US Needs Federal Sandbox to Catch Up with EU FinTech Innovation

While the FinTech market is booming around the world, the United States has fallen behind when it comes to both consumer adoption and the regulation needed to boost innovation.

European regulators have worked hard to create an environment that promotes growth in the FinTech sector while still protecting consumers. The United Kingdom’s Financial Conduct Authority (FCA), for example, has operated a regulatory sandbox since 2015, working with 70 FinTech startups and seeing 90 percent of those bringing products to market. And the European Union’s Payment Services Directive (PSD2) has ensured that banks will allow approved third-party firms access to customer information, as well as request payments on a customer’s behalf.

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In addition, Australia, Hong Kong, Indonesia, Malaysia, Singapore, Thailand, Abu Dhabi, and other nations are implementing their own sandboxes.

But regulators in the U.S. have yet to set up a federal sandbox, instead relying on a “patchwork of state and federal initiatives that lack a common organizing strategy, exposing markets to regulatory uncertainty and consumers to potentially harmful products and services without adequate protections,” according to a report from The Pew Charitable Trusts.

The result is the U.S. falling behind its international counterparts, especially when it comes to the adoption of faster payments. In fact, US Faster Payments Council (FPC) and Glenbrook recently surveyed 700 stakeholders—financial institutions, core processors, payment network operators, FinTechs and acquirers—and found that nearly 60 percent felt that the US is not making enough progress in this area. 

Fortunately, there is some progress being made: The Consumer Financial Protection Bureau (CFPB) has been working with the Commodity Futures Trading Commission to develop a regulatory sandbox for FinTech firms. In the meantime, individual states are also taking initiative. Arizona was the first state to adopt a regulatory sandbox in 2018, followed by Wyoming and Utah in 2019.

But as Trevor Dryer, Co-Founder and President, Mirador at CUNA Mutual Group, recently wrote, a federal sandbox is needed to promote innovation that will benefit both FinTech banks and consumers. “A sandbox would significantly lower the barrier to entry for new consumer financial products, without exposing either banks or consumers to unnecessary risk,” he explained.