing or registration. The 

participating innovators gain feedback on their product/service or business 

model, assess consumer uptake and commercial or technological viability and 

refine product features to address regulatory feedback. If the product turns out to 

be economically viable, it is typically allowed to launch on the wider 

marketplace either on an existing licensing regime or a bespoke regulatory 

framework. The objective of the product testing sandbox is to allow the product 

to see the light of the day with a lower initial burden. The output of such sandbox 

is the launch of a financial product into the marketplace under either an existing 

or a modified license. 

2. Policy testing sandbox 

Policy testing sandboxes are set up to evaluate regulations or policies that may 

hinder beneficial new technologies or business models. The leading policy 

testing sandbox is the approach by the Monetary Authority of Singapore (MAS). 

They describe this type of sandbox as a mechanism for evaluating whether 

particular rules or regulations should be changed based on specific use cases47. 

The testing process then assesses a particular regulatory hypothesis, e.g. whether 

a particular rule or regulation should change with respect to a particular test 

result, rather than the economic viability of the underlying technology. The 

sandbox becomes the final step in a process which begins with the informal 

guidance on regulatory uncertainties and ends with a test to determine whether 

the business model requires modification of an existing rule or regulation. The 

output of a policy testing sandbox is the revision, cancellation or approval of a 

legacy rule or policy. 

3. Multi-jurisdictional sandboxes 

This concept of a Regulatory Sandbox is being actively explored to promote 

cross-border regulatory harmonization and enable innovators to scale more 

rapidly on regional or global basis. They can operate as product testing or policy 

testing sandbox – or both which depends on the sandbox’ objective. The 

resources required to design and implement a Regulatory Sandbox vary 

according to local market context and the specific parameter of each sandbox. 

Multi-jurisdictional sandboxes may offer economies of scale through multiple 

regulators who operate the sandbox together, however, the initial resources to 

design such sandbox may be significant, given the challenges in developing a 

sandbox framework across multiple jurisdictions. Almost 20% of all FinTech 

companies in the Latin America-Caribbean region operate in more than one 

 
47 mas.gov.sg, “Overview of Regulatory Sandbox”, last access 05.11.19. 



28 
 

jurisdiction, most likely because of the small size of individual regional markets 

(Herrera and Vadillo 2018; Inter-American Development Bank 2017). Many 

FinTechs with the aim to provide their financial products and services need to 

find sustainable solutions beyond the reach of country-level markets. In theory, 

this is where the multi-jurisdictional sandbox can remedy the situation: it 

facilitates cross-border expansion through shared testing programs and reduce 

the potential for regulatory arbitrage across individual sandbox jurisdictions48 

(EBA 2018). 

However, the lines between the three types are not rigid. Almost all product 

testing Regulatory Sandboxes have some elements of regulatory uncertainty in 

the testing process and therefore may provide some of the possible benefits of 

policy testing sandboxes. Vice versa, policy testing sandboxes will also function 

as a product testing sandbox for participating companies. Policy testing 

sandboxes may be less resource intensive than product testing sandboxes if the 

regulator admits only a small number of companies to test a policy, which, 

however, is not a strict rule since regulators may admit any number of firms to a 

sandbox (UNSGSA FinTech Working Group and CCAF 2019). 

Regulatory Sandboxes can provide several advantages for regulators as well as 

for FinTech companies and consumers. Regulators can create a signal of 

commitment to innovation and learning, which may encourage FinTech 

companies to finally start their business. Through direct contact between 

regulating authorities and companies they promote communication and 

engagement with market participants. Furthermore, after they had time to 

analyze the experiences they gained, regulators can update the regulations which 

may prohibit beneficial innovation and therefore improve the regulatory situation 

for new established FinTechs. The Fintech companies profit from a reduced time 

to launch products and services at the market through accelerated authorization 

processes. Furthermore, they gather feedback on regulatory requirements and 

risks and face therefore less regulatory uncertainty. Investors may furthermore 

be more attracted to invest in FinTechs that work in such regulatory safe zone as 

it improves the chances of a successful outcome. Consumers profit through the 

fact that the introduced new products and services are potentially safer as they 

come from a regulated environment. Lastly, customers profit from enhanced 

financial inclusion and do therefore have better access to financial products and 

services (Jenik and Lauer 2017; Murphy and Mueller 2018; Mueller et al. 2018). 

Sandboxes, regardless of the type, have certain benefits for the regulation 

authorities as well as FinTech companies and consumers: 

Regulating authorities: 

- Obtaining information on how to build long term policies through learning 
and experimentation 

 
 

48 Regulatory arbitrage defines the practice of companies to capitalize on loopholes in regulatory 

systems in order to circumvent unfavorable regulations, businessdictionary.com, last access 

12.11.19. 



