The sandbox approach

Much has been said about the doom that FinTech is set to spell for traditional banking. However, this rivalry is now giving way to a more future-first collaborative approach. The simplification of complex processes, bundled with heightened user experience, has made FinTech appealing and has encouraged many banks to open their doors to FinTech alliances that will enable the co-creation of solutions to foster a new wave of digital disruption.

Globally, innovative banking endeavours like the UK’s Open Banking Standard—an approach that aims to transform and improve the banking experiences of customers—is showing promise not only in the UK but also in other countries and markets. The project already works with most German banks and is creating an ecosystem of third-party applications for customers. The success of the Open Banking Standard and other such FinTech initiatives has inspired developed markets to adopt them. Alternatively, banks are playing with the idea of creating an innovation zone within their organisations by on-boarding different technology vendors to create solutions that are customised to their needs.

What is a FinTech sandbox?

A FinTech sandbox or an application program interface (API) sandbox is an environment that innovators and testers can use to mimic the characteristics exhibited by the production environment on a real-time basis to help simulate responses from all the systems an application interfaces with. This enables banks and FinTech players to experiment with innovative financial products or services within a well-defined space and duration. Moreover, the presence of appropriate safeguards helps in containing the consequences of failure. Essentially, the sandbox allows for the pilot testing of newly developed technologies. 

An ideal FinTech sandbox

FinTech Sandbox

The need for a FinTech sandbox

The rising sophistication of FinTech solutions is leading to increasing levels of risks. In circumstances where it is unclear whether a new financial product or service complies with existing banking standards, some financial institutions may err on the side of caution, thereby hindering innovation. Furthermore, every organisation is trying to do pilots with dozens of FinTechs and managing the process is becoming very complex. We believe that a FinTech sandbox can help innovators overcome these challenges.

A sandbox acts as a layer between banks and their innovation initiatives and facilitates smooth collaboration between FinTech companies and incumbents. Additionally, banks are relieved of the stress of dealing with multiple data requests (often the first step to solution development) as the sandbox serves as a ready reservoir of process-related information.

Although this approach is most popular among banks, the set-up and its benefits can also be enjoyed by insurance and investment management firms. 

Benefits of a FinTech sandbox 

Piloting a product or business model through a sandbox will help companies manage their regulatory risk during the testing period itself.

There are no restrictions on transaction size as the sandbox is in a UAT environment.

A sandbox could also facilitate more partnerships between legacy and start-up companies.

Three ways for banks to master the sandbox approach

Business design

A sandbox should be designed in a way that encapsulates the business logic and data necessary to represent multiple banking functions such as APIs, products, services and transaction flows. This will help developers to achieve a more holistic view of the bank. A sandbox should also contain data on all critical banking functions so as to ensure coverage and equal innovation opportunities across all lines of business. Some key APIs that banks should offer are:

  • Virtual account creation
  • User creation and validation
  • Detailed statement
  • Mini statement
  • Mandate
  • Funds transfer
  • Payment (bills, recharge, etc.)
  • Beneficiary registration
  • Credit score
  • eKYC application
  • Deposits creation
  • Sweep services/scheduled payments
  • Single payment to beneficiary
  • Multi-payment
  • Cheque services
  • CIF creation
  • Currency rates
  • IFSC finder
  • Office locator
  • PAN verification
  • Interest rate enquiry
  • Loan eligibility and application
  • Trade and treasury services
  • Test data creation

Easy access

Easy accessibility should be one of the key features of a sandbox. This could be through a physical space or virtual cloud presence to ensure that location constraints can be overcome. Access to an industry sandbox should be made simple for companies of all sizes. It should be a separate deployment environment with virtual users and transactional capabilities which are similar to the production system in all aspects.

Collaboration

A sandbox should be conducive to a collaborative environment that provides developers with the necessary tools to create and share codes. This could be done by developing a forum to discuss relevant topics or enabling digital hang-outs so as to overcome regional constraints. Capabilities could be demonstrated through tutoring services to enable developers to create a truly customised solution.

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