This article was originally featured in Central Bank Payments News.

It is without a doubt that the world has gone digital and the fourth revolution is upon us – where technology is no longer a tool to improve how we do things but instead infused to all we do. New business models in financial technology (FinTech) leveraging on low marginal cost infrastructure like the mobile and superior customer experiences provides opportunities to both individuals and businesses to access and actively participate in an inclusive, equitable, digital and empowering financial economy. However, there is no doubt that leveraging digital financial services and FinTech for financial inclusion goals come with new risks such as those stemming from unfair lending practices related to unmonitored use, and those related to the analysis of big data or increased systemic vulnerabilities due to threats of cybersecurity. Yet on the whole, there are strong reasons to believe that – if effectively supervised – digital financial services will strengthen both financial stability and financial integrity.

Inclusive FinTech

Financial regulators in the Pacific which are structured in the Pacific Islands Regional Initiative (PIRI) within the Alliance for Financial Inclusion (AFI) are recognizing that the disruption in financial technology offers great opportunities for developing and emerging economies to significantly drive the uptake of Digital Financial Services (DFS). AFI is the world’s leading organization on financial inclusion policy and regulations, a member owned network of developing and emerging countries, that work together to achieve greater financial inclusion through promoting and developing evidence-based policy solutions. The network applies a cooperation model that embraces a bottom-up approach to policy formulation and implementation.

PIRI was created in 2014 at the Global Policy Forum (GPF) in Maputo, Mozambique and was officially launched in Dili, Timor Leste in 2015. It is made up of members from the central banks of Fiji, Samoa, Solomon Islands, Vanuatu, Papua New Guinea, Timor Leste, Tonga and Seychelles. The PIRI member countries have made progress in their financial inclusion journey although each is at differing stages, including with regard to their achievements. The association of PIRI members with AFI and its extensive network of central banks and monetary authorities has benefited members in the Pacific through knowledge sharing and smart policy development for the region.

A world-first regional sandbox

The characteristic of small island nations with rugged geographic terrain, dispersed islands with low population densities, limited public infrastructure, poor telecommunication network connectivity and high illiteracy making the provision of financial services a daunting task. At the 2018 AFI Pacific Islands Regional Initiative (PIRI) Leaders Roundtable held in Apia, Samoa, members from the Pacific and small islands states, strengthened their determination and affirmed their commitment to FinTech. With the challenges that the region and other small islands face, the disruption in financial technology (Fintech) offers great opportunities to address these challenges. They recognized that disruption in FinTech offered great opportunities for developing and emerging economies to significantly drive the uptake of Digital Financial Services (DFS), as such launched the Apia Action Plan on FinTech for Financial Inclusion in the Pacific Islands.

One of the first activities under the workstream was a regional training on fintech for financial inclusion. The training focused on emerging fintech innovations in the Pacific and small island states and corresponding regulatory responses in the form of regulatory sandboxes and other innovative regulatory approaches. The training also explored the setting up of a regional regulatory sandbox. Globally, members felt that the Pacific was rightly placed both from a policy and market perspective to test a regional regulatory sandbox approach. This is because of the many commonalities related to culture, geography, socio-economic development and most importantly challenges related to financial inclusion. Members also acknowledged that working as a regional block will be beneficial both to regulators as well as fintech companies/service providers. In this context, leaders from the Pacific provided their in-principle approval for setting up a regional regulatory sandbox.

The regional sandbox hits the road

As an outcome of the training, members developed an outline of the Pacific regional regulatory sandbox. A technical sub-group, consisting of members from PIRI member countries, was formed to work towards development of sandbox guideline. The subgroup presented regional regulatory sandbox guidelines along with tentative implementation plan at the PIRI Leaders’ Roundtable meeting held on September 11th, 2019 in Kigali Rwanda. PIRI leaders endorsed and approved taking forward the Regional Regulatory Sandbox Guidelines and the Implementation Roadshow and Plan. Following the endorsement and adoption of the PIRI Regional Regulatory Sandbox Guidelines, the technical subgroup and AFI management unit were tasked on taking forward the implementation plan and operationalizing the regional regulatory sandbox starting with the sandbox implementation roadshow.

The roadshow was an in-country visit by the AFI management unit with the intent to engage with each participating member and all other stakeholders such as telecommunications authority, ministries, public and private sector stakeholders, trade unions and associations, external strategic stakeholders etc. to identify the in-country implementation mechanism, provide support with implementation and capture specific requirements and considerations for each participating country towards implementing the regional sandbox. The roadshow was undertaken from 24 October 2019 to 03 December 2019 in member countries.

During the roadshow, there were few observations recorded across the PIRI members countries. The difference in knowledge levels on regulatory sandbox was observed. It was noted that the highly knowledgeable countries in a structured regulatory sandbox included Fiji and PNG, who both exhibited a clear understanding and ideas on how they will implement the regional sandbox in-country. A few countries also presented some knowledge on sandboxing through some of their regulatory approaches to DFS and fintech, in this category are Tonga with their approach to develop a national payment system and Timor Leste, through their approach to licensing their first set of FinTech players. Additionally, the keenness to link the sandbox to macro-economic objective and economic growth strategies was a desire that members shared. To link and leverage the regional sandbox as a tool to achieve economic growth strategies such as improving their global “ease of doing business” ranking, presenting cases for fintechs and other global businesses to domicile their businesses in their countries to aid employment, foreign direct investments and also lower the cost of digital financial services. Fiji, PNG, Samoa, Tonga and Solomon Islands were particularly excited about these possibilities.

Members shared that the establishment of the regional sandbox will provide long-term opportunities for member institutions to share a common vision for greater financial inclusion, while working towards ensuring affordable, secure and efficient technology that will provide client-centric financial services.

A test-bed for innovation

The establishment of a regional regulatory sandbox will be an excellent platform for PIRI member countries to leverage regulation by allowing for new innovations to be trialed in a secure environment to ensure that new fintech innovations have the necessary KYC, cyber security, risk management frameworks, including AML/CFT, data privacy  and  sanction  provision  requirements,  that  will allow  for  the delivery of affordable, safe and efficient financial services to the unbanked. The regulatory sandbox is an electronic portal where members can access information to view applications, their status and the jurisdictions in which it may be trialed. A major benefit of the regulatory sandbox is that fintech innovations not presently covered by legislation can be trialed within the Sandbox and if they are assessed to be of significant benefit to society and commercially viable, thereby challenging regulators to make legislative changes, policy amendments and new standards to accommodate innovation.

PIRI Members have undertaken an unprecedented move to create a regional regulatory sandbox that encourages the development of innovative financial technology solutions and foster financial inclusion in the region. Members acknowledge that the  regional sandbox is a framework to encourage  innovators  to  come  into  the   region   and,   having   passed  the necessary criteria, can be housed  within  the  national sandbox ensuring the  achievement  of  maximum  benefits  from  synergies,  especially in regulatory assessments and fintech product trials. The regulatory sandbox will allow financial services providers and innovators to experiment with innovative financial services in a live production environment bounded by clear parameters, appropriate safeguards and defined spaces and duration. This is to contain the consequences of failure and to maintain the safety and soundness of the domestic financial system.

Read more about the Pacific Regional Regulatory Sandbox Guidelines.

The PIRI initiative is partially funded by UK aid from the UK government.