The first cohort of the first fintech regulatory sandbox

The early stages of any start-up are always challenging, but much more so in the case of fintechs. The regulatory needs of the financial sector can be overwhelming, and not just because of the amount of rules that need to be complied with, but precisely because some of them can prove outdated, considering the impact that technology is having in finance.

As a result of all these difficulties, many fintech projects die before they make it past the idea stage, a fact that ultimately proves detrimental to society, as it robs it of a more complex and competitive financial offer.

The British Financial Conduct Authority (FCA), announced last year an initiative intended to tackle this problem. As part of its so-called Project Innovate, it unveiled its regulatory sandbox – a sort of testing environment - for fintech.

But, what is a sandbox? The sandbox is a safe environment that allows fintech startups to progressively adapt to the many requirements of financial activity, under the guidance of the own FCA. It is neither the real world nor just a simple experimental environment. It is a middle ground.

The goal is to encourage competition and financial innovation, controlling the risks and preventing them from affecting the end consumer. Fintech startups make progress in their processes, complying little by little with all regulations, until they finally reach the end of the road and transition out of this testing environment to compete with regular financial institutions, now without a safety net.

The UK’s experience – probably the country that is committing more to the development of fintech – is the first in the world. Other countries, such as Hong Kong, Singapore, Switzerland, Thailand and Australia are readying similar initiatives.

As part of this process, launched in May 2016, the FCA recently announced the first cohort of firms that were successful in their applications to begin testing in the regulatory sandbox. Out of the 69 companies that submitted their application, 18 were shortlisted.

What is this first cohort like? Participant profiles are extremely heterogeneous – there are Polish, Asian, South African startups… - some haven’t even started taking their first steps, while other have already garnered support from well established firms. But they are all one step away from turning from promise into reality.

The 18 pioneers

Personal finance is a market niche in which several of the shortlisted startups, such as Bud, compete. Bud is an online platform which allows users to manage their personal financial products on a single dashboard. Bud offers personalized insights and a series of services which users can interact with through API integrations.

Citizen Advice has nothing to do with the British NGO that bears the same name. Citizen Advice offers semi-automated debt management services.

HSBC Smartsave is the new app launched by the financial institution, developed in partnership with FinTech start-up Pariti Technologies to help customers better manage their finances.

FCA also another project by another major UK lender, Lloyd’s, which is aimed to integrated and improve its customers' experiences across three environments: branches, phone and online.

With its Nested trademark, Nextday Property acts both as fintech and real estate valuation service. So far it only works in London: the company promises to provide an interest free loan for a guaranteed amount to customers if they are unable to sell their property within 90 days. Also, the seller receives 80% of any amount paid in exceeds of this valuation.

Oval is an app which helps users build up savings which can then be used to pay off existing loans early.  Oval will be working with Oakam and a number of their customers during the test period.

BBVA Open Talent 2016 finalist, Tramonex is an e-money platform that facilitates the use of “smart contracts” to transfer donations to a charity.

Swave is a micro savings app. It offers personalized advice and integrates several bank accounts.

Transfers, in a broad sense of the word, are another recurring niche among the selected startups. Billon is a Polish start-up that, through blockchain and with a simple app, promises to facilitate quick and safe financial transactions.

Luno is a South African start-up that was originally called BitX. Already active in the Spanish market, its core purpose is the purchase of bitcoins.

Epiphyte, another startup which is part of this first sandbox cohort, is betting its future on the development of blockchain. This fintech is trying to remove friction from all sorts of payments processes using blockchain technology.

Govcoin recently signed an important partnership deal with the UK Government’s Department for Work and Pensions. Together, they are working on blockchain applications for making emergency payments faster and more reliable.

SETL is developing contactless payments card supported by blockchain technology.

Some of the fintechs selected by the FCA explore less travelled business paths than personal finance and the improvement of transfers and payments. This is the case of Issufy, a web-based software platform that streamlines the overall IPO distribution process for investors, issuing companies and their advisors.

Nivaura and Otonomos are also working in the business niche. The first one manages corporate debt with blockchain. Singapore start-up Otonomos’ proposal sounds quite promising: its technology allows anybody to create and manage one or several companies online. They take care of all the paperwork and legal issues in the real world, while the entrepreneur stays on top of everything online from a single dashboard.

Tradle creates personal or commercial identity and verifiable documents on a distributed ledger.  Finally, the only insurtech in this first cohort of the sandbox is Blink Innovation, which is finalizing the launch of a very specific insurance product: an automated claims process, which allows travellers to instantly book a new ticket on their mobile device in the event of a flight cancellation.