Pros of sandbox regulation for fintech companies

Introduction

Financial inclusion, with the participation of fintech companies, has been one of many developing countries' top priorities. Fintech is thought to help customers, particularly individuals and small and medium-sized enterprises (SMEs), gain access to banking and financial services at lower costs and with more user-friendly procedures than traditional banking services. Vietnam is one of the developing countries that is firmly committed to this development, owing to its reliable digital finance infrastructure (e.g., internet and smartphone infrastructure) and its young and interested population.

Fintech in Vietnam

Leading fintech company

While Vietnam has a high rate of smartphone users, according to the State Bank of Vietnam (SBV), less than half of the country's population has a bank account, resulting in the rapid growth of Vietnamese fintech companies. The government recognized the rise of fintech in 2018 and formed a steering committee to improve the sector's ecosystem. All of these factors have resulted in a thriving tech entrepreneurship scene for fintech solutions.

Vietnam currently has 77 fintech companies. Among the three product segments (digital payment, personal or retail finance, and corporate finance), digital payment solutions account for 89 percent of the service market share. In June 2019 the SBV licensed 30 intermediary payment service providers, of which the majority offer e-wallets. The most popular companies that provide e-wallet services in Vietnam are:

  • Momo;
  • VnPay;
  • BaoKim;
  • NganLuong; and
  • Zalo Pay.

These activities were licensed under the mechanism of non-cash payments regulated in Decree 101/2012/ND-CP issued by the government in 2012 on non-cash payments.

Another notable activity in Vietnam's fintech landscape is peer-to-peer (P2P) lending, which is categorised as personal or retail finance. There are 40 P2P companies that provide a platform for money lending between users in the country (eg, Mofin, HuyDong and BaGang). The lending is believed to help customers, especially household businesses and SMEs, access banking and financial services at low costs. The development of P2P lending will also create a new capital supply channel instead of the credit system of traditional banks.

Blockchain in fintech company

Incorporate finance, the introduction of new technologies such as blockchain – with its primary applications in cryptocurrencies – has sparked considerable interest in Vietnam, particularly in light of the global skyrocketing rise of bitcoin and ethereum. The Vietnamese dong was used by 15% of surveyed cryptocurrency payment companies worldwide in 2017. In the country, blockchain has opened up new avenues for data collection and analysis, risk management, and treasury management. However, only a few start-ups are active in this field (eg, cash2vn, Bitcoin Vietnam, fiahub and Verichains).

The activities of P2P lending and blockchain are not currently governed by any regulations in the Vietnamese legal system. In practice, fintech companies operating P2P lending or blockchain platforms must only obtain an enterprise registration certificate. When the companies wish to implement new projects, they may submit official letters to the competent authorities explaining their product and service plan to obtain approval.

Obviously, this expands access to blockchain technology for fintech companies. Providing two-way support platforms, in particular for B2B fintech companies, allows them to benefit greatly from blockchain, allowing all activities conducted via this technology to settle faster and more efficiently. FinFan, a company that quickly changed when it used blockchain to build a "cross-border money transfer" platform. The outcomes of this technology are undeniable. Take a look at FinFan and see how it grew from a "blind" business to becoming a partner of more than 50 major money transfer partners around the world.

However, due to the lack of a legal framework, the competent authorities are often confused when assessing submitted dossiers and allowing new activities in the fintech market. Consequently, the dossiers usually remain pending or are rejected, which leads to projects not being deployed. On the other hand, the lack of regulations enables many companies to operate liberally without satisfying any legal requirements. These operations, without any control from the authorities, carry risks of high-tech, fraud and financial crimes, such as:

  • theft of personal information;
  • tax evasion;
  • money laundering; and
  • unlawful capital mobilisation.

Sandbox

Vietnam can draw on the experience of developed countries in the formulation and development of such frameworks to meet the urgent demand for a legal framework for fintech. The fintech regulatory sandbox is one implemented pilot mechanism for the operations of fintech firms (sandbox).

The concept of a "sandbox," which emerged during a period of rapid technological innovation in financial markets, is an attempt to address the tensions that exist between different regulators' desires to encourage and enable innovation. The first sandbox was launched in 2015 in the United Kingdom, and many other countries have since followed suit. A "sandbox" is a framework set up by a financial sector regulator, typically summarised in writing and published, to enable small-scale, live testing of innovations by private firms in a controlled environment (operating under a special exemption, allowance or other limited, time-bound exception) under the state authorities' supervision. A sandbox typically works as depicted in Figure 1.

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Figure 1: sandbox application and approval process

The process can be explained in four stages.

Application stage

During the initial application stage, the fintech company (ie, the sandbox entity) submits a sandbox package, including four types of the dossier. Upon the receipt of the package, the authorised state agency (ASA) will review the dossiers and inform the sandbox entity about the potential suitability of its package. This information helps the sandbox entity adjust its business and resource planning.

Evaluation stage

During the evaluation stage, the sandbox entity discusses the specific milestones for its project (eg, the time for testing and operation or the time for completion of the experimentation stage) with the ASA. Meanwhile, the ASA sets out a legal framework with which the sandbox entity must comply. Depending on the service's completeness and complexity, the ASA may reject the package. However, the sandbox entity is allowed to re-apply. The rejection must be in writing and contain explanations to assist the entity in resubmitting their package.

Experimentation stage

Upon approval by the ASA, during experimentation stage, the entity may operate its service only once it has notified its customers that the service is being tested in a sandbox and disclosed all key risks that customers may encounter while using it. Simultaneously, the ASA will establish an expert committee, including financial, legal and technical experts, to monitor the operation of the service. After the experimentation stage has ended, the ASA will decide whether to extend the experimentation time, discontinue the project or officially deploy the project.

Decision stage

Once the decision has been made to deploy the project, it sets out a framework for other fintech companies operating similar services. Such companies would still have to apply to go through a sandbox process. However, they may be exempted from going through the evaluation and experimentation stages if they operate similar services to the sandbox entity that has been approved by the ASA.

To make its decision, the ASA will carefully review the pros and cons of the service and feedback from customers.

Comment

Using a regulatory sandbox may affect digital financial inclusion in several ways, including:

  • The introduction of new, affordable products or services that address the needs of excluded customer segments;
  • The introduction of distribution channels that reach out to dispersed populations in remote and rural areas;
  • Operational efficiencies that enable financial service providers to serve low-margin clients profitably;
  • The introduction of ways to address compliance and risk management barriers to financial inclusion; and
  • Increased competition, which may prompt traditional service providers to focus more attention on unserved segments and improve procedures to keep their revenues steady.

Although the SBV is preparing and will soon issue pilot regulations on the establishment and business operations of fintech companies, the Vietnamese law system is still lacking regulations that enable the operation of such pilot entities. Therefore, it is recommended that the government creates a legal framework for the sandbox as pilot regulations have already been implemented effectively in various other countries.