The creation of a “global sandbox” by regulators clears the way for cross-border fintech, which should benefit innovative financial firms, says Moody’s Investors Service in a new report.
Last week, a collection of 12 global regulators, including the Ontario Securities Commission and the Autorité des marchés financiers, announced the launch of the Global Financial Innovation Network (GFIN), which aims to facilitate co-operation among regulators around the world and innovative financial firms to enable firms to experiment across borders, and to share information on policy development in this area.
“We expect the GFIN to achieve greater international regulatory cooperation in innovative financial services, to facilitate cross-border financial technology (fintech) activity and reduce the time that fintech companies require to bring their services to the market,” the Moody’s report states.
By enabling cross-border fintech, the rating agency says that this initiative will benefit innovative financial firms. “The establishment of a global regulatory sandbox is a credit-positive development for agile incumbent banks that aggressively pursue digital strategies to defend their core franchises and other financial services companies because it will allow them to test new products under a regulatory umbrella, and in multiple jurisdictions,” the report states.
In particular, banks could benefit from innovation in certain areas, such as lending, risk management and controls. In addition, enhanced competition typically supports economic growth, which is also a positive for banks, and increased international regulatory co-operation reduces compliance risks.
At the same time, the development represents a negative for traditional financial firms that have yet to embrace innovation “because it reduces their inherent competitive advantages as it helps new companies with more limited resources test their products in the marketplace,” the report states.
The report explains: “agile incumbent banks that are already pursuing large-scale digitalisation strategies to continue to invest in these technologies to defend their franchises, increase their client bases and improve their operational efficiency levels. The setup of the GFIN offers even greater opportunities to develop these activities, particularly at large internationally diversified banks. However, laggard banks will likely face increased customer attrition, reduced pricing power and uncompetitive cost structures.”