29 
 

- Changing existing regulation that may prohibit beneficial innovation 

- Promote communication and engagement with market participants 

- Sending out positive signal to FinTech sector by showing engagement and 
commitment 

FinTechs: 

- Reduced market entry through shorter authorization processes 

- Reduced regulatory uncertainty 

- Direct feedback from regulators on regulatory requirements and risks 

- Improved access to capital since money lenders (equity and debt lenders) 

have higher confidence in the FinTech and its chances of success through 

less regulatory uncertainty 

Consumers: 

- Increased access to financial products and services 

- Safety of products enhances through regulatory observation 

 

 
On the downside are the costs and effort involved in establishing a sandbox. In 

contrast to Innovation Offices, where the organizational and personnel effort is 

limited, sandboxes require trained personnel who concentrate exclusively on the 

support of the participants. In addition, a sandbox is usually set up over a longer 

period of time, which reduces the marginal costs per supported company but 

increases the total costs. UNSGSA FinTech Working Group and CCAF (2019) 

came in their report to the following observations after analyzing the first 

sandbox approaches, which can turn into downsides as well if the issue is not 

handled properly: 

1. Regulatory Sandboxes are neither necessary nor sufficient for promoting 

financial inclusion 

Regulators in general seem to prioritize the resource-intensive sandbox programs 

over more comprehensive innovation policies, market engagement strategies or 

financial inclusion programs. Establishing sandboxes can vary substantially by 

regulator and across the operational stage. Furthermore, setting up a sandbox 

takes at least six months in advanced economies and 18 months in developing 

economies. Even though cost may decrease in the operational stage, two thirds of 

interviewed regulators stated that they significantly underestimated the resources 

required to develop and operate their sandbox and were overstrained with 

processing the number of applications for a sandbox. Nevertheless, it has to be 

taken into account that a quarter of the interviewed regulators admitted to not 

having had evaluated feasibility, demand, potential outcomes or collateral effects 

before setting up a sandbox. A reason for that may be a feeling of “peer pressure” 

to establish a sandbox in order to stay competitive. Furthermore, depending upon 

the development of a country, experience has shown that regulatory questions 

raised could be resolved without the need for a live testing environment. Instead, 

proportional or risk-based licensing regimes 



30 
 

and regulations49 may help lower the costs of regulatory compliance for 

FinTechs and are available to all market participant, unlike sandboxes. 

2. The effort of processing a Sandbox should not be underestimated 

As mentioned before, many regulators were unprepared for the level of effort 

and resources required to process a sandbox. In order to e.g. efficiently handle a 

large amount of applications, the process can be streamlined and simplified, and 

the communication channels can be expanded. This is currently being done by 

MAS50 and the Canadian Securities Administrators51. 

3. Regulatory coordination is essential, most of all in multi-peak 

jurisdictions 

In multi-peak jurisdictions52, FinTech-related innovations often fall within the 

supervisory scope of different regulators. This often leads to no coordination 

among the regulating authorities and generates inefficiencies. Clearly defining 

the regulatory scope of each possibly involved authority is indispensable. Hong 

Kong, for example, has experienced the benefits of improved regulatory 

coordination. While the Securities and Futures Commission and Insurance 

Authority of Hong Kong had independent Regulatory Sandboxes before, which 

made organization and coordination difficult, they now linked their sandboxes 

and provided a single point of entry for FinTechs and its products in Hong Kong. 

As a result, the number of companies that are testing their products across the 

three sandboxes has now significantly increased (UNSGSA FinTech Working 

Group and CCAF 2019). 

4. The importance of senior leadership and institutional engagement is 

critical to sandbox initiatives 

A lack of leadership and institutional engagement could have negative 

consequences for the Regulatory Sandboxes. Obtaining clear support from 

relevant regulatory officials, on the other side, encourages alignment among 

participating departments and individuals. The officers in charge therefore need 

to communicate purpose and goals across internal divisions and have to ensure 

hiring appropriate staff. 

 

 
4.4. Concluding overview 

 
Table 3 summarizes the concept, purpose, advantages and disadvantages of the 

individual regulatory approaches. 
 
 

49 “A proportional or risk-based approach generally implies simpler rules for small, less complex 

financial institutions, but can also take the form of additional regulations for large and more 

complex institutions”, (UNSGSA FinTech Working Group and CCAF 2019), p.31 
50 mas.gov.sg, “MAS Proposes New Regulatory Sandbox with Fast-Track Approvals”, last 

access 14.11.19. 
51 securities-administratos.ca, “CSA Regulatory Sandbox”, last access 14.11.19. 
52 Multi-peak jurisdictions are jurisdictions with multiple financial regulators, UNSGSA FinTech 

Working Group and CCAF (2019). 



31 
 

 

 

Innovation Office Regtech Regulatory Sandbox 
Concept 
- Representatives of 

the regulating 
authorities are 
available as contact 
persons (e.g. office 
hours, hotlines, 
websites etc.) 

