Why the Fintech Regulatory Sandbox is a Game Changer

Today ASIC released its consultation paper on the regulatory sandbox to our FintechMelbourne community.It provides details of the plan that allows early stage fintech startups to test their products oncustomers.Companies will still need to apply for an Australia Financial Services License (AFSL) howeverfor a period of 6 months they will be able to gain traction with their businesses as they worktowards full licensing.This is a game changer for the local fintech industry as most early stage companies face acatch-22 situation when starting up. They require funding to gain an AFSL yet are unable toprove their business models because they do not have one.Few people seem to appreciate how important this is for the industry.Its not about VC moneyA common misconception is that accelerating the growth of fintech in Australia is all aboutincreasing access to venture capital.With $438 million of investments made in the Australian fintech market in 2015, there are in facta plethora of private and corporate venture funds.However the reality is that investors dont make investments just on ideas. The expectation isthat entrepreneurs back themselves by putting in their own money and resources to prove theirconcept before receiving any significant funding.This is all well and good for generalist Uber for cats startup companies. However in fintechthere is a rigorous and expensive process of legal and regulatory engagement.In fact, many members within the Fintech Melbourne community have waited up to 2 yearsbefore receiving AFSL approval.The sandbox enables ideasThus most fintech startups never make it past the ideas stage. As per the 2015 FintechCensus, over 86% of of fintech entrepreneurs are aged 30 and over. The majority have youngfamilies and mortgages.Asking individuals to give up their livelihoods for up to 2 years just to gain regulatory approval tobegin testing an innovative business model can dissuade even the bravest of individuals. Yetmany still do it.However it doesnt have to be that way, and the ASIC regulatory sandbox seeks to provide analternative pathway.Inevitably, many of the fintech companies created as a result of the sandbox will fail. But from ahigh level perspective, creating more early stage startups will result in more later stagecompanies that could become the next billion dollar Pepperstone or Tyro.By allowing fintech entrepreneurs to test their ideas in a limited manner prior to receiving a fulllicense absolutely enables for the fintech ecosystem in Australia.I expect great things to come of it.Andrew Lai is the founder of Fintech Melbourne and FinancialAsk