Building a U.S.-UK FinTech Sandbox?
March 7, 2018
The United States and United Kingdom have been at the forefront of the FinTech industry, spawning hundreds of companies that help consumers and companies borrow, raise capital, lend, get insured, and pay online. But between these empowering tools and their potential users is a sprawl of regulations that make it costly for FinTechs to scale, especially in the United States, and complicate UK FinTechs’ prospects to serve markets on both sides of the Atlantic. Could the market FinTechs in particular be more integrated between the U.S and UK, for the hop across the pond to be just that?
Proliferating to number 6,000 around the planet, FinTech startups have disrupted the world of financial services dinosaurs, such as banks, insurance companies, and credit card businesses. In the process, they have done a great deal of good, for example opening access to fast-disbursing loans to small businesses in rural regions and segments abandoned by banks, helping women entrepreneurs raise capital more easily for their businesses than they would from VCs, and enabling a friend to pay another for a dinner (or perhaps completed homework!) with a tap of their phones. In record year, in 2015 venture capital investment in U.S. FinTech hit a record $6 billion and in UK $676 million. Online loans from FinTechs are still a couple of percentages of small business loans made by banks in the U.S., but they are growing some 20 times faster.
Yet bringing FinTech innovations to market is costly, due to the myriad of regulations surrounding financial services. Of course, some rules are in the books for a good reason – such as to prevent fraudulent crowdfunding campaigns or predatory lending practices. UK has helpfully lowered FinTechs’ time and money to market with the sandbox approach, whereby companies can bring to market a new financial product or service without the entire gamut of regulatory approvals, and regulators can watch the market develop and regulate undesirable behaviors out.
Various countries such as Australia, Singapore, and Thailand have copied the sandbox in order to energize their FinTech ecosystems. With nearly a dozen federal and a range of state agencies regulating FinTech, the U.S. has its own sandbox proposal – in a bill calling for a Financial Services Innovation Office to (FSIO) to support the development of financial innovations.
Yet a critical problem remains: each country (and in the U.S., each state) has its own financial services regulations that do not interoperate well. This forces FinTechs scaling across borders to adopt rules and apply for licenses specific to each new market. For example, a British (or for that, an American) online lender seeking to service all U.S. states will have to meet each state’s regulations. Or, a U.S. equity crowdfunding site that wants its clients be able to solicit UK investors would need to do costly paperwork to ensure the securities sale was in line with UK’s securities laws, not just with the rules of the U.S. Securities and Exchange Commission.
These frictions make the very point of FinTech, or any “-Tech” scalability, much harder to attain than is the case for, say, social media or ecommerce companies. The regulatory mismatches are reflected in the cost and time – on average, $2 million and 2 years – it takes to make a U.S. FinTech to scale and get into black. Granted, venture capital for FinTechs is more amply available in the U.S. than UK, but it’s tougher to build a FinTech in the U.S. without it. Similarly, expanding to the U.S. market is an option only for those UK companies that have deep enough pockets to meet the various regulations. This limits U.S. and UK consumers' and companies’ access to innovative financial services.
The obvious way to help FinTechs take off faster with less is to make transatlantic financial regulations interoperate.
The United Kingdom has made good headway on this idea – with Canada. In February 2017, UK’s Financial Conduct Authority (FCA) and the Ontario Securities Commission of Canada signed an agreement to refer to one another innovative businesses seeking to enter the other’s market and help them navigate regulations and lower time to market. The deal is hailed as a template for the first cross-border regulatory collaboration in the FinTech market. And so it probably was intended: just a month earlier, FCA’s new Chief Executive Andrew Bailey gave a speech stressing the need for global regulatory standards as the basis to govern market access for financial services firms. For its part, the Ontario Securities Commission of Canada had earlier concluded a similar deal with the Australian Securities and Investments Commission. UK and Australia have also created a FinTech bridge to enable their respective FinTechs to play in each other's markets. UK has created similar bridges with South Korea and Singapore, among others.
Meanwhile U.S. has made progress on creating uniform state law to be adopted across all states to regulate Bitcoin and virtual currency businesses, and states and the federal bank regulator Office of the Comptroller of the Currency are on their respective fronts (and egged on by each other) working on a more uniform rules for online lenders across states. In addition, in January 2017 the USTR and Treasury created with the EU the first insurance “covered agreement” to resolve the disparate treatment of U.S. insurers operating across EU member states, and to eliminate collateral requirements for EU insurers in the United States.
These efforts provide a great basis for a U.S.-UK deal to create a common market for FinTechs looking to service users on both side of the Atlantic. Paul Thanos has proposed U.S. and UK pilot an InsurTech Greenhouse, a lusher, binational version of the sandbox, that would enable U.S. and UK InsurTech companies to do beta tests that regulators could then assess and learn to determine which companies are ready for licensing. With the ongoing drives in the U.S. and UK to bridge regulatory islands, timing is right to scale the idea into a U.S.-UK FinTech Sandbox. And let’s bring the Canadians and Australians to play in it too.