Exploring a new incubation model for FinTechs: Regulatory sandboxes

Abstract

Research on incubation models indicates that incubators and accelerators are crucial catalysts for the development of start-ups. To facilitate start-ups in financial markets, several regulatory authorities have adopted a new incubation model called a ‘regulatory sandbox’. Regulatory sandboxes enable eligible applicants to test their technology-enabled financial solutions for a certain period of time (subject to conditions the regulator imposes). As such, these instruments allow innovation while preventing severe instability in financial markets caused by systemic risk. Despite their importance, management research has devoted little attention to studying how sandboxes operate as a new incubation model. In our abductive study, we adopt the activity system framework and a qualitative analysis approach to investigate the activities of five leading sandboxes and compare them with the activities of other incubation models. The data analysis yielded an activity model with three design elements (achieving membership, participating and detaching) and one design theme (improving connectedness). Thus, sandboxes are characterized by providing regulatory guidance and facilitating access to testing across international jurisdictions, distinguishing them from both generic and specialized incubation models. Our primary contribution to the incubation literature is extending the knowledge of a unique incubation model through a set of theoretical propositions.