The Central Bank of Nigeria’s Draft Framework for Regulatory Sandbox Operations was issued on June 23rd, 2020, introducing a promising feature into the country’s rapidly evolving fintech industry. You can find a summary of the framework here, in which we highlighted the most important parts of the framework from the perspective of an operational or prospective fintech company. Here, we provide more clarity to help fintech founders make the right decisions on participating in the sandbox.
Why join a sandbox instead of building and testing privately?
The answer here needs some context: (1) Joining the sandbox is a strategic decision because there could be risks/downsides to joining a sandbox as well. Founders need to be clear about what they want to achieve if they decide to join a sandbox. Of course, it’s also a decision that must be discussed at the board level and for which board approval must be obtained. (2) Note that the sandbox is not mandatory, at least based on the draft regulation. Note also that the sandbox regulations are typically directed at fintech companies whose business models do not have clear regulations that apply to their product, or for which the applicable regulations are overly onerous.
Now, here are some incentives that you may benefit from participating in the sandbox:
1. Regulatory Certainty: What the Sandbox regulators are saying is that if there are some regulatory or other legal hurdles that are affecting your Fintech product, come into the sandbox, show us what you’re doing and if it’s secure and reliable, we will fix things by either identifying the regulation that applies or crafting a regulation or other legal process that will help that innovation to thrive. Joining a Sandbox will give you clarity and certainty as to what regulations apply to your fintech product and how to comply.
If existing regulations are onerous, joining a sandbox may also help regulators see reason why they should ease onerous regulatory requirements. For instance, if it becomes clear to the regulator that the company that owns a fintech product does not require, say, 100M in share capital, assuming that is a requirement in an existing regulation, a regulator may consider reducing this share capital requirement for that sandbox participant or similar companies in that particular vertical.
2. Strategic Partnerships: Strategic partnerships are a key asset for all companies, but especially so for fintech companies who often have to rely on infrastructure (API access, for instance) owned by other fintech companies, banks or other financial institutions. Joining a sandbox can give participants access to strategic partners that they need to scale their product.
3. Fundraising: In my experience advising investors, one of the most significant risks that venture capital and private equity investors are concerned about in Africa is regulatory risk. Completing a sandbox program will provide additional comfort to an investor looking to invest in a Fintech startup. The fact that a company has been through the sandbox and received the endorsement of the CBN to launch its products and services into the market would be a positive factor as potential investors evaluate the company, mitigating the fear of negative regulatory action in the future.
What variables should fintech companies focus on while conducting tests in a Sandbox?
When testing products and services in a regulatory sandbox, the most important consideration from the perspective of the supervising regulator would be the safety of the customer, risk management, and the security/integrity of the products in relation to the overall financial system. Interested fintech companies would be well-served if they highlight the low risk of their products and services to the consumers as well as to the structural integrity of the overall financial system. Themes or variables like cybersecurity, financial inclusion, data protection, reduction of transaction costs would be crucial.
Why join the CBN fintech sandbox over others such as the FSIA sandbox?
The primary difference between the sandbox being run by the Financial Service Innovators Association of Nigeria and that of the CBN is that the latter has the force of law, being created via subsidiary legislation by a Regulator. The FSI is not a regulator. Unlike the FSI, the CBN will have the power (as contained in the draft) to approve or prohibit a fintech company from proceeding to launch its products or services into the market, if CBN takes the view that the product will pose unmanageable risks to consumers or the financial system in general. Hence, a private-sector sandbox may be more akin, in practice, to a startup accelerator, with all the attendant benefits. A private sector sandbox simply cannot provide the level of regulatory certainty that a regulatory sandbox will provide.
