From hedge funds like Numerai to personal loan providers like Prosper, financial technology (FinTech) firms are bringing to market new solutions to increase efficiency and inclusiveness in banking and financial services. The potential of FinTech is even greater in emerging markets. Economist Irving Wladawsky-Berger wrote, “For the billions around the world without access to traditional financial services … FinTech could be their ticket to financial inclusiveness and membership in the global digital economy.”

Firms leveraging machine learning, such as Lendable (a debt platform for African alternative lenders) and Destacame (an alternative credit scoring platform), can help developing countries leapfrog over many stages of development in the financial sector. Central bankers are hopeful, but also aware that regulatory barriers can significantly slow down or prevent FinTech innovation. For the last two years, the main policy tool used to support the development of the FinTech sector has been the creation of regulatory “sandboxes.” Similar to sandboxes used in the tech industry, where developers test software in a segregated environment to avoid risks to the wider system, these regulatory sandboxes allow firms to test solutions in a controlled environment for a set duration (typically 6 months) without immediately imposing the usual regulatory costs and approval procedures. This process allows innovators to test their products and understand what regulatory boundaries may eventually apply once they have “graduated” from the sandbox. At the same time, it gives the regulator time to learn before making a decision on how to regulate new products and services.

Read the full article by Simone di Castri & Ariadne Plaitakis about financial technology from Stanford Social Innovation Review