By Pavel Shust, Consultant, AFI
Central banks in Fiji, Papua New Guinea, Samoa, Seychelles, Solomon Islands, Timor-Leste, Tonga and Vanuatu are set to launch the world’s first-of-its-kind regional regulatory sandbox with support from AFI.
The Pacific Regional Regulatory Sandbox will allow financial service providers and financial technology firms (FinTechs) from across the world to test their products and services in a live environment, enabling greater access to markets in eight participating countries. It offers a single market solution that solves specific challenges for people, markets and financial systems in a region that has one of the highest rates of unbanked persons globally.
It establishes a joint approach for financial regulators in the Pacific to review potential applicants, easing the application process and allowing successful applicants to simultaneously test their innovative technologies in multiple jurisdictions.
“The sandbox presents the Pacific as a single market to build scale and attract solutions that would previously have been inaccessible within each individual country. It is, most importantly, a mechanism for greater collaboration exchange and capacity building among central banks in the region,” the governors of the eight participating central banks said in a joint statement.
This project will further promote cooperation and alignment of approaches across the Pacific region and beyond. Although regulatory decisions will remain with the national regulators, such coordination may ease market entry for incumbent and new service providers bringing new, secure and affordable financial services to the region, particularly those who are still financially excluded.
“We encourage other innovators across the globe to join us on this exciting journey and contribute towards to the drive for a more inclusive and progressive society that fosters financial innovation and improves the access, use and quality of financial services,” they added.
While new financial products and services can bring significant benefits to financial inclusion, they can also create unanticipated risks. Regulatory sandboxes allow regulators to identify and mitigate these unanticipated consequences before they become systemic and detrimental to consumers and the wider economic system.
More than 30 local sandboxes are currently in operation across the world, supporting rigorous testing that helps regulators gain a clearer understanding of ways to lessen risks ahead of a possible full-scale roll-out. In other words, if done right, regulatory sandboxes can be an important instrument for evidence-based decision-making.
The Pacific Regional Regulatory Sandbox, which is expected to be launched in early 2022, takes this concept one step further by expanding the geographical limits of testing and offering the Pacific as an attractive option for innovators.
It consists of two elements. First are guidelines that outline the requirements that applicants and products must meet in order to join the sandbox, as well as the main stages of the regulatory sandbox lifecycle. Second is the electronic platform, where firms can apply for testing. Applications can be made to all or a select few participating regulators, where they are reviewed individually.
The electronic platform will be used to exchange additional information, submit reports and handle communications between the innovators and Pacific Islands Regional Initiative (PIRI) regulators on sandbox testing. Inter-regulatory communications will also be maintained through the same platform.
Blueprint for regional cooperation
Pacific Regional Regulatory Sandbox is a great example of successful cooperation among stakeholders facing similar challenges and acts as a blueprint for regional cooperation in the future.
In the Pacific, higher costs related to geographical and infrastructure challenges mean that economies can struggle to attract innovators. FinTechs usually want to scale up their products quickly, a feat that is often difficult to achieve in small islands states.
Regional cooperation provides opportunities to reach these economies of scale. Innovators that gain approval to test their products in the sandbox can serve customers in Fiji, Papua New Guinea, Samoa, the Solomon Islands, the Seychelles, Timor-Leste, Tonga and Vanuatu, making the region more attractive to FinTech providers. If successful, this approach can be replicated in other regions.
PIRI governors and the heads of central banks in New Zealand and Australia endorsed the sandbox at the annual South Pacific central bank governors meeting held in November 2021. In a speech to participants, Bank of Papua New Guinea Assistant Governor Ellison Pidik emphasized that the sandbox complements the Pacific Islands Regional De-Risking Action Plan.
“[It will] attract innovative solutions to the region that help to achieve PIRI members’ financial inclusion goals and to tackle persistent regional challenges such as de-risking by allowing testing of solutions in areas such as digital identification and cross-border payments,” he said.
Adopted by PIRI leaders last year, the action plan aims to mitigate or reverse the impact of a withdrawal of banking services from money transfer operators serving small island state economies in the region, and a decline in correspondent banking relationships between regional players and international payment systems.
The sandbox also specifically supports innovative products and services focused on financial inclusion by focusing on areas that include expanding account ownership, improving digital and financial literacy, developing the micro, small and medium enterprise sector and implementing gender-sensitive financial services. This will encourage financial innovators to steer towards socially important products and services.
Finally, the sandbox platform is a great example of digitizing regulatory processes. It supports the digital workflow for submitting applications and supporting documents, as well as communication between all parties throughout the testing and evaluation processes.
While the sandbox and its platform are experiments themselves, if successful, they can be expanded to include other countries or repeated elsewhere to spur cooperation among other likeminded regulators. There has already been significant interest towards this initiative from within the AFI network with members of its PIRI welcoming Central Bank of Seychelles, expanding the jurisdictions covered by the sandbox.
PIRI is made up of seven AFI members: Banco Central de Timor-Leste, Bank of Papua New Guinea, Central Bank of Samoa, Central Bank of Solomon Islands, National Reserve Bank of Tonga, Reserve Bank of Fiji and Reserve Bank of Vanuatu. Officially launched in Timor-Leste in 2015, PIRI aims to make formal financial services accessible across the region, which faces multiple challenges including geographically dispersed islands, small populations and limited banking infrastructure.