A Quick Look at the Arizona Fintech Sandbox

My partner repeatedly tells me that I’m not as old as I think I am, but I remember playing in public sandboxes as a kid. I’m honestly not sure people make those anymore—they’re probably “unsafe” or “unhygienic” or something. Still, I remember the freedom of a sandbox. In the short run, you can create your own castle, moat, and entire surrounding village if you want.

Like most sandboxes in the tech world, the Arizona fintech sandbox is geared toward securely testing new software. There’s no actual sand involved, which makes cleanup much easier.

But the freedom is still there.

Sandboxes as stable, virtual software testing sites may at first sound less exciting than real sandboxes with real sand, but actually, they’re so much cooler.

Why a “Sandbox?”

Sandboxes are a good place to build new things, test ideas, and generally play around with things. The differences between a virtual sandbox and a traditional sandbox are many. The benefits to a virtual sandbox include:

  • Things built in them may last longer
  • They can accommodate more participants
  • Cats won’t mistake them for a different kind of box
  • They’re geared toward adults with big ideas

Clearly, the Arizona fintech sandbox has a lot going for it. It’s not often that you can find a place to freely experiment with new software without worry.

But what might one worry about when playing with new software?

Well, regulations, for starters. The Arizona fintech sandbox is designed to make it easy on entrepreneurs and innovators.

Mo’ Money, Mo’ Problems

As you’re no doubt well aware, the world of money and finance is very thoroughly regulated. Think about it this way:

Nurses and doctors jump through hoops to perform complicated hand-washing procedures. There’s a standard to which they must conform. There’s a certain technique and order of operations to the process, and it can seem eye-rollingly draconian.

Except it’s for people’s safety.

Regulations in finance are in place for the same reason. The small-dollar loan industry is heavily regulated to prevent predatory loan practices. Regulation of financial services and institutions, in theory, prevents issues like the subprime mortgage crisis and other potentially-catastrophic occurrences that threaten daily life and livelihood.

So, regulations are good.

But not for progress. Regulations are just sets of rules that determine best practices for existing companies, services, technologies, and so forth. And it can cost a lot of money to prioritize consumer safety remain in regulatory compliance. Between licenses, fees, authorization, and oversight all add up.

The problem is that fintechs frequently don’t have consumers. They’re developing. They’re testing. They’re revising. They’re working with emerging services and technologies for which existing regulation may not adequately address.

In short, although regulation may keep consumers safe from careless or bad financial practices, it may also hinder innovation. Fintechs and other startups risk sinking their limited resources into licenses and compliance rather than into research and development.

Is It an Oasis or a Mirage?

Arizona’s regulatory sandbox aims to remove such obstacles from progress. They offer promising fintechs the opportunity to create and test their products without oppressive regulatory burden.

It’s not carte blanche, however; fintechs accepted to Arizona’s program must observe a few rules:

  • Can’t be harmful or evil
  • Income and loans may be restricted within reason
  • Two years maximum in the sandbox
  • Operate under the jurisdiction of the Arizona attorney general
  • The user base for each fintech’s product is capped at 10,000
  • Users unaffiliated with the fintech must be Arizona residents

There are a few more caveats, but those are the major ones. Arizona’s idea was that a fintech sandbox would help companies reduce compliance costs and accelerate their entrance into the marketplace.

But will it work? Is it an oasis, or is it a mirage?

Surely, time will tell. But if the DCU Fintech Innovation Center is any indication, then we can at least see that the fintech industry often benefits greatly from a little support and encouragement.

And, so long as we’re taking our cues from similar programs, I should mention that Arizona’s regulatory sandbox isn’t the first of its kind. Some countries, including the UK, Singapore, the United Arab Emirates, and Australia have implemented similar initiatives.

Furthermore, the Arizona AG may permit reciprocity agreements in other jurisdictions that want to do the same thing. With approval, that would allow fintechs in the Arizona sandbox to expand their user base to other jurisdictions, and vice versa.

A Look at Who’s Playing in the Sandbox

So, which fintechs have capitalized on Arizona’s sandbox offer?

At the time of writing, I count four.

     1. Omni Mobile, Inc.

Omni Mobile, Inc. was the first fintech allowed to play in the sandbox in early October of 2018. Omni Mobile, Inc. provides a financial service platform implementing an array of emerging technologies to improve modern payment systems. They offer better interaction with direct ACH payments through a centralized wallet infrastructure.

Personally, I’m intrigued by OM Cash, a flexible payment system with potential rewards.

     2. Grain Technology, Inc.

Grain Technology, Inc. offers consumers personalized savings plans and credit opportunities through their existing bank accounts. They use machine learning to incorporate important variables and metrics that offer customized lines of credit that more precisely fit a borrower’s unique financial picture.

Grain has the potential to help people without credit—and people with thin files—to build a strong credit history. And, as a formerly very broke graduate student, I appreciate the subtle benefits that their services confer.

     3. Sweetbridge NFP, Ltd.

Sweetbridge NFP, Ltd. joined the Arizona fintech sandbox in late October 2018, same as Grain. Sweetbridge is working on a way to better process transactions using blockchain technology. Their hope is that they can simplify commerce, compliance, and more. Currently, they enable financing without credit checks to offer affordable, consumer-friendly loans with capped interest rates.

My favorite aspect of Sweetbridge is their commitment to common good. They’re making their protocols open source so that any and all may benefit from their work.

     4. Align Income Share Funding

The latest addition to the Arizona regulatory sandbox, Align Income Share Funding operates in the lending marketplace. They provide consumers with loans in exchange for a percentage of the borrower’s future income over a set period of time. If the borrower’s income fluctuates, Align Income Share Funding adjusts to accommodate that fluctuation.

While there are surely contingencies in place to protect their interests, I’m impressed by their claim: “if your income goes down, so do your payments, potentially all the way to zero.”

The Takeaway

In my estimation, the Arizona fintech sandbox is a welcome breath of fresh air. The US needs more spaces for people with big ideas to test their products and theories.

Plus, sandboxes like Arizona’s may accelerate the growth of emerging technologies and services that could help many. I’m all for expediting beneficial and consumer-friendly products.

We’ll keep our eye on news and developments from the sandbox, and we wish the participants the best. If you’re interested in joining the sandbox, you can view the application here. Or, go ahead and check out the links below. They’re on completely different subjects, but if you want to read about marketing automation or online banking providers, then you’re in luck!

Email Marketing vs. Automated Marketing for Credit Unions

CU-2’s Top Online Banking Providers of 2019 (Part 1)

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