- Provides regulatory 
clarification and 
basic regulatory 
assistance 

- Used in both 
emerging/ 
developing and 
developed countries 

- Software 
- Consists of compliance 

technology 
(CompTech) and 
supervisory 
technology (SupTech) 

- Collects relevant 
information based on 
which new regulatory 
approaches can be 
introduced 

- Focuses on how to 
monitor and enforce 
regulatory activity 

- Long-term orientated 

- Frameworks in which 
products/services of 
companies can be live 
tested under special 
exemption or allowance 

- Product testing 
sandboxes, policy testing 
sandboxes and multi- 
jurisdictional sandboxes 

- Time-bounded 
- Full regulatory support 

and monitoring through 
regulating authority 

- Mainly used in 
industrialized countries 

Purpose 
- Improvement of the 

regulator-innovator 
relationship 

- Often used as first 
step before 
establishing a 
sandbox 

- “Sandbox light” 

- Obtaining resilient 
data to improve 
regulatory framework 

- Used both by 
regulators and 
companies 

- Significantly improve 
relationship between 
regulator and company 

- Obtain resilient long-term 
data to improve 
regulatory framework 

Advantages 

- Learning effects for 
both regulator and 
innovator 

- Improves regulator- 
innovator 
relationship 

- Comparatively 
inexpensive to 
establish 

- Attractive for 
resource-restricted 
countries 

- Can be 
reduced/enlarged as 
required 

- Evaluable data 
through statistical 
data acquisition 

- Relatively inexpensive 
to maintain once 
established 

- High learning effects for 
both regulator and 
innovator 

- Very good 
communication between 
regulator and innovator 

- Regulator obtains 
resilient data 

- Simplified access to 
market through lower 
entry barriers and 
therefore higher chances 
of being successful in the 
real market for 
participating companies 

- Can be designed 
differently and flexibly 
according to 
requirements 



32 
 

 

Disadvantages 

- No comprehensive 
support of the 
FinTechs, only basic 
assistance 

- Only limited learning 
effect, as effects on 
the financial system 
are not evaluated 
separately 

- Especially for 
regulators expensive 
and elaborate to 
establish 
(buying/developing 
software, adaption of 
internal systems, 
hiring adequate staff) 

- Data can only be used 
after long time period 
to have statistical 
certainty 

- Bigger, more complex and 
highly resource intensive 
compared to Innovation 
Offices 

- Time consuming 
- Special training of 

personnel necessary 
- Pre- and postprocessing 

of obtained information 
- High degree of regulatory 

effort 
- Not suited for solving 

financial inclusion related 
problems 

Table 3: General overview over regulatory approaches 

Source: own elaboration 

 

 

5. Examples of Regulatory Sandbox approaches 

 
As of 31.12.2018, there is more than 50 Regulatory Sandbox approaches used in 

jurisdictions across the globe (see Annex 5 and Annex 6). When ordering the 

countries by yearly per capita income (PCI) (see Annex 7) it can be observed that 

more sandboxes are established in countries with higher PCI and vice versa 

(Figure 11). 
 

 

Figure 11: Number of countries that established Regulatory Sandboxes by PCI level as of 

31.12.2018 

Source: own elaboration, data by ESMA et al. (2018); UNSGSA FinTech Working Group and 

CCAF (2019); World Bank (2019) 

25 

20 

3 
  1  

2 

15 7 

1 
10 1 2 

5 
2 
1 
2 

1 
2 
2 
1 

3 

1 

12 

4 
 

5 

0 

3 5 24 

Low Income 
Middle East 

Lower-Middle Income 

European Union 

Latin America 

Europe 

East-Asia 

Africa 

Upper-Middle Income 
South Asia 

High Income 
South-East Asia 

Oceania North-America 

3 



33 
 

For that reason, in the following section the already established sandboxes in 

the EU as well as the sandboxes in the countries, which in their geographical 

regions represent the largest role for the FinTech market (USA for Americas 

and China for Asia-Pacific) will be further examined. The intention is to find 

similarities and differences among the Regulatory Sandboxes, with the possible 

implications for the EU being described in the next section. This helps to get a 

general idea of the structure and functioning of real-life examples, which can 

then be applied to a potential sandbox in the EU. 

 

 
5.1. USA, China and the European Union 

 
The state of Arizona (USA) and China recently launched their Regulatory 

Sandboxes. For this reason, there is little data that can be evaluated. In general, 

they follow the same objectives as the ones established in the EU (see Section 

5.2.). They want to increase the quality and price benefit ratios of the 

products/services, stabilize the financial system and are open only if the 

participant offers an innovative products/services (see Annex 8). 

In the European Union, there are currently seven operating Regulatory 

Sandboxes with five of them providing accessible information (GBR, PL, NLD, 

LTU, DN). Furthermore, Norway is currently preparing one and Austria is 

considering the launch of a Regulatory Sandbox. The list of the current operating 

Regulatory Sandboxes in the EU, which are included in Annex 9, make clear that 

the sandboxes have a significant number of common features. When comparing 

the European sandboxes to the Regulatory Sandboxes from the US and China in 

Annex 8 again, it can be observed that there are many similar characteristics. In 

order to understand the concept of a “European Regulatory Sandbox” it is worth 

considering the following common distinguishing marks: 

- The sandboxes are not limited to a specific financial sector and open for 

all kind of FinTech. This includes general banking and broker services, 

investment services, insurances, crypto currencies and blockchain 

technology. 

- They are no limits regarding the candidates that can operate within the 

san