New fintech sandbox pilot could boost blockchain innovation
Fintech is New Zealand’s biggest sub-category of the tech sector, accounting for $2.88 billion last year, according to the recently published TIN200 report.
But experimentation in fintech, particularly in areas related to digital assets, cryptocurrencies, peer-to-peer lending, and algorithmically-driven financial products hasn’t been as extensive here as in other countries.
It comes down to risk, which can see banks shy away from offering financial services to startups experimenting with cutting-edge technologies and new business models, to our regulatory framework which is geared towards protecting consumers.
Now the Financial Markets Authority (FLA), mirroring schemes in the UK, Australia, Dubai, Singapore and other countries, is setting up a “regulatory sandbox” which will make it easier for fintech businesses to test new services and business models.
The FMA will run a pilot phase from January to July 2025 and is taking applications from companies interested in being involved. Based on progress, the FMA will then decide if a permanent regulatory sandbox is needed to stimulate fintech innovation.
A monitored space to experiment
The sandbox is open to any businesses currently covered by the FMA’s remit, both new and established entities.
“The pilot is also open to more than just regulated financial services, and can include products or services that, for example, simplify compliance solutions, or use blockchain or regulatory technologies,” the FMA pointed out.
What does being in a sandbox involve? According to the FMA, companies can test their systems in a “monitored space” allowing them to work with the FMA to gain a better understanding of the authority’s “supervisory expectations”
“The opportunity to adjust a product or service before full commercial launch may help reduce costs for firms,” notes the FMA.
That could be music to the ears of blockchain and digital assets companies that often struggle to satisfy strict compliance and risk assessment policies at the major banks. In 2023, Web3NZ and Callaghan Innovation published a report looking at the problem of debanking in the Web3 industry in New Zealand, which many participants see as having a chilling effect on innovation.
Singapore’s sandbox success
Overseas, regulatory sandboxes have served to give the financial sector and regulators greater confidence to let early-stage companies experiment with new types of financial services, often based on blockchain technologies.
In Singapore, where the fintech regulatory sandbox run by the Monetary Authority of Singapore has been operating since 2018, numerous companies have refined their product offerings and received valuable feedback from the MAS before advancing to a full launch of their products and services.
Singapore-based private markets platform ADDX was an early participant in the regulatory sandbox in 2018, graduating from it in 2019. It was able to live-test its blockchain-based platform ahead of developing and listing the first ever tokenised fund, Eternal Glade Fund.
Another blockchain-based fintech company BondbloX (formerly BondEValue) was another early sandbox participant in Singapore and went on to develop one of the world’s first and largest fractional bond exchanges.
“It was the predetermined testing environments within the Sandbox Express,” BondbloX founder and chief executive Banerjee told Singapore’s Economic Development Board.
Participation in a regulatory sandbox is often a way to attract investors and partners, who are attracted to the risk-mitigating oversight they can provide in the early stages of a company’s development.
The types of fintech firms the FMA is looking for with its regulatory sandbox:
Have a product ready to be tested in the New Zealand market with customers.
Understand what aspects of existing financial regulation apply to their product or service.
Have considered where they need guidance from the FMA and why participation in the sandbox will help to their ‘go to market’ plans.
Firms interested in joining the fintech regulatory sandbox can submit an expression of interest with the FMA here.
Mapping the open banking ecosystem
Meanwhile, OpenFinanceANZ has just published its first market report in the Aotearoa New Zealand open banking ecosystem. It comes as scrutiny of the banking sector intensifies with finance minister Nicola Willis outlining measures to increase competition in the banking sector, including injecting up to $500 million of investment into Kiwibank, possibly from Kiwisaver funds, and reviewing minimum capital thresholds for new entrants into the banking sector.
“New Zealand is often seen as the little brother against the Aussies. We’re trying to give that little brother a little bit more muscle to get a fairer deal for Kiwis,” Willis said this week.
New Zealand’s open banking ecosystem
Open banking inched forward in New Zealand this year with some technical progress made to that allows customer data held by the big four banks, ASB, ANZ, BNZ, and Westpac to be more easily shared with approved third parties. But there’s a long way to go before New Zealand gets near to the sort of access to customer banking data on offer in other countries.
“We estimate that well over 1 million customers currently use unregulated forms of open banking in New Zealand each year,” Josh Daniell, Co-founder, Akahu writes in the OpenFinanceANZ market report.
“The migration of existing activity will be the key determinant of whether New Zealand’s regulatory regime is considered successful.”
New Zealand is developing the Consumer Data Right to facilitate sharing financial data with trusted third parties. So far payments use cases form the largest use case (23%) in our fledgling open banking ecosystem, followed by accounting services.
Key use cases in the open banking ecosystem.
In terms of how financial data is accessed by third-parties, including fintech companies, 75% is a result of screen scraping, the report said. That is expected to change as open banking allows for standardised APIs (application programming interfaces) to allow more flexible sharing of data that can enable a broader range of fintech services.
Open banking designation under the regulatory framework is expected to commence for ANZ, ASB, BNZ and Westpac, with Kiwibank to follow later in 2026.
“With clearer government intentions regarding the proposed CDR legislation and substantial efforts by Payments NZ and its members, we anticipate that open banking capabilities will extend to over 90% of bank customers,” Jason Roberts, Executive Director, Fintech NZ, wrote in the report.
“This combined expansion is likely to foster increased collaboration within the sector, spur innovation, boost competition, and enhance customer outcomes.”
Access the Aotearoa New Zealand Open Banking Ecosystem Report here.
Photo credit: Hitesh Choudhary/Unsplash
