With new financial technologies transforming how we send, receive and spend money, Texas lawmakers are evaluating what it would mean if a regulatory “sandbox” were to be implemented in the state.
Right now, Arizona is the only state in the U.S. to adopt such a policy, which alleviates some regulations that financial technology companies must deal with when trying to launch a new product to market.
Cesare Fracassi, associate professor of finance at the McCombs School of Business at the University of Texas at Austin, says it’s currently a costly process to ensure consumers are protected.
“Think about how expensive it is to open a bank,” he said. “In order to open a bank, you have to actually go through a series of regulatory hurdles to make sure when you actually open a bank, you’re going to receive the money. You’re going to use the money in a way that it’s actually not risky.”
A compliance framework that attracts innovation and protects consumers could help the economy, Q2 chief strategy officer Will Furrer said.
Q2, based in Austin, provides digital banking solutions for community banks. The company crafts programs that help with everyday banking activities.
“Anytime you’re in financial services, talking about people’s money and talking about their lives and talking about the critical payments that they need to make so that they don’t get removed from a home or have their water turned off, those types of things just require a certain level of responsibility for the developers or the development talent that are working on those things,” Furrer said.
Furrer says companies such as Q2 have a similar setup to a “sandbox” internally, where they test new ideas and conduct research to see what will best fit the needs of consumers in the market.
“They don’t necessarily release them to the public,” he said. “But they are able to look at new workflows for payments, workflows for bill payments or help people set up goal accounts. They can do these things in a very safe test environment and socialize them internally with their account holders.”
The feedback helps companies pinpoint what’s needed for the final product.
“After something is built – it’s bringing consumers in, whether those are millennials or a small business and asking them to use their product so they can know how it works or if it actually addresses the problem they’re trying to solve,” he said.
Stephanie Newberg with the Texas Department of Banking provided lawmakers on the Investments and Financial Services Committee with a list of recommendations for a “sandbox” policy.
“[It] must have an established test period, you must truly define what “innovative” is and what products and services will include, you have to have adequate consumer disclosures, limits on consumer losses, anti-money laundering programs,” she said.
Having this type of policy could attract startups looking to establish a presence in Texas.
“The idea of creating a sandbox and an environment where they can actually explore and experiment might actually be very interesting,” Fracassi said.