Building a 'regulatory sandbox' would help Ohio join the fintech revolution

Logan Kolas Nov 17, 2021

This opinion piece was first published by The Columbus Dispatch.

Recently introduced legislation in the Ohio Senate offers a smarter way for Ohio to regulate the rapidly emerging financial technology sector, or "fintech." The bill proposes building a “regulatory sandbox” in which fintech companies may test new products or services and experiment in the marketplace under the supervision of expert regulators, but without the added expense of Ohio’s full regulatory regime.

The proposal looks promising for companies and consumers.

Fintech firms provide banking and investing apps, crowdfunding platforms, and online financial services such as Venmo, Acorns, and Credit Karma. These products, services, and technologies help consumers protect and strengthen their finances. They make money and investments more accessible and may be especially helpful to Ohio’s financially disadvantaged and unbanked consumers.

But Ohio’s archaic rules governing financial services and technology make it harder and more expensive for fintech firms to bring their innovative products to market.

Seeking regulatory approval to operate in a single state often costs thousands of dollars. Some startup companies—disproportionately represented in the fintech sector—spend more than $83,000 complying with regulations in their first year alone.

Regulatory hurdles on the path to national expansion can cost even more, adding millions of dollars in fees and compliance expenses. And ambiguous regulatory obstacles make would-be investors in untested technologies nervous and their investment capital more difficult to attain. 

Regulatory sandboxes remove some of these obstacles, decrease uncertainty and ease access to investment capital, which reduces startup expenses and makes it easier and more affordable to test new services and technologies safely. Other states have already done so successfully.

Arizona, Utah, Nevada, Wyoming, West Virginia, North Carolina, and Florida, for example, have all created fintech sandboxes. Utah’s fintech sandbox was so successful that the state’s legislature expanded it to other industries like legal services, insurance technology, and drones before later voting unanimously to extend the sandbox to all industries.

Arizona’s regulatory flexibility helped financial companies bring low-cost banking services to Arizona’s unbanked and less affluent consumers. Ohio can and should do the same.

Regrettably, more than four percent of Columbus and six percent of Ohio residents remain unbanked. Offering affordable, accessible financial technologies can help Ohio residents them save money and plan their financial futures. A well-planned regulatory sandbox can make income sharing agreements for loan payments easier, enhance access to cloud-based banking, and offer unbanked consumers branchless banking.

Ohio’s strong network of universities and trade schools, along with central Ohio’s position as a financial services leader, provide an ideal foundation for building a regulatory sandbox designed to foster fintech innovation.

Emerging financial products and services can help families and businesses in Columbus and across the state better manage their finances and investments, but outmoded regulatory rules get in the way. That needs to change.

Building a smart regulatory sandbox would help consumers and businesses access the banking and capital they need, and help Ohio join the fintech revolution. 

Logan Kolas is an economic policy analyst with The Buckeye Institute’s Economic Research Center and the author of Policy Solutions for More Innovation: Build a Regulatory Sandbox for Financial Technology Innovators.