• Johannes M. Gerlach and Daniel Rugilo

The predicament of FinTechs in the environment of traditional banking sector regulation – an analysi


A full working paper version of this article was published in the FiDL Working Papers-Series ISSN 2625-7041 (online), Working Paper No. 1 (2018), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3233435.

“Financial Technology-companies” (FinTechs) are increasingly changing the financial services industry worldwide and pose considerable challenges for regulators tasked to solve the arising trade-off between sound regulation and innovation support. Through their application of new technologies, FinTechs – for the purpose of our paper comprising both incumbents and startups - already provide the entire range of financial services traditionally covered by established banks and have become a significant segment within the traditional financial services sector in the meanwhile.

Beside their various opportunities to enhance efficiency and competition within the markets, these highly innovative entities may also pose considerable risks to financial stability. This is because there is still uncertainty about how regulators should best apply their strict banking regulations to the novel settings of FinTech business models without simultaneously creating a major hurdle for innovation.

In this regard, regulatory sandboxes, which were recently introduced in several jurisdictions, provide a promising solution, as they imply a liberalization of regulatory requirements in order to enable FinTechs to test their innovative services. Despite the diversity of successful and beneficial sandbox solutions already elaborated worldwide, we observe that to date no comparable initiative exists in Germany. In fact, so far only one legislation, which specifically addresses FinTech concerns in the crowdfunding business, was implemented. However, Germany’s status as one of the major FinTech markets as well as the rapid diffusion of FinTechs in the highly regulated German financial sector clearly indicate the growing need for the (local) regulator to provide explicit regulatory guidance for FinTechs by creating a contemporary and flexible solution.

Based on the identified need for action in the German context and the high interest of the federal supervisory authority – the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) – in this topic, we aim to develop a sandbox framework that is applicable in the German regulatory environment without compromising core regulatory objectives. Building on an in-depth analysis of the various sandbox models worldwide, which were identified as relevant systematically, a major objective of our paper is to develop an own set of recommendations as a basis for an accessible and sustainable sandbox implementation.

To the best of our knowledge, our paper represents the first study of key international sandboxes as a basis to design guidelines specifically for the German financial market. Thereby, we contribute to the literature as we evolve an effective regulation within the new setting of innovative financial technologies. Moreover, our findings and implications contribute to the practical solution of current challenges faced by both regulators and affected companies. Moreover, even though our derived implications focus on the Germany financial sector, the results may potentially be applicable in further jurisdictions with similar regulatory requirements. Additionally, our analysis of various sandbox models worldwide can be used as a basis for further research, which focuses on other than the German financial markets.

Johannes M. Gerlach, Heinrich-Heine-University and Daniel Rugilo, University of Cologne


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