Fintech Toolkit: Smart Regulatory and Market Approaches to Fintech Innovation

By | July 6, 2020

Fintech is re-shaping the financial sector at an unprecedented pace and driving structural changes by digital transformation. Fintech can stimulate competition and product variety and generate positive outcomes for societies and economies. Capturing these upsides, however, requires adequate regulatory responses to Fintech innovation. An enabling FinTech ecosystem needs to support innovation balanced with financial inclusion, financial stability, market integrity, and consumer protection.

In a recent report entitled Fintech Toolkit: Smart Regulatory and Market Approaches to Fintech Innovation, we analyze the range of tools available to promote financial innovation and inclusion and how they might best interact with current technologies and regulatory capacities. The tools we consider include innovation hubs, testing and piloting frameworks, regulatory sandboxes, umbrella sandboxes, waiver programmes, restricted licences and FinTech special licenses. This toolkit presents novel regulatory and market approaches for policymakers, regulators, and development professionals to support safe Fintech innovation.

How to Regulate Financially Inclusive Innovation

Regulatory frameworks will determine the future of Fintech. Following principles from global good practice (which are mainly activity-based, proportional, and technology-neutral regulation), sequenced regulatory approaches help create pathways for the growth of innovative Fintech firms.

First, regulators should identify and modernize unsuitable regulation based on a regulatory impact assessment that determines whether legacy rules remain useful.

Second, a good starting point for nations in identifying and revamping legacy regulations is to implement proportional regulation in a tiered approach. Provisions for market stability and integrity should be proportional to the extent of the risks of the regulated activity, with more lenient provisions for less risky activities and increasing, more prudential, requirements for riskier services. This approach will create supportive pathways for new, inclusive non-bank financial services.

Fourth, testing and piloting regimes allow for the application of leniency for innovative firms through wait-and-see or test-and-learn approaches. Authorities can support innovations by licensed institutions and start-ups by extending, on a case-by-case basis, waivers or no-action-letters which validate certain activities or suspend certain rules.

Fifth, a regulatory sandbox, which standardizes the scope of testing and piloting, allows regulators to create a tightly defined safe space which exempts from specific regulatory requirements innovative firms that qualify. Global experience strongly suggests that most Fintech entrants in the MENA (Middle East and North Africa) region will probably not qualify for a sandbox – or will decline to enter it, as their growth trajectory will take them quickly beyond its limits – but will benefit greatly from the guidance offered by an Innovation Hub.

Sixth, restricted licenses allow approved innovative firms to further develop their client base and financial and operational resources in a controlled manner.

Seventh, a full license will become essential for innovative firms to scale.

By developing through some of these stages, regulatory rigour and costs only increase in line with the Fintech firm’s maturity and ability to manage risks and compliance, while maintaining a level playing field for licensed entities.

Demand and Supply

Demand and supply often eventually propel innovative entrepreneurship and Fintech growth. Market approaches to Fintech innovation combine the support of financial and digital literacy in consumers, cybersecurity capacities in the sector, acceleration programmes and investor-friendliness in the business environment, and technology clusters or digital centres in public-private-academic partnerships.

In considering the infrastructure needed to support both public and private digital financial activities, the core building blocks are sovereign digital identity systems, simplified account opening systems based on golden source government data, and interoperable electronic payment systems. Such a framework provides the basis for digital financial transformation, enables more effective government actions involving finance, and – central from the standpoint of supply and demand – reduces costs of customer acquisition and new business models, thereby enabling commercially viable business development to a large range of previously excluded segments of society. This has been very clearly reinforced by experiences in the context of the global COVID-19 pandemic.

This toolkit focuses on innovative regulatory approaches to support the evolution of Fintech in a balanced and proportional way and provides policymakers and regulators with guidance and the range of available options to harness Fintech innovation derived from global best practice. The choice of any particular approach is a matter of sovereign discretion informed by local expertise in the domestic ecosystem and market.

Cross-Border Harmonization and Market Access

We suggest that policymakers and regulators focus particularly on the benefits of regionally harmonized regulatory frameworks for Fintech. The more consistent regulatory approaches are across a region, the more attractive each of the national markets will be to innovative financial service providers.  In turn, a greater number of providers in a region allows customers to choose from a wider range of services and benefit from more competitive prices.

Achieving regionally integrated frameworks as part of enabling ecosystems for Fintech is not an easy task. It is important to educate stakeholders across a region to understand that a high level of collaboration is their best option for attracting innovative financial services providers.


Sequenced reforms that are informed by global best practice, responsive to the local context, and contribute to regionally consistent frameworks are policymakers’ best options to support an enabling ecosystem for Fintech. Concerted efforts will enable innovative financial service providers to tap the market and reach the scale to enable Fintech to support financial inclusion, competition, and economic development across the region.


Dirk A. Zetzsche is a Professor in Financial Law and ADA Chair in Financial Law and Inclusive Finance at the University of Luxembourg.

Douglas W. Arner is the Kerry Holdings Professor in Law at the University of Hong Kong. He led the development of the world’s largest massive open online course (MOOC): Introduction to FinTech as part of the first online Professional Certificate in FinTech.

Ross P. Buckley is a Scientia Professor and KPMG Law — King & Wood Mallesons Professor of Disruptive Innovation at University of New South Wales (UNSW).

Atilla Kaiser-Yücel is central bank advisor for financial inclusion and technology at GIZ.

This post is adapted from their paper, “Fintech Toolkit: Smart Regulatory and Market Approaches to Financial Technology Innovation,” available on SSRN.